Literally as this issue headed to press, the Supreme Court released its unanimous decision in the case of Metro-Goldwyn-Mayer Studios v. Grokster—a decision that is likely to have monumental consequences for years to come. To summarize the basic issues, for many years peer-to-peer file-sharing networks have relied on the 1984 Sony v. Universal Studios decision (“Betamax case”) which held the distribution of a commercial product capable of substantial noninfringing use could NOT give rise to contributory liability unless the distributor had actual knowledge of specific instances of infringement and failed to act. With peer-to-peer file-sharing, the network software architecture is decentralized, making it unlikely that the provider of the file-sharing software (in this case Grokster and StreamCast) could actually know of any specific instances. Even the theories of vicarious infringement were thrown out by the lower courts because neither Grokster nor StreamCast monitored, controlled or supervised the use of the software (nor did they have an independent duty to police against infringement).
Enter the Supreme Court, which agreed to hear the case on appeal from the 9th Circuit, which held that Grokster and StreamCast could not be liable for contributory infringement because there was no ability to prove actual knowledge and the software was capable of substantial non-infringing use. To give readers context, evidence was introduced indicating that on the FastTrack and Gnutella networks, more than 100 million copies of file-sharing software had been downloaded and billions of files are shared across those networks each month! The court noted “the probable scope of copyright infringement is staggering.”
So the Supreme Court overturned the 9th Circuit decision—but not for the reasons you might think. In my view, the Supreme Court did not overturn or even modify the Betamax case. Distributors of peer-to-peer file-sharing software using a decentralized indexing system to share copyrighted songs and movies, and which is capable of substantial non-infringing use, cannot be held liable for contributory infringement absent showing the distributors had specific knowledge and made a material contribution to direct infringement. The court also confirmed that software distributors cannot be held liable for vicarious infringement without showing the ability to block direct infringement by users.
The Supreme Court went to great pains in overturning the 9th Circuit to note “this case is significantly different from Sony and reliance on that case to rule in favor of StreamCast and Grokster was error.” The Sony case applied to distribution of a product that had both lawful and unlawful uses and sought to impose liability because Sony knew some users might use the product unlawfully. That case held it is inequitable to impute fault and corresponding secondary liability based on the unlawful acts of others, where the product has substantial lawful utility.
The Grokster case also relates to the distribution of products capable of infringing and non-infringing uses, but that didn’t let them off the hook. Now the Supreme Court says they may be liable, but the basis of liability—if liability is to be found—will be different. Here, the distributors (Grokster and StreamCast) were not merely distributing a product, but evidenced a “purpose to cause and profit from third-party acts of copyright infringement. If liability for inducing infringement is ultimately found,” the court concluded, “it will not be on the basis of presuming or imputing fault, but from inferring a patently illegal objective from statements and actions showing what the objective was.” (emphasis supplied)
One only has to read the decision to understand the distinctions: “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 steps to encourage infringement,” and later the court notes that increasing use of the software produces more advertisements to be directed to users screens (volume driven). The more advertising, the higher the revenues. Thus, the evidence demonstrates that commercial gain realized by Grokster and StreamCast increases when overwhelmingly infringing use is higher in volume. In the face of the evidence, the Supreme Court stated, “The unlawful objective is unmistakable.” The Supreme Court remanded the case to the lower courts to re-examine the evidence in light of these new and additional standards for determining liability.
While perhaps not the “pure” victory the motion picture studios, music publishers and copyright owners hoped for, this clearly arms copyright owners with a new array of legal tools to hold software distributors and network operators liable.