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Supreme Court Decides Unanimously Against Grokster

by Richard Koman
Jun. 27, 2005

Ernest Miller: Case Muddies the Law


I just got off the phone with Ernest Miller, author of The Importance Of ... blog (I interviewed him last year about the failed Induce Act). Here are his thoughts about the decisions:


Overall, Miller said, it's a muddled result. "If I were Intel or Apple, I'd be quite happy. If I were a smalltime innovator, I'd be less comfortable." Major techs should easily be able to avoid the appearance of inducement and in any case would have the deep pockets to fend off liability suits. Small companies wouldn't have those resources and would be more vulnerable.


"To a certain extent, there remains a lot of uncertainty. There's certainly more certainty that there was. Is there enough for everybody? I don't really think so."


Essentially, Miller said "the Court didn't draw as bright a line as they might have" on what constitutes contributory liability. "It seems to me that things like "they made money because of violations ... to use that as evidence of intentionally inducing" is confusing. He's referring to a part of the decision that suggests that the networks' business model leads to infringement.


"It is is useful to recall that StreamCast and Grokster make money by selling advertising space, by directing ads to the screens of computers employing their software. ... The more the software is used, the more ads are sent out and the greater the advertising revenue becomes. Since the extent of the software's use determines the gain to the distributors, the commercial sense of their enterprise turns on high-volume use, which the record shows is infringing. This evidence alone would not justify an inference of unlawful intent, but viewed in the context of the entire record its import is clear."


So, a high-traffic, online-advertising based business model is illegal, or at least puts a company at higher risk? To Miller, that's where the uncertainty is. For Apple or Intel, advertising is a small percentage of their total revenue. They may choose to eliminate that business. For small companies, advertising may be their only revenue. Does that make them vulnerable to charges of inducement if users start using it for copyright infringement?


Miller participated in the Wall Street Journal's public roundtable on the decision and put the question this way:



In this decision, the Court emphasizes that StreamCast and Grokster followed in the wake of Napster and wanted to capture Napster's users. But, heck, iTunes wants to capture Napster's users as well. What would StreamCast and Grokster have to have done in order to avoid liability for following in the footsteps of bad actor Napster? What will the next developer of P2P have to do if Grokster and StreamCast are found liable in the lower court?


Does the next company that deploys a Grokster-like or gnutella-based network become illegal? "That is unclear," Miller said.


I asked Miller is BitTorrent would be vulnerable to lawsuits now that the decision has been issued. "BitTorrent is probably not vulnerable," he said. "But the BitTorrent search engine possibly raises questions. It remains murky because of the intent issue."


Despite claims of "complete victory," the opinion is anything but, Miller said. Hollywood was looking for a refutation of Sony or at least a narrowing of it. While the majority decision declined to re-examine Sony, the existence of the two concurring opinions regarding the landmark case serve again to muddy the waters.


Any lower court looking at Sony now has three opinions to point to - the original decision, Ginsburg's opinion urging a narrowing of Sony, and Breyer's opinion reasserting the scope of the decision. "Sony is up for grabs," Miller said.


At the end of the day, Grokster's road is not yet over. The case now goes to trial and although the trial court is under orders to find Grokster guilty of inducement, the court might still invoke Sony and it might find its way up to the Supreme Court again. Very likely it will wind up in the Court of Appeals.


A final note. The case is likely to put a stop to congressional action for an INDUCE bill, which was introduced and failed last year. Miller says: "The Supreme Court didn't give them the INDUCE Act but it gave them (Hollywood) a lot. That makes it difficult to get INDUCE through Congress now." If Grokster and its brethren go down because of this ruling, that may have to satisfy Hollywood for awhile.


Understanding Grokster


In the Grokster case, the RIAA, the MPAA and various other copyright holders sued Grokster and StreamCast because of the widestread illegal downloading of copyright content from the services. Both the trial court and the Ninth Circuit Court of Appeals found the P2P companies had no liability because the Sony decision protects companies whose technology is capable of "substantial noninfringing uses." The Appeals Court found no liability unless "the distributor had actual knowledge of specific instances of infringement and failed to act on that knowledge.


The studios had asked that the Supreme Court use this case to revisit Sony and overturn it or issue a narrower interpretation of it, so that the pendulum of liability would swing more towards the copyright holders.


The Court declined. The Appeals Court's "view of Sony, however, was error," Justice Souter writes for the majority, "converting the case from one about liability resting on imputed intent to one about liability on any theory." Because of this error, "we do not revisit Sony further, as MGM requests, to add a more quantified description of the point of balance between protection and commerce ..."


Sony, the Court explained, said that a company couldn't be held liable merely on the basis of distributing a technology that is capable of infringing uses. It doesn't preclude liability based on other corporate behavior.


And in this case, the Court finds plenty of unsavory behavior. Basically, the companies engaged in all kinds of marketing designed to promote the services for the purpose of illegally downloading copyright material. The Court thus offers a new theory of contributory liability, an inducement theory. The Court sent the case back to District Court with a strong suggestion that Grokster and StreamCast be found liable under this inducement theory.


"Evidence of the distributor's words and deeds ... shows a purpose to cause and profit from third-party acts of copyright infringement. If liability for inducing infringement is ultimately found, it will not be on the basis of presuming or imputing fault [unacceptable under Sony - RK] but from inferring a patently illegal objective from statements and actions showing what that objective was."


So Grokster and StreamCast go back to trial where they must be found liable under the Court's decision today. End of story?


Not quite. There were two other opinions issued in this case, both concurring with the majority decision. Justice Ginsburg's opinion, which was joined by Chief Justice Rehnquist and Justice Kennedy, looks askance at much of the evidence presented to show that noninfringing uses were occurring on the networks. Indeed she calls it a "motley collection of declarations." She doubts that there is very much on the P2P networks that is not copyrighted content, and cautions that "if ... the case is not resolved ... in favor of MGM based on Grokster and StreamCast actively inducing infringement, the Court of Appeals ... should reconsider, on a fuller record, its interpretation of Sony's product distribution holding."


Justice Breyer, meanwhile, wrote a concurring opinion disagreeing with Ginsburg and restating the correctness of Sony. "A strong demonstrated need for modifying Sony (or for interpreting Sony's standards more strictly) has not yet been shown.




EFF: 'An era of uncertainty'

EFF attorney Fred von Lohmann says in the EFF press release that the decision includes a new theory - inducement of copyright violation - that spells trouble for technology companies:


Today the Supreme Court has unleashed a new era of legal uncertainty on America's innovators. The newly announced inducement theory of copyright liability will fuel a new generation of entertainment industry lawsuits against technology companies. Perhaps more important, the threat of legal costs may lead technology companies to modify their products to please Hollywood instead of consumers.



THE OPINIONS (PDFs)


The opinion of the Court (Souter)


Concurring opinion (Ginsburg)
Concurring opinion (Breyer)


PUBLIC KNOWLEDGE - BETAMAX RULE 'RE-EMPHASIZED AND PRESERVED'
Here's a statement on the case from Public Knowledge CEO Gigi Sohn (via Ernest Miller's The Importance Of ...):



... [T]o the extent that providers of P2P technology do not intentionally encourage infringement, they are exempt from secondary liability under our copyright law. The Court also acknowledged, importantly, that there are lawful uses for peer-to-peer technology, including distribution of electronic files 'by universities, government agencies, corporations, and libraries, among others.'


The Court is clearly aware that any technology-based rule would have chilled technological innovation. That is why their decision today re-emphasized and preserved the core principle of Sony v. Universal City Studios -- that technology alone can't be the basis of copyright liability -- and focused clearly and unambiguously on whether defendants engaged in intentional acts of encouraging infringement. The Court held expressly that liability for providing a technological tool ... depends on 'clear expression or other affirmative steps taken to foster infringement.' What this means is, in the absence of such clear expression or other affirmative acts fostering infringement, a company that provides peer-to-peer technology is not going to be secondarily liable under the Copyright Act."




'HOLLOW VICTORY' FOR STUDIOS
University of Chicago law prof Doug Lichtman writes on the Picker Moblog that the decision looks like a "hollow victory" for MGM.

MGM won on paper today, but my first reading of the opinion makes me wonder whether the victory will have any bite outside of this specific litigation. Intent-based standards, after all, are among the easiest to avoid. Just keep your message clear -- tell everyone that your technology is designed to facilitate only authorized exchange -- and you have no risk of accountability.

Lichtman filed a brief in support of the studios and was looking for a much broader decision - to allow liability based on a company's failure to take technical steps to block illegitimate uses. He didn't get that, and that God. Such a decision would have set the courts up as arbiters of what is technically feasible and what is not. Going down that road would be a very sticky path. You can already see companies selecting architectures based on plausible deniabiity rather than technical efficiency.


UNANIMOUS RULING AGAINST GROKSTER - The Supreme Court has decided unanimously against Grokster in the MGM v Grokster case. [Associated Press]

The decision settles the question of whether Grokster can be sued for the behavior of its users. The case is now cleared to go to trial. A trial court would have to decide whether Grokster and Streamcast induced users to break the law. It doesn't appear that lawbreaking without inducement would be sufficient for liability.

"We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by the clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties," Justice David H. Souter wrote for the court.

Things don't look for Grokster, though. "There is substantial evidence in MGM's favor on all elements of inducement," Souter wrote.


Richard Koman is a freelancer writer and editor based in Sonoma County, California. He works on SiliconValleyWatcher, ZDNet blogs, and is a regular contributor to the O'Reilly Network.

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