The End of the Peer Show?

August 31, 2005

Unless you have been living on another planet for the past few weeks you cannot have failed to notice the United States‘ Supreme Court Decision in Metro-Goldwyn-Mayer Studios Inc and others v Grokster Limited and others. This decision represents a paradigm shift in US law in favour of the entertainment industry and against technology innovators. The effects of this decision are not just felt in the United States. It has profound implications beyond those shores.

The specific issue before the Supreme Court was the liability of Grokster and StreamCast for the unlawful infringements of copyright carried out by users of their peer-to-peer software. For a detailed explanation about how peer-to-peer networks operate, see Jo Oliver’s excellent article on the Australian Kazaa litigation in Computers & Law, Volume 15, Issue 6.

Protection versus innovation

The wider issue under consideration by the Supreme Court was the tension between supporting creativity through copyright protection and promoting technological innovation by limiting the extent to which innovators are subject to liability for copyright infringement. Delivering the unanimous opinion of the Court, Justice Souter said:

“The tension between the two values is the subject of this case, with its claim that digital distribution of copyrighted material threatens copyright holders as never before, because every copy is identical to the original, copying is easy, and many people (especially the young) use file-sharing software to download copyright works…the indications are that the ease of copying songs or movies using software like Grokster’s or Napster’s is fostering disdain for copyright infringement..these fears are said to be offset by the different concern that imposing liability…on distributors of software based on its potential for unlawful use, could limit further development of beneficial technologies.”

This debate is not a new one. In 1984 a similar battle was fought in the US Supreme Court between Universal Studios and Sony, the makers of Betamax video recorders. Universal Studios alleged that users of Sony’s video tape recorders (“VTR”) had infringed Universal’s copyright by recording television programmes using the Sony VTR. Universal chose to sue Sony, as opposed to the individual copiers, using US legal concepts of contributory infringement of copyright. The Supreme Court dismissed Universal’s claim in a 5:4 majority ruling. The majority rejected the notion that Sony was in a position to control primary infringers’ actions. Sony’s contact with the infringers ended at the point of sale. Nor did Sony actively encourage the copying activities by advertisements or otherwise. The majority said that liability might therefore only be established on principles that Sony sold equipment with constructive knowledge that its customers might use it to infringe copyright. The majority were wary of imposing liability on this basis because it would interfere with lawful uses of the VTR – the so called staple article of commerce doctrine. If a finding was made against Sony then in theory makers of typewriters, cameras or photocopiers could also be found liable for copyright infringements committed by users, and this would interfere with the legitimate and valuable uses of such devices. This was a recognition of an underlying principle that intellectual property rights grant limited monopolies in order to stimulate innovation, but they must not be used in such a way as to stifle legitimate innovation in the future. Accordingly the test applied by the majority was whether the VTR was capable of substantial non-infringing uses. The court found that there were such substantial non-infringing uses because some copyright holders did not object to their works being taped and because a major use of the VTR was for time-shifting, the recording and watching of a programme at a later time, and this fell within a “fair use” exception to infringement.

So far so good for Grokster and StreamCast

It was confidently predicted that this decision would offer protection to Grokster and StreamCast against the attacks by the entertainment industry on their peer-to-peer software. This proved to be the case both before the District Court and the Ninth Circuit Court of Appeals. Both courts gave summary judgment for the Defendants. Specifically, the Ninth Circuit held that the distribution of a commercial product capable of substantial non-infringing use could not give rise to contributory liability for infringement unless the distributor had actual knowledge of specific instances of infringement and failed to act on that knowledge. The underlying policy reasons for this decision are perhaps best illustrated by the following passage from the judgment of Circuit Judge Thomas:

“we live in a quicksilver technological environment with courts ill-suited to fix the flow of internet innovation. The introduction of new technology is always disruptive of old markets, and particularly to those copyright owners whose works are sold through well-established distribution mechanisms. Yet history has shown that time and market forces often provide equilibrium in balancing interests, whether the new technology be a player piano, a copier, a tape recorder, a video recorder, a personal computer, a karaoke machine or an MP3 player. Thus, it is prudent for courts to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent magnitude.”

Supreme Court surprise

The Supreme Court unanimously overturned the Ninth Circuit’s summary judgment ruling in favour of the Defendants, and remitted the case to the District Court for re-consideration on the evidence. The Supreme Court ruled that the Ninth Circuit had posed the wrong question. They should not have asked first whether the software was capable of non-infringing uses. Instead, they should have considered whether contributory infringement, by directing or promoting the primary infringement, had taken place and if the answer was in the affirmative then the staple article of commerce doctrine would not come into play at all. Justice Souter said:

“We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps to foster infringement, is liable for the resulting acts of infringement by third parties.”

The Supreme Court held that there was ample evidence that Grokster and StreamCast had promoted infringement. Despite the case being formally remitted there seems little room for manoeuvre on the part of the Defendants when it comes up for re-consideration by the District Court:

“The record is replete with evidence that from the moment Grokster and StreamCast began to distribute their free software, each one clearly voiced the objective that recipients use it to download copyrighted works, and each took active steps to encourage infringement.”

This evidence included that StreamCast’s plans had been to capture as much of Napster’s file-sharing business as possible if Napster was shut down by the US courts, as proved to be the case. StreamCast’s advertising promoted the company as similar to Napster. The evidence referred to by the Supreme Court went as far as a statement by the CTO of StreamCast to the effect that the company’s goal was to get into trouble with the law and be sued because that was the best way to get publicity. In similar vein, Grokster sent out advertising referring to its ability to provide popular copyrighted material. The Supreme Court also took into account that Grokster and StreamCast’s business models rely on revenue derived from advertising sent to their users, and with the growth in access to copyrighted materials using their systems would come increasing advertising revenue. The court said that this alone would not be enough to found liability, but it is a factor when viewed against all of the other evidence. Finally, neither company made any effort to filter copyrighted material or otherwise impede the sharing of such files. The Supreme Court took this as underscoring an intentional facilitation of the primary infringements. In summary, the Supreme Court said the evidence demonstrated a purpose to cause and profit from third party acts of copyright infringement.

Where next for Grokster and Streamcast?

The case is not over as it has been remitted to the District Court. However, there seems little doubt that a finding will be made against the Defendants. If their services are shut down then this will not only have an impact within the United States but around the world. Services of this nature are no respecters of national boundaries. But it may not come to this. A finding of liability does not necessarily lead to a wide-ranging injunction. For example in Sony, the minority in the Supreme Court referred to the possibility of lawful and unlawful uses of technology being balanced by reference to the relief granted. Remedies could be granted that do not interfere with legitimate valuable lawful uses. For example, royalty payments could be awarded to a successful Plaintiff rather than an injunction that would effectively prohibit both lawful and unlawful uses.

Where next for peer-to-peer?

There is no doubt that this decision has even wider ramifications. Based upon the evidence referred to by the Supreme Court it may be thought right that the entertainment industry should have recourse to remedies against Grokster and StreamCast. But there will undoubtedly be other cases where the evidence is less clear. The potential chilling effect of the Supreme Court’s decision is in its ability to be used by the entertainment industry to stifle innovation. This in turn threatens new modes of distribution. One can foresee litigation where detailed inquiries will have to be made into the innovator’s knowledge, their internal and external communications, and the underlying function of the technology, that could tie up the innovator in litigation for years. They may simply think it is not worth it.

With the music industry, the likely result is that we will see more deals between innovators and copyright owners. The public is now aware of this distribution method and is demanding it. But the financial dynamic of those deals has been fundamentally altered by the Grokster ruling, in favour of the copyright owners.

With the film industry the position is not so clear-cut. Distribution through peer-to-peer is much less well developed and public demand is simply not there in the same way as with music. Could Grokster be used to kill this method of distribution? There are huge vested interests in maintaining the current system of distribution through cinemas, DVD sales and rental (the latter two ironically spawned by the invention of the VCR). One wonders what the position may have been now with music distribution if Grokster had been decided five or six years ago.

And over here?

Obviously, the Supreme Court’s decision does not have any direct influence on the legal position in this country. The law is fairly well settled following the House of Lords decision in CBS Songs Ltd and others v Amstrad Consumer Electronics and another, a case concerning the liability of Amstrad, as manufacturers, and Dixons, as retailers, for acts of copyright infringement carried out by purchasers of tape-to-tape recording machines. It seems unlikely that the decision arrived at by the Supreme Court would be mirrored in the English courts. For example, in CBS v Amstrad, the House of Lords found that although the promotion by Amstrad of the copying facilities of its machine was open to severe criticism, it could not be said to have “authorised” the infringement of copyright by users of the machine. Under the Grokster ruling the Supreme Court is likely to have come to the view that such advertising led to a finding of contributory infringement. We may well have a clearer indication of the likely result in our courts from the Kazaa litigation currently before the Australian courts, as foreshadowed in Jo Oliver’s article. CBS v Amstrad is under consideration there. At the time of writing, the Australian judgment has not yet been delivered.

Ian De Freitas is a Partner at Berwin Leighton Paisner.