TELECOM AND MEDIA PRACTICE GROUP E-NEWS — JUNE 27, 2005
U.S. Supreme Court Rules Companies Promoting
Infringing Uses of a Product or Service as Principal
or Primary Use are Liable for Copyright Infringement
The U.S. Supreme Court’s decision today in Metro Goldwyn Mayer Studios v. Grokster, Ltd., vacates
the Ninth Circuit’s determination that the operators of peer-to-peer (P2P) file-sharing technology
services were not contributorily liable for copyright infringement by users of their technology because
the P2P technology also was capable of substantial non-infringing uses. Today’s decision also clarifies
the Supreme Court’s landmark decision in Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S.
417 (1984) (Sony-Betamax), which determined that the maker of a product "capable of substantial noninfringing uses" was not liable for contributory copyright infringement
In Sony-Betamax, television program copyright holders sued Sony for contributory infringement
because users of Sony’s Betamax videotape recorders were taping television broadcasts, allegedly
infringing their copyrights. The Supreme Court’s 5-4 decision in 1984 held that "the sale of copying
equipment, like the sale of other articles of commerce, does not constitute contributory infringement if
the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable
of substantial non-infringing uses."
Today, responding to the rise of Internet music-sharing software, the Court reasoned that, under
existing legal principles, the fact that a technology was "capable of substantial non-infringing uses," was
not an absolute defense to contributory infringement, in the face of actual evidence of intent to
encourage users to engage in copyright infringement.
The Grokster case began when major motion picture studios and recording companies, later joined by
music publishers and songwriters, sought both injunctive relief and damages for copyright infringement
against music file-sharing software providers Grokster and StreamCast Networks. The district court
found that the defendants’ services were distinguishable from those that had been enjoined in the
earlier "Napster" music file-sharing litigation. Unlike the Napster service, the defendants’ current
software did not rely on a company-controlled server to facilitate file-sharing. The district court
concluded that because the defendants did not play a direct role in assisting copyright infringers and
could not block access to infringing files even after copyright holders provided notice about specific
files, the defendants were entitled to summary judgment.
The Ninth Circuit affirmed, analyzing the case based on two recognized theories of secondary copyright
liability: contributory copyright infringement and vicarious copyright infringement. To prove contributory
copyright infringement, a plaintiff must show: (1) direct infringement by the end-user, (2) that the
defendant knew of the infringing use, and (3) that the defendant materially contributed to the
infringement. There was no dispute that end-users were infringing copyrights. The Ninth Circuit
reasoned, however, that the defendants’ products had substantial non-infringing uses, and, in contrast
to the Napster service, did not have constructive knowledge of the infringing use, and further that the
defendants did not materially contribute to the users’ infringement because, unlike Napster, they did not
participate in the actual exchange of copyrighted files.
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To prove vicarious copyright infringement, a plaintiff must show: (1) direct infringement by the end-user,
(2) that the defendant benefited financially from the infringement, and (3) that the defendant had the
right and ability to supervise the infringers. There was no dispute that end-users were infringing
copyrights, or that the defendants benefited financially from the use of their products. The Ninth Circuit
concluded, however, that the defendants had no ability to supervise the infringers because once again,
unlike Napster, the defendants did not participate in the actual exchange of copyrighted files. The Ninth
Circuit also noted that, in their software licensing agreements with users, defendants had not reserved
any right to block illegal use of their products. In addition, although it may have been possible for the
defendants to modify their software to enable blocking in future versions, the court considered this
irrelevant on the issue of whether vicarious liability existed for current versions.
The Supreme Court granted certiorari in 2004 and heard oral arguments on March 29, 2005. The
Court’s unanimous decision is noteworthy in its attention to the actual activities of the defendant
companies, and the actual, known conduct of the users of the defendants’ services. For example, the
Court noted that "Grokster and StreamCast are not … merely passive recipients of information about
infringing use. 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."
The Court further described the actual operation of the defendants’ businesses:
In addition to this evidence of express promotion, marketing, and intent to promote further, the
business models employed by Grokster and StreamCast confirm that their principal object was
use of their software to download copyrighted works. Grokster and StreamCast receive no
revenue from users, who obtain the software itself for nothing. Instead, both companies
generate income by selling advertising space, and they stream the advertising to Grokster and
Morpheus users while they are employing the programs. As the number of users of each
program increases, advertising opportunities become worth more. … While there is doubtless
some demand for free Shakespeare, the evidence shows that substantive volume is a function
of free access to copyrighted work. Users seeking Top 40 songs, for example, or the latest
release by Modest Mouse, are certain to be far more numerous than those seeking a free
Decameron, and Grokster and StreamCast translated that demand into dollars.
The Court then explained that the Ninth Circuit had misapplied the law regarding contributory or
vicarious liability for infringement, by overstating the protection from liability that technologies with both
infringing and non-infringing uses should have:
We agree with MGM that the Court of Appeals misapplied Sony, which it read as limiting
secondary liability quite beyond the circumstances to which the case applied. Sony barred
secondary liability based on presuming or imputing intent to cause infringement solely from the
design or distribution of a product capable of substantial lawful use, which the distributor
knows is in fact used for infringement. The Ninth Circuit has read Sony’s limitation to mean that
whenever a product is capable of substantial lawful use, the producer can never be held
contributorily liable for third parties’ infringing use of it.
…
This view of Sony, however, was error, converting the case from one about liability resting on
imputed intent to one about liability on any theory. Because Sony did not displace other
theories of secondary liability, and because we find below that it was error to grant summary
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judgment to the companies on MGM’s inducement claim, we do not revisit Sony further, as
MGM requests, to add a more quantified description of the point of balance between protection
and commerce when liability rests solely on distribution with knowledge that unlawful use will
occur. It is enough to note that the Ninth Circuit’s judgment rested on an erroneous
understanding of Sony and to leave further consideration of the Sony rule for a day when that
may be required.
…
Sony’s rule limits imputing culpable intent as a matter of law from the characteristics or uses of
a distributed product. But nothing in Sony requires courts to ignore evidence of intent if there is
such evidence, and the case was never meant to foreclose rules of fault-based liability derived
from the common law. … Thus, where 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’s staple-article rule will not preclude liability.
…
[T]he 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. We are, of course, mindful of the need to keep
from trenching on regular commerce or discouraging the development of technologies with
lawful and unlawful potential. Accordingly … mere knowledge of infringing potential or of actual
infringing uses would not be enough here to subject a distributor to liability. Nor would ordinary
acts incident to product distribution, such as offering customers technical support or product
updates, support liability in themselves. The inducement rule, instead, premises liability on
purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate
commerce or discourage innovation having a lawful promise.
…
The Court then applied existing law concerning contributory and vicarious liability for infringement, but
reached a very different conclusion than the Ninth Circuit in its application of that law to the facts
presented:
There is substantial evidence in MGM’s favor on all elements of inducement, and summary
judgment in favor of Grokster and StreamCast was error. On remand, reconsideration of
MGM’s motion for summary judgment will be in order.
In sum, applying the Court’s ruling today, those involved in distributing technologies that may be used
for infringing as well as non-infringing activities should be aware of how the Court’s new decision has
clarified the liability rules for contributory copyright infringement. The Court’s decision today confirms
that technology distributors that knowingly promote and encourage infringing activity may be liable for
copyright infringement. Evidence of intent, as well as evidence of actual infringing use, is key to
this analysis. However, "mere knowledge of infringing potential or of actual infringing uses would not
be enough … to subject a distributor to liability." Some key questions for technology distributors to
evaluate in light of the Court’s decision include:
ƒ
Does the company directly benefit from infringement? Is the company’s business plan viable if
revenues or benefits resulting from infringing uses of the technology are excluded?
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ƒ
Does the marketing or provision of ongoing services to users encourage or induce infringing
activity? Does the company specifically target demand for infringing uses?
ƒ
Are most uses of the technology actually infringing uses? Does the technology, as marketed,
have substantial or commercially significant non-infringing uses that are credible?
ƒ
Could the company limit infringing activity? Does the company make an effort to respond to
allegations of infringement and prevent infringement?
The complete U.S. Supreme Court decision, with citations to the cases discussed above, may be found
at: http://www.supremecourtus.gov/opinions/04slipopinion.html
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