B  U  L  L  E  T  I  N

The Legal Landscape After MGM v. Grokster:  Is it the Beginning of the End or the End of the Beginning?

Part I:  Understanding the Context

by Tomas A. Lipinski

Tomas A. Lipinski is associate professor and co-director of the Center for Information Policy Research at the University of Wisconsin-Milwaukee. He can be reached at P.O. Box 413, Milwaukee , WI   53201; 414-229-4908; email: tlipinsk at uwm.edu

As Jack Black’s character in the recent movie School of Rock instills in his young charges, “[I]n this life you can’t win … because the world is run by the man … there used to be a way to stick it to the man, it was called rock ’n roll … but guess what, oh no the man ruined that too with a little thing called MTV.”

View MTV as the epitome of everything that is wrong with the music industry and you pretty much have the essence of the philosophical-musical dichotomy between how the industry and consumers each perceive the state of music. Jack Black’s character, who poses as a substitute teacher at an elite preparatory elementary school, further admonishes his students: “If you want to rock, you gotta break the rules, you gotta get mad at the man.” One battle in the war between the “downloaders” (consumers) and the industry (the “man”) came to a head in the long-awaited decision in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd. The decision offers several important lessons for those with some stake or interest in the continued battle between copyright owners and copyright users – or abusers.

This article, the first of two, discusses the background legal principles and surrounding case law involved in Grokster and proceeds to review the holding of the decision and the facts on which it was based.   A later article will discuss a possible “safe harbor” for fair use and the potential impact of the ruling on future Internet technologies and on various stakeholders.

Most readers are aware of the concept of copyright infringement. In recent years one could hardly escape discussion of it, especially in light of the publicity that lawsuits against individual file-sharers generated in the national media. Philosophers among us might think such strong-arm techniques against un-named defendants are unethical or at least that responsibility for wrongdoing ought to be shared with those who facilitate infringement and not the end-user alone. Likewise, economists among the Bulletin’s readership might wonder if the transaction cost of pursuing remedy from some 12-year-old downloader or a college student struggling to make ends meet is further proof of the market failure inherent in the copyright law.

Actually, the copyright law reflects these same sorts of quandaries. The concept of secondary liability, in particular contributory infringement, reflects the judicial recognition that at times a third party should share in the responsibility for another’s primary or direct infringement and that pursuit of these actors is a fair and efficient form of risk-shifting within the law.

While the concept is well developed in the lower courts, and one could argue that a version is codified in the Copyright Act as amended (17 U.S.C.§ 512) in 1998 by the Digital Millennium Copyright Act, the concept remains a product of the common law.   In addition, the Supreme Court has had little occasion to address the matter of secondary liability. New technologies have twice presented opportunities for the Court to consider the matter – first in 1984 and some 20 years later this past spring (oral arguments were heard in March) and summer. In 1984 it was the videocassette recorder (in Sony Corp. of America, Inc. v. Universal City Studios), and in 2005 it was P2P or peer-to-peer file sharing systems in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.

Understanding the Legal Context: Contributory Liability

Contributory copyright infringement occurs when “one who, with knowledge of the infringing activity, induces or causes, or materially contributes to the infringement of another” (Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 11 59, 1162 (2d Cir. 1971).  Liability for contributory infringement is not a strict liability law as is direct copyright infringement, which is the standard used for P2P uploaders and downloaders. Rather, it is based on the scienter and conduct of the second party, the “contributing” infringer. Black’s Law Dictionary (8th ed. 2004) defines scienter as

a degree of knowledge that makes a person legally responsible for the consequences of his or her act or omission; the fact of an act’s having been done knowingly, especially as a ground for civil damages or criminal punishment – p. 1373.

As a result, a claim of contributory infringement contains an element of knowledge; that is, the contributing or contributory infringer must know or have reason to know that the infringing behavior of another will be the result of its conduct. This requirement ensures that accidental or ignorant conduct is not mistaken for bad intent. Second, a contributory infringer must engage in conduct that contributes to the direct infringement of another person in some substantive way, by doing something or in some circumstances by refusing to do something (for example, not intervening to prevent continuing infringement). As with vicarious liability (another species of secondary liability), if there is no direct infringement there can be no contributory liability.

Liability for Distributing Infringing Technologies: The Sony Standard

Under the Sony standard, adopted from the patent law’s staple article-of-commerce doctrine, the Supreme Court in 1984 created a safe harbor for entrepreneurs: simply because a product could be put to infringing use, the conduct of producing and distributing the product (or refusing to cease such operations) did not trigger liability as long as the technology could be capable of substantial non-infringing use. Moreover in a somewhat clairvoyant and telling footnote the Sony dissent observed that “[t]his case involves only the home recording for home use of television programs broadcast free over the airwaves. No issue is raised concerning cable or pay television, or the sharing or trading of tapes” [Sony Corp. of America, Inc. v. Universal City Studios, 464 U.S. 417, 459, n.2 (1984) (J. Blackmun, dissenting) (emphasis added)].

Thus the fair use the Supreme Court bored out in 1984 for consumers came in the form of time-shifting, not in the guise of all consumer recording such as library-building, back-up copying or transferring formats from cassette to CD or from CD to MP3 – so-called space-shifting. In other words the protections of Sony’s safe harbor for substantial non-infringing use do not apply in instances where the questionable activity involves the use (reproduction and distribution) of copyrighted content obtained from sources other than those offered for free through various mass media such as radio (but not fee-based Internet services) or broadcast television (as opposed to cable or satellite).

In other words it applies where the facts of Sony apply – to consumers using the recording technology to tape movies and other content that air on broadcast television networks such as NBC, CBS and PBS.   Networks are not the source of most P2P content where much of the source content is recorded music (CD) or movies (VHS or DVD) first purchased by the consumer.   Moreover, the copying done by the Sony consumer is one-to-one, not one-to-many. Most important, the use of the technology in Sony was limited to circumstances where consumers made a limited, time-shifted use of the copyrighted work, one of the most misunderstood aspects of the decision. Thus, obtaining CDs, VHS tapes or DVDs from your local public library – a free distribution authorized under section 109 of the copyright law – in order to build a library at home would not be within the Sony safe harbor, at least according to one appellate court (In Re Aimster Copyright Litigation, 334 F.3d 643, 647 (7th Cir. 2003)).

The Sony Court discussed the nature of the alleged contributory technology: some uses to which the technology, the Beta machine, could be put were conceivably infringing, so-called “library building” for example, but others were fair, e.g., a consumer might buy or rent a video or watch a home movie of family outings.   In other words, a substantial number of non-infringing uses were possible. Therefore the Beta machine, like the VHS recorder of today, is not a contributory technology (Sony Corp. of America, Inc. v. Universal City Studios, 464 U.S. 417, 442 (1984)).

In 1984, the Court used this distinction to develop a test to help courts determine whether a certain technology contributes to the infringement of others to such an extent that its producers should be deemed to have engaged in contributory conduct and share in the legal responsibility for infringing uses others make of it, that is, be liable for contributory copyright infringement. The question for the Court in Grokster was whether P2P is such a technology as well.

The Seventh Circuit Standard: A Posnerian (Cost-Benefit) Approach to Copyright

Two years ago in a case involving another P2P system (In re Aimster Copyright Litigation) the Seventh Circuit in an opinion authored by Judge Posner suggested a variation of the application of contributory infringement concepts where network technologies are involved: “What is true is that when a supplier is offering a product or service that has non-infringing as well as infringing uses, some estimate of the respective magnitudes of these is necessary for a finding of contributory infringement …the balancing of costs and benefits is necessary only in a case in which substantial non-infringing uses, present or prospective, are demonstrated [334 F.3d 643, 650 (7th Cir. 2003) (emphasis added)]. Under this “relative” standard of cost (for example, policing network users or checking the content of linked sites) and benefit (prevention of infringement) a potential contributory infringer is liable only when it would not be efficient for it to cease its contributory conduct relative to the amount of infringement it would prevent, rather like the old adage applied to the copyright law: an ounce of prevention – such as policing or monitoring – to a pound of cure (compliance). As a result  

[e]ven when there are non-infringing uses of an Internet file-sharing service, moreover, if the infringing uses are substantial then to avoid liability as a contributory infringer the provider of the services must show that it would have been disproportionately costly for him to eliminate or at least reduce substantially the infringing uses.-- In Re Aimster Copyright Litigation, 334 F.3d 643, 653 (7th Cir. 2003) (all emphasis added).

How this factor is to be applied is not further elucidated by the court, nor is the attractiveness of this standard to courts outside the Seventh Circuit determinable.   However, Justice Ginsburg in her concurring opinion cited this cost-benefit concept in a favorable comparison to the decision in A&M Records, Inc. v. Napster, Inc., [Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., __ U.S. __, 125 S.Ct. 2764, 2784, at n.1 (2005) (Ginsburg, J., concurring)] in which the Ninth Circuit offered an alternative articulation of the legal standard applicable in P2P litigation [A&M Records, Inc. v. Napster, Inc., 239 F. 3d 1004 (9th Cir. 2001)].

The Ninth Circuit Decision in Grokster: A Copyright Mea Culpa?

The Ninth Circuit issued its decision in Grokster after the Aimster case was decided, ; thus it had the benefit of reflection on Judge Posner’s “law and economics” influenced opinion. However, the Ninth Circuit was not convinced of Judge Posner’s treatment of P2P providers in light of both Supreme Court precedent, such as Sony, and its own line of cases, such as Napster:

We are mindful that the Seventh Circuit has read Sony’s substantial non-infringing use standard differently… However, Aimster is premised specifically on a fundamental disagreement with Napster I’s 1’s reading of Sony-Betamax…Even if we were free to do so [entailing an overrule of Napster] we do not read Sony-Betamax’s holding as narrowly as does the Seventh Circuit…Implicit in the Aimster analysis is that a finding of substantial non-infringing use, including potential use, would be fatal to a contributory infringement claim, regardless of the level of knowledge possessed by the defendant. – Metro-Goldwin Studios, Inc. v Grokster, Ltd., 380 F.3d 1154, 1162, at n. 9 (9th Cir. 2004), reversed and remanded,   __ U.S. __, 125 S.Ct. 2764 (2005).

The Supreme Court Re-Affirms the Limits of the Sony Safe Harbor and Then Some! In June of 2005, the U.S. Supreme Court in a unanimous decision authored by Justice Souter (with concurrences by Justices Ginsburg and Breyer) held “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” [Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., __ U.S. __, 125 S.Ct. 2764, 2770 (2005)].

The question before the Court was “under what circumstances the distributor of a product capable of both lawful and unlawful use is liable for acts of copyright infringement by third parties using the product.” While it might appear at first glance that the opinion represents a retrenchment from Sony, it is clear from Justice Souter’s opinion that the rule and safe harbor of Sony remains the law of the land. However, the Court did identify an additional mode of behavior that can subject an entrepreneur to liability as a contributory infringer. This addition is significant and offers some indication of how the Court might respond when future issues arise. In an interpretation of nuance, the decision may also signal the proper judicial attitude towards Internet piracy today.

According to Justice Souter, “One infringes contributorily by intentionally inducing or encouraging direct infringement.”   In a like-minded legal articulation reminiscent of the sole Supreme Court decision prior to Grokster involving the distribution of technology that may be put to infringing uses – the Sony decision in which the Court adopted the “staple-article-of-commerce” doctrine [35 U.S.C. § 271(c)] from the patent law – the Supreme Court in 2005 adopted the “inducement” rule, also from the patent law and applied it to the copyright law. As a result, the common law copyright is now aligned with the patent (albeit codified patent) law:

Liability under our jurisprudence may be predicated on actively encouraging (or inducing) infringement through specific acts (as the Court’s opinion develops) or on distributing a product distributees use to infringe copyrights, if the product is not capable of “substantial” or “commercially significant” non-infringing uses. – (Ginsburg, J., concurring)

The intended impact will be to “deter them [entrepreneurs] from distributing products that have no other real function than – or that are specifically intended for – copyright infringement, deterrence that the Court’s holding today reinforces (by adding a weapon to the copyright holder’s legal arsenal).” (Breyer, J., concurring)

This is the first point of significance in the opinion. The Court is more than willing to fashion a remedy if it believes a wrong must be righted. Moreover, the Court may look to other regimes within the intellectual property system, even if it means creating a new form of liability, such as borrowing again from the patent law.   Not only can one induce infringement with respect to conduct in relation to a particular consumer (the previous articulation of contributory conduct developed in the lower courts) but the mere “distribution of a product can itself give rise to liability where evidence shows that the distributor intended and encouraged the product to be used to infringe. In such a case, the culpable act is not merely the encouragement of infringement but also the distribution of the tool intended for infringing use.” While Sony involved distribution of a product to be sure, the additional element of inducement was absent.

As a result of the Court’s opinion, the Ninth Circuit decision in the Grokster case was vacated and remanded for further proceedings. The immediate significance is that Grokster and StreamCast (the two defendants in the case), as well as other similarly situated defendants, may be subject to secondary liability for copyright infringement if those defendants “distribute 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, [if supported by the evidence, the defendant] is liable for the resulting acts of infringement by third parties.” Figuring the impact of this ruling requires a closer look at the opinion, examining what the Court said as well as what the Court left unsaid!

A Closer Look at the Evidence (At Least as the Court Saw It)

The copyright infringement issues surrounding Napster, Grokster and Aimster – and whatever subsequent “next-ster” there is – did not arise by accident. In fact, Grokster attempted to ride the coattails of Napster’s customer base exploitation and likewise contributed to subsequent infringing activities of those customers. The Court found the use of a similar sounding name significant: “Grokster’s name is apparently derived from Napster, it too initially offered an OpenNap program, its software’s function is likewise comparable to Napster’s, and it attempted to divert queries for Napster onto its own Web site.” Unlike the lower courts, the Supreme Court found ample evidence of the defendants’ unsavory conduct scattered throughout the hundreds and hundreds of pages of the appellate record of which both Justice Souter and Justice Ginsburg made liberal quote, reference and use. It did not take an expert witness to calculate the scale of the infringement:

But MGM’s evidence gives reason to think that the vast majority of users’ downloads are acts of infringement, and because well over 100 million copies of the software in question are known to have been downloaded, and billions of files are shared across the FastTrack and Gnutella networks each month, the probable scope of copyright infringement is staggering.

The evidence weighed heavily against the defendants and the infringing nature of most downloading and uploading.  In fact Grokster and StreamCast conceded this point in their brief. Moreover, internal documentary evidence (there’s always a memo!) suggested that both Grokster and StreamCast desired to fill the empty shoes Napster left behind, exploiting the extant market for users desiring a vehicle to continue their infringing quests for copyrighted recordings and other material.   Advertisements and other external communications reflected the outward expression of this internal desire.

The Court appeared less concerned with the fact that some amount of non-infringing material appeared on Grokster and StreamCast systems (or P2P systems in general for that matter) or that this material is put to non-infringing uses. Of greater concern was the fact that this non-infringing material accounts for very little of the actual use made of the available material. The Court was not persuaded by arguments that Grokster, StreamCast and similar P2P systems are widely put to legitimate uses; indeed, the court  and  recognized, as have lower courts, the sheer scale of piracy facilitated through digital and Internet technologies.   

While the Court based its theory of liability on a concept heretofore foreign to the copyright law, that is, articulating the inducement rule as an exception to the Sony safe harbor substantial-non-infringing-use rule, the Court nonetheless displayed disdain (as well as a certain hipness) for the argument that such non-infringing capabilities are realistic, given the current Gen-X mindset: Morpheus “[u]sers 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.” Justice Ginsburg offered additional criticism of the lower court’s reliance onf similar evidence as tentative at best:

Here, there has been no finding of any fair use and little beyond anecdotal evidence of non-infringing uses. In finding the Grokster and StreamCast software products capable of substantial non-infringing uses, the District Court and the Court of Appeals appear to have relied largely on declarations submitted by the defendants. These declarations include assertions (some of them hearsay) that a number of copyright owners authorize distribution of their works on the Internet and that some public domain material is available through peer-to-peer networks including those accessed  through Grokster's and StreamCast’s software. – --((Ginsburg, J., Cconcurring)

In contrast, in his concurring opinion Justice Breyer observed significant non-infringing uses, or at least an amount equivalent to that of the consumers in Sony. Justice Souter’s majority opinion failed to undertake that consideration--recall his articulation of the question before the Court: “. . . under what circumstances the distributor of a product capable of both lawful and unlawful use is liable.” Perhaps leaving the question of substantial non-infringing uses unsaid as well as unasked was a strategic move, thus allowing all members of the Court to agree in unanimity. However, liability for inducement is not inconsistent with a Sony safe harbor qualification but operates, as in the codified patent law, as an exception to it. In the words of the court:

Nor does the Patent Act’s exemption from liability for those who distribute a staple article of commerce, extend to those who induce patent infringement, § 271(b).

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.

This finding is the second significant point that can be made.  The Supreme Court appears unmoved by the mere possibility of non-infringing uses and more influenced by the improbability of such uses. It might be going too far to conclude that the Court is as disdainful of Internet piracy as some recent lower courts have been [In Re Aimster Copyright Litigation, 334 F.3d 643, 645 (7th Cir. 2003); United States v. Elcom Ltd., 203 F.Supp. 2d 1111, 1132 (N.D. Cal. 2002)], but the interjection of such sarcasm does suggest that claims of non-infringing uses from subsequent defendants will be suspect. Legitimate uses will need to be well documented.

The Court, like others in positions of policy formation, such as Congress, appear to recognize all too well the scope of the problem in spite of perhaps grasping only the proverbial elephant’s trunk. If some readers here are in doubt regarding the extent of piracy on the Internet, do the math as did the Court: “over 100 million copies of the software known to have been downloaded” times the “billions of files shared across the Fastrack and Gnutella networks each month” equals a figure reflecting that “the probable scope of copyright infringement is staggering.” Factor in the variety of other P2P systems capable of similar exchanges, such as intranets, and the amount of infringing traffic is more likely astronomical.   Regardless of the actual numbers, the perception of members of the judiciary reflected in court opinion as well as expressed by members of Congress paints a view of decision-makers short on patience and long on punishment. For example, after holding hearings in 2003 on the P2P rampage and other copyright abuse among student Internet users [see <http://commdocs.house.gov/committees/judiciary/hju85286.000/hju85286_0.htm> and <http://hsgac.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=120>], legislation was introduced that would offer plaintiffs the opportunity to sue those who aid or abet another’s infringement [S. 2560, 108th Cong., 2nd Sess. (2004) (Inducing Infringement of Copyright Act of 2004)].

What do these attitudes and the new law spawned in Grokster represent for the future of innovation in Internet technologies? Perhaps we must wait to see how the lower courts interpret Grokster before the decision’s full impact can be assessed, and, of course, Congress might decide to tinker again with the copyright law. Several additional comments from the decision, however, may point to the basis for such future articulation, and we will explore them in Part 2 of this article.

© Tomas A. Lipinski 2005

Copyright © 2005, American Society for Information Science and Technology