We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
October 10 2005
An uneasy tension lies between the protection of creative content and new forms of technology for exploiting creative content. The conveniences of modern technology have dramatically increased the ease with which users can enjoy creative works. However, with convenience comes challenge. Photocopy machines, tape recorders, video cassette recorders (VCRs), digital computers, CD burners and ubiquitous internet access all have the potential to make illicit copying easy, thus weakening the ability to protect creative ideas. Legal protection can help copyright owners guard their creative works, but care must be taken to avoid stifling new forms of technology.
Thus, the question becomes: how does the law strike the delicate balance between fostering new innovation and simultaneously protecting intellectual property in a digital age? The answer is not completely clear, but a recent Supreme Court decision provides a new piece of the puzzle. MGM v Grokster, much like the Napster controversy of five years ago, considers the issue of holding an internet peer-to-peer file sharing service liable for indirect copyright infringement. Such services are quite popular and, as a result, the Grokster Case has been the subject of much attention, both in technical circles and in the mainstream media.
On the very last day of its 2005 term, the Supreme Court handed down its ruling in Grokster, answering some questions and simultaneously posing new ones. This update explores the recent history of copyright infringement law and technology in the context of Grokster and two key cases that preceded Grokster: the Sony-Betamax decision and the Napster decision. It examines what issues have been settled by these cases and what issues are still up for debate.
There are two main legal theories under which a party can be sued for copyright infringement: direct infringement and indirect infringement. Direct infringement actions target parties who actually engage in illegal uses of copyrighted material, whereas indirect infringement actions target parties who facilitate direct infringement.
Copyright owners have always had the option of suing direct infringers. That is, the owner of the copyright to a bestselling novel can always sue the person who uses a photocopy machine or computer to make and sell illegal copies. Likewise, copyright owners can always sue the person who uses a CD burner or a software program to make pirated copies of the owners' songs and movies.
However, such enforcement can be costly and difficult, and the ability to obtain a significant remedy may be limited. The sheer number of direct infringers can be very large and it is often not economically feasible to track down and sue thousands or even millions of such direct infringers. So copyright holders may prefer to use a legal theory of indirect infringement, by which they can sue a not-so-innocent third-party provider whose products or services are utilized by the direct infringer. However, imposing such liability can create a difficult issue when the provider's product or service has both lawful and unlawful uses.
Typically, a copyright holder has two such theories of indirect liability available. The first is vicarious liability, and allows a copyright holder to sue an indirect party that has supervisory control over the direct infringer and a financial interest in the infringement. For example, Napster was held vicariously liable because its technology ran through a centralized server under Napster's control and the wide use of its product for copyright infringement allowed Napster to bring in advertising revenue. The second theory, contributory liability, allows a copyright holder to sue a party that facilitates infringement. Generally, this has required the indirect infringer to know about the direct infringement and to make a material contribution to that infringement.
One of the first big cases in which an indirect copyright liability theory was utilized involved VCR technology. This case is popularly known as the Sony-Betamax Case.(1) In 1976 Sony introduced the Betamax VCR to the consumer market at an affordable price and it quickly became a popular new gadget. However, major motion picture studios such as Universal brought suit against Sony for contributory liability, arguing that the manufacturer had provided a material contribution to copyright infringers by offering its VCR product for sale and that Sony knew that users were utilizing it for infringement purposes. In particular, the film industry had documented widespread use of the Betamax to record broadcasted television programming. Sony countered that:
The case presented difficult choices. A ruling of infringement would have resulted in taking an extremely popular consumer product off the market and potentially create a technological chilling effect on technology development in the United States. On the other hand, giving technology manufacturers a free pass would have potentially weakened the copyright protection that fosters creative expression. Weighing the two sides, the court ultimately ruled in favour of Sony. The court held that recording television programmes for the purpose of watching them later at a more convenient time a practice that the court described as "time shifting" was covered by the doctrine of fair use and did not constitute infringement. Furthermore, Sony did not act with the intent that purchasers commit direct copyright infringement. Applying a theory of contributory copyright infringement borrowed from patent law, the court ruled that when a product is capable of "commercially significant non-infringing" purposes, the product manufacturer will not be held responsible for contributory infringement.
Left open from the Supreme Court's ruling in the Sony-Betamax Case was whether this rule provided a complete defence to contributory liability, or whether it only shielded the more 'innocent' manufacturers. Sony was a good-faith manufacturer that genuinely marketed its product for non-infringing purposes and had no way of knowing to what extent it might otherwise be used for infringement. But could this rule also shield from liability a manufacturer that purposely designs a product to facilitate infringement, as long as it has some non-infringing uses? This issue would ultimately arise both in Grokster and its famous antecedent, Napster.
The explosion of the Internet and peer-to-peer file sharing in the late 1990s created new difficulties for copyright holders. This was particularly acute in the music industry: users could create and swap high-quality digital versions of copyrighted music files at very low cost. Fuelled by the Napster peer-to-peer network, mass copyright infringement of popular digital music was carried out over the Internet.
Napster provided a software framework that allowed users to trade digital files on the Internet through a peer-to-peer file sharing network. Napster was used primarily to trade music files. The Napster network was a distributed file-sharing system, meaning that it allowed real-time sharing of files, but the files themselves lived only on the computers of other Napster users and not on the Napster system itself. Thus, a user's shared files did not remain accessible on the network after the user logged off. Users could utilize a search feature on the Napster network to look for songs or any other media content to download. The details of the search feature were complex, but the system used a centralized file-indexing system that was stored on Napster-owned servers. This turned out to be a critical design detail, as it gave Napster the ability to supervise and control its users a key element to vicarious copyright infringement.
Napster was sued by a number of copyright holders in the record industry for both vicarious and contributory copyright infringement. The case was styled A&M Records v Napster.(2) The Napster Case worked its way up to the Court of Appeals for the Ninth Circuit, which held that Napster could be liable for contributory copyright infringement, but only to the extent that it:
The copyright holders had given Napster a list of approximately 12,000 infringing files available on Napster's network, providing Napster with undisputed actual knowledge of direct infringement. Napster was unable to remove all infringing files from its system.
Further, the court ruled that Napster could be held liable for vicarious copyright infringement because it failed affirmatively to use its ability to patrol its system and preclude access to potentially infringing files listed in its search index. Ultimately, Napster's centralized design features made it subject to vicarious liability. However, the Napster Case did not address what would happen if a company created a similar file-sharing product that avoided the particular traps (eg, the centralized file index) that had made Napster vulnerable to liability.
Much like Napster, Grokster produced a software product that allowed users to swap files on the Internet. However, the Grokster software ran on a decentralized network, meaning that the system did not require a central server to operate. Thus Grokster was completely uninvolved with the operation of the program after it was downloaded and put into use by a customer. Grokster had no ability to control its users, and no means of knowing or learning how its users were utilizing the product.
This design decision was probably no accident. Grokster had most likely studied the Napster decision and was betting that a decentralized design would allow it to escape the two main theories of indirect copyright infringement liability. Vicarious liability could in theory be avoided, since the company would have no control over its product's operation. Likewise, contributory liability could in theory be dodged under the Sony-Betamax rule: Grokster's product was capable of some non-infringing use, such as the swapping of non-copyrighted files in the public domain.
A group of major copyright holders put this theory to the test and sued Grokster under theories of both contributory and vicarious liability. They argued that the Sony-Betamax rule should not apply as a shield in this context. Instead, they asked for a rule requiring that the majority of a product's use be non-infringing; but such a rule would require inventors to anticipate the amount of infringing use before a product goes out to market - which would potentially stifle innovation.
However, Grokster faced a tough battle. The evidence showed that the vast majority of Grokster's customers used its product illegally to swap copyrighted files. According to the study relied upon by the court, 90% of all Grokster use was infringing. Grokster was well aware of this fact, and even went so far as to advertise its product as a replacement for Napster and a venue for free downloads of music and other media. However, it raised the Sony-Betamax rule as a shield, arguing that their product was capable of non-infringing uses and that this barred any finding of contributory liability.
Though neither side won a clear victory, the Supreme Court's decision clearly places the onus of responsibility for the infringement on the defendants (Grokster and Streamcast).(3) The court held that the Sony-Betamax rule did not operate as a complete defence to contributory liability. As in the Sony-Betamax Case, the court again borrowed from patent law, holding that when a party markets a product with the intention that it be used for the purpose of infringement, that party will be liable for contributory liability under an alternate contributory liability theory called inducement, regardless of whether the product is capable of substantial non-infringing uses. Justice Souter, in his majority opinion for the unanimous court, issued the holding:
"For the same reason that Sony took the staple-article doctrine of patent law as a model for its copyright safe-harbour rule, the inducement rule, too, is a sensible one for copyright. We adopt it here, holding 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 taken to foster infringement, is liable for the resulting acts of infringement by third parties."
So, what happens if you want to manufacture a product that is potentially capable of infringing use how might this rule play out? Under an inducement theory, courts will look to evidence of how you intended your product to be used, but it remains to be determined what exact factors might be considered. The parties in Grokster are being sent back down to a lower court for a trial where much of this will be explored, but the Supreme Court's Grokster opinion gives us a number of hints.
Marketing is a key area to observe. It is very important to ensure that your product is not advertised or solicited in a way that is suggestive of infringing use. The court called this the "classic instance" of inducement and evidence of this nature was particularly damaging to Grokster. The court's opinion noted that Grokster had actively advertised its product in way designed to capture former users of Napster. In particular, the court highlighted the proposed Grokster advertisement campaign: "Napster Inc has announced that it will soon begin charging you a fee. That's if the courts don't order it shut down first. What will you do to get around it?" Clearly, manufacturers of new products that have the potential to contribute to copyright infringement should be very careful to avoid advertising these products in ways that might suggest or encourage infringing use.
Be careful of newsletters or other materials that are sent to your users. Grokster had distributed a newsletter to its users that included links to external articles that promoted Grokster as a means for freely downloaded popular copyrighted music and the Supreme Court took note. Also, beware of any resemblance that your product might have to other infringing products. The court noted that advertising campaigns touted Grokster as being the "#1 alternative to Napster" and that even Grokster's name seemed to be a derivative of 'Napster'. Further, co-defendant Streamcast had made frequent references to the Napster product in its internal documents and had initially made its product compatible with the Napster service through a special software program.
By deciding Grokster on an inducement theory, the Supreme Court avoided the issue of the Sony-Betamax rule and left open a big question which may perhaps be decided in the future. Suppose Grokster had simply put its product out into the stream of commerce and then remained silent, never actively attempting to capture Napster users and never suggesting that its product be used for copyright infringement. In such a case, with no evidence of inducement, would the Sony-Betamax rule shield the company from all indirect liability? The Supreme Court did not address the issue, perhaps setting the stage for a future case in which the law must once again strike a balance between innovation and copyright protection.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.
Brian S Mudge