JULY 2005
Copyrights
In Grokster The Supreme Court Reinstates Infringement
Claim While Performing a Balancing Act
In a decision long-awaited by the entertainment and
technology industries, on June 27, 2005, the United
States Supreme Court unanimously reinstated a
copyright infringement law suit against file-sharing
software companies Grokster and StreamCast. The
music and movie industry plaintiffs, whose lawsuit
had been derailed by the trial court and the United
States Court of Appeals for the Ninth Circuit, now
can continue with their legal attempts to shut down
and seek damages from the services that enabled
what the Court described as a “staggering” amount
of copyright infringement.
The Grokster case, Metro-Goldwyn-Mayer Studios,
Inc., et al. v. Grokster, Ltd., et al., has been the focus
of a great deal of media attention, in part because of
the wide spread and growing popularity, if not
cultural acceptance, of personal music and movie
downloading, and in part because of the
acknowledged importance of intellectual property
law in striking the right balance between protection
that supports and promotes creativity and protection
that stifles innovation and investment. Grokster also
provided the Court with its first opportunity to
revisit, explain, or modify its historic decision in
Sony Corp. of America v. Universal City Studios,
Inc., the 1984 copyright decision which established
the legality of VCRs and their use by consumers for
the personal recording of television programs. For
more than 20 years, Sony, and its notion of
“substantial non-infringing uses,” has been thought
by many observers to have acted as a shield
protecting technological innovation and driving
economic growth.
In somewhat of a surprise, the Grokster decision does
not take on Sony directly. Rather, the Court focuses
on a separate and distinct “inducement” theory of
secondary copyright infringement liability. Though
“inducement” combined with “knowledge of the
infringing activity,” has been part of traditional
contributory infringement analysis, the Grokster
Court, at a minimum, provides a new and different
emphasis. Justice Souter, writing for the Court, holds
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.” The Court found that
the entertainment industry plaintiffs had produced
more than enough evidence of inducement to create
a factual issue that precluded judgment for Grokster
and StreamCast. The Court remanded the case to
the lower court for further action. The entertainment
industry plaintiffs were back in the show.
THE BACKGROUND
In 2001, after the infamous Napster file sharing,
music downloading service was shut down by court
order, Grokster and StreamCast jumped into the
breach with a new type of software used for filesharing. Their software attempted to avoid some of
the centralized, operational aspects that were the
basis for liability in Napster. In reaction to this new
perceived threat, a large group of motion picture
studios, recording companies, song writers, and
music publishers filed suit against Grokster and
StreamCast. After discovery, both sides moved for
summary judgment. The trial court held that the
users of the file-sharing software, i.e., the public,
directly infringed the plaintiffs’ copyrights, but
Grokster and StreamCast were granted summary
judgment as to secondary copyright infringement. It
appeared that the changes in the technology made a
difference under the law. The trial court ruled that
Grokster and StreamCast could not be liable because
the de-centralized network of users created by their
software did not allow Grokster and StreamCast to
have the requisite actual knowledge of specific acts
of infringement. Without that knowledge, they had
not violated the law.
The entertainment industry appealed, but in a
decision that surprised many, the Ninth Circuit Court
of Appeals affirmed the dismissal of the case based
on its reading of Sony. The appeals court held that
there could be no secondary copyright infringement
liability for Grokster and StreamCast because the
software was “a commercial product capable of
substantial noninfringing uses,” and they had no
actual knowledge of specific acts of infringement
that they had failed to stop. This rule, according to
the appeals court, immunized Grokster and
StreamCast, even though there was strong evidence
that the overwhelming percentage of use (the
plaintiffs said no less than 90%) was by users
committing massive infringement, perhaps
numbering in the billions of illegally downloaded
files.
THE SUPREME COURT AND THE HOOPLA
The Supreme Court accepted the entertainment
industry’s request for review. The case attracted
great interest in the world of entertainment,
technology, and business. More than 50 “friends of
the Court” filed briefs in the case. The amici
represented an incredibly diverse group, including
Intel, the National Venture Capital Association, The
American Civil Liberties Union, The Office of the
Commissioner of Major League Baseball, the
Business Software Alliance, numerous law school
professors, the Consumer Electronics Association,
the American Intellectual Property Law Association,
and the Christian Coalition. Debate raged in the
court filings, in the press, and in the on-line world.
“Innovation,” both sides argued, had to be nurtured.
2 JULY 2005
The entertainment industry argued that real
intellectual property protection that allows hard work
and creativity to be rewarded was the only way to
foster innovation. Grokster and StreamCast, and
their supporters, argued that overbroad copyright
protection could stifle technological advance and
scare off investment in the technology sector.
THE SUPREME COURT’S BALANCING ACT
In its decision reinstating the case against Grokster
and StreamCast, the Supreme Court showed a keen
awareness of the balancing act that is at the heart of
much intellectual property protection: how much
protection is enough, how much protection is too
much? The Court itself noted the tension between
the value of “supporting creative pursuits through
copyright protection and promoting innovation in
new communication technologies by limiting the
incidence of liability for copyright infringement.”
Though the Court reversed the Ninth Circuit, it did
so by focusing on the conduct of Grokster and
StreamCast, not on the nature of the technology
itself. “One infringes contributorily,” the Court
stated, “by intentionally inducing or encouraging
direct infringement.” By holding that evidence of
the defendants’ acts precluded summary judgment
on inducement, the Court was able to provide legal
protection against a powerful engine for
infringement, while at least theoretically, not
dampening future technological advances.
The Supreme Court did not need to directly explain
the meaning of Sony; it nevertheless noted that the
Ninth Circuit Court of Appeals misunderstood and
misapplied Sony, reading the “substantial noninfringing use” language as a broad immunization
from any secondary liability, except in very limited
circumstances. According to the Court, the Ninth
Circuit Court of Appeals failed to appreciate that
Sony “did not displace other theories of liability,”
like inducement. The test in Sony is applicable to
circumstances in which liability is based solely on the
distribution of a product that had both lawful and
unlawful purposes, not to instances, such as in
Grokster, in which the “evidence goes beyond a
product’s characteristics or the knowledge that it may
be put to infringing uses, and shows statements or
actions directed to promoting infringement….” Sony
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
was not reversed or revised, and its perceived
salutary effect for technology companies was not
disturbed. In short, at least for the moment, the Court
limited the reach of Sony without eroding its core
effect. In fact, the two concurrences, each supported
by three justices, attest to the ongoing vitality of
Sony, as the opinions debate with each other how the
“substantial non-infringing uses” test might be
applied.
THE INDUCEMENT RULE
The Court elaborates on what it calls the
“inducement rule.” Secondary liability may be
based on the distribution of a device, which is
promoted to infringe copyrights, in a manner that is
clear and affirmative. “[M]ere knowledge of
infringing potential or of actual infringing uses” is
not enough to have liability attach to a distributor
under this rule. Only “purposeful, culpable
expression and conduct” can lead to liability. In this
way, what the Court characterizes as “legitimate
commerce” and “innovation having a lawful
promise” will not be affected at all.
Of course, identifying these acts which turn a
“legitimate” commercial enterprise into an unlawful
infringer may not be simple. The Court identified
several “active steps to encourage infringement”
taken by Grokster and StreamCast:
■
The promotion of the services to users and
advertisers as successors to Napster
■
The derivation of the Grokster name from
Napster
■
The promotion of an expanded body of copyright
protected music to users
■
The adoption of a business model based on giving
away the software but selling advertising, the
value of which increases with usage
■
The failure to filter the use of any copyright
protected material (though the failure to use such
filters alone will not be sufficient to find
inducement)
And more generally, the Court pointed to
advertising, solicitations, demonstrations,
instructions, and recommendations as activities that
could be the basis for inducement liability.
Companies looking to avoid or minimize the risk of
inducement liability will need to monitor and
control carefully its business plans, marketing
material, advertising campaigns, and its internal
documentation. It will now be up to the lower courts
to apply this intent-based rule to actual situations.
CONCLUSIONS AND ACTIONS
This case is not over. It now will move back to the
trial court, where the suit may be decided on the
entertainment industry’s motions, or where it may go
to trial. But in the short run, Grokster no doubt gives
the entertainment industry a boost to its enforcement
activities and a most practical means of battling
infringement. Though thousands of infringement
lawsuits have been filed against individual
downloaders, it clearly is much more efficient to
challenge the enablers of the infringement. The
large file-sharing competitors of Grokster and
StreamCast may be the first parties to be targeted
following this ruling. Some observers believe that
the Court’s deciding the case on inducement grounds
has given the entertainment industry a huge club to
use against any perceived infringer. Only time will
tell how this battle plays out, but the effect of
Grokster is not likely to be dramatic for most
technology companies.
Though Grokster has defined a type of liability, and
though the exact contours of that liability can not be
known in every instance, the chance of liability can
be reduced by prudent action. Companies that are
developing technologies or services that could have
infringing uses should consider a full compliance
review. The careful preparation and control of
business, marketing, and advertising plans will
reduce potential exposure And finally, Sony’s
protection of technology companies and their new
products remains intact, at least until the Supreme
Court revisits the delicate balance it has tried to
maintain between intellectual property protection
and the freedom to innovate.
David J. Byer
617.261.3115
dbyer@klng.com
3 JULY 2005
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
If you have questions or would like more information about K&LNG’s Copyright practice, please contact
one of our Copyright lawyers listed below:
Boston
David J. Byer
Deborah J. Peckham
Robert Everett Wolin
Carleton O. Strouss
Nigel A. Davies
Bonnie E. Berry LaMon
Daniel A. Casey
Anthony P. La Rocco
Mark I. Peroff
Jon Michaelson
Franklin B. Molin
Deborah Bailey-Wells
Marc S. Martin
Dallas
Harrisburg
London
Los Angeles
Miami
Newark
New York
Palo Alto
Pittsburgh
San Francisco
Washington
617.261.3115
617.261.3126
214.939.4909
717.231.4503
44.(0)20.7360.8128
310.552.5015
305.539.3324
973.848.4014
212.536.4865
650.798.6704
412.355.6251
415.249.1065
202.778.9859
dbyer@klng.com
dpeckham@klng.com
rwolin@klng.com
cstrouss@klng.com
ndavies@klng.com
bberry@klng.com
dcasey@klng.com
alarocco@klng.com
mperoff@klng.com
jmichaelson@klng.com
fmolin@klng.com
dbaileywells@klng.com
mmartin@klng.com
www
w.. k l n g . c o m
BOSTON DALLAS HARRISBURG LONDON LOS ANGELES MIAMI NEWARK NEW YORK PALO ALTO PITTSBURGH SAN FRANCISCO WASHINGTON
■
■
■
■
■
■
■
■
■
■
■
Kirkpatrick & Lockhart Nicholson Graham LLP (K&LNG) has approximately 950 lawyers and represents entrepreneurs, growth and middle market, capital markets participants, companies and leading
FORTUNE 100 and FTSE 100 global corporations nationally and internationally.
K&LNG is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one qualified in Delaware, U.S.A. and practicing from offices in Boston,
Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Palo Alto, Pittsburgh, San Francisco and Washington and one incorporated in England practicing from the London office.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts
or circumstances without first consulting a lawyer.
Data Protection Act 1988 - We may contact you from time to time with information on Kirkpatrick & Lockhart Nicholson Graham LLP seminars and with our regular newsletters, which may be of
interest to you. We will not provide your details to any third parties. Please e-mail cgregory@klng.com if you would prefer not to receive this information.
© 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP. ALL RIGHTS RESERVED.