In the Technology-Driven, File Sharing Era, Copyright Protection Remains Alive and Well As a Tool to Combat Active Inducements to Infringe

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1 In the Technology-Driven, File Sharing Era, Copyright Protection Remains Alive and Well As a Tool to Combat Active Inducements to Infringe On June 27, 2005, the Supreme Court in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd. (No ), breathed new life into copyright law s ability to combat infringement over peer-to-peer networks. In a unanimous decision, the Court held that one who distributes a device [here, peer-to-peer file sharing software] 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. Slip Op. at 1. In Grokster, the trial court granted summary judgment to the providers of peer-topeer file sharing software, because they did not have actual knowledge of specific acts of infringement by the users of their software. Slip Op. at 9. The Ninth Circuit Court of Appeals affirmed. According to the Ninth Circuit, under Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), the defendants were insulated from liability because their software was capable of substantial non-infringing uses, and they had no actual knowledge of the infringement (which would have obliged the defendants to do something to stop it). Slip Op. at In Sony, the defendants manufactured and sold home video tape recorders. The plaintiffs were the owners the copyrights on some of the television programs that were broadcast on public airwaves. Members of the general public used video tape recorders sold by the defendants to record a large number of these broadcasts. Sony, 464 U.S. at The average member of the public used these video recorders principally to record programs that could not be viewed as they were being televised, so that they could be watched at a later time. This practice, known as time-shifting, was done by the public without objection from the owners of the copyrights on the programs. Id., 464 U.S. at 421. This practice continues today. The plaintiff copyright owners did not sue members of the general public. Instead, they sued the video recorder manufacturers for monetary and injunctive relief Id., 464 U.S. at 420. The theories pursued by the plaintiffs were those of contributory and vicarious infringement. The Supreme Court held that the video recorder manufacturing defendants were not liable under either theory. Borrowing from patent law principles, the Court stated that [t]he staple article of commerce doctrine must strike a balance between a copyright holder's legitimate demand for effective not merely symbolic protection of the statutory monopoly, and the rights of others freely to engage in substantially unrelated areas of commerce. Accordingly, 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 noninfringing uses. Sony, 464 U.S. at 442.

2 In Sony, the defendants demonstrated a significant likelihood that substantial numbers of copyright holders who license their works for broadcast on free television would not object to having their broadcasts time-shifted by private viewers. Further, the plaintiffs failed to demonstrate that time-shifting would cause any likelihood of nonminimal harm to the potential market for, or the value of, their copyrighted works. The video recorders, therefore, were capable of substantial noninfringing uses. The defendants sale of such equipment to the general public did not constitute contributory infringement of the plaintiffs copyrights. Sony, 464 U.S. at 456. The video recorder manufacturing defendants also were not liable under the theory of vicarious infringement. As the Sony court stated, [i]f vicarious liability [were] to be imposed on Sony in this case, it must rest on the fact that it has sold equipment with constructive knowledge of the fact that its customers may use that equipment to make unauthorized copies of copyrighted material. There is no precedent in the law of copyright for the imposition of vicarious liability on such a theory. Sony, 464 U.S. at 439. The Sony decision, for two decades, thus provided a blueprint for technology companies to avoid secondary liability for the direct infringement of their customers who used their hardware, software, or copying/replication equipment. If this technology was capable of a substantial non-infringing use, no matter how theoretical, then secondary infringement liability could be avoided. The issue was not to be squarely addressed in the technology context until the now infamous Napster peer-to-peer file sharing service arose out of today s ubiquitous Internet communications network. In A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, (9 th Cir. 2001), the Napster service enabled its customers to exchange copyrighted music files over the Internet at will, without recompense to the copyright owners, by means of a central hub or network to which the customers were connected by software Napster provided. The copyright owners of these musical works sued Napster for contributory and vicarious copyright infringement. Napster, 239 F.3d at Napster made itself an easy target. Affirming the district court s imposition of liability against Napster, the Ninth Circuit Court of Appeals held that one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a contributory infringer. [L]iability exists if the defendant engages in personal conduct that encourages or assists the infringement. Id., 239 F.3d at Napster offered a number potential non-infringing uses of its system, attempting to take advantage of the safe harbor provided by Sony. The Ninth Circuit did not find these potential non-infringing uses substantial or credible. Regardless of the number of Napster s infringing versus noninfringing uses, the evidentiary record supported the district court s finding that [the] plaintiffs would likely prevail in establishing that Napster knew or had reason to know of its users infringement of plaintiffs copyrights. Napster, 239 F.3d at

3 The Ninth Circuit concluded that sufficient knowledge existed to impose contributory liability when linked to demonstrated infringing use of the Napster system. Napster had actual knowledge that specific infringing material was available using its system, that it could block access to the system by suppliers of the infringing material, and that it failed to remove the material. Napster, 239 F.3d at The Ninth Circuit also Napster materially contributed to the infringing activity. [W]ithout the support services defendant provide[d], Napster users could not find and download the music they want[ed] with the ease of which [Napster] boast[eds. Id., 239 F.3d at The plaintiffs in Napster also demonstrated proof of liability for vicarious infringement. That is, there was evidence that Napster had a direct financial interest in, and benefited from, the infringing activity on its system. Napster also retained the right to control access to its system, yet turned a blind eye to detectable acts of infringement for the sake of profit. Id., 239 F.3d at The defendant in Napster was an easy target because of the central hub or network it provided to facilitate its customers infringements by peer-to-peer file sharing. The defendants in Grokster, however, had learned from Napster s experience. In Metro-Goldwyn-Mayer Studios, Inc. v. Grokster Ltd., 380 F.3d 1154, 1158 (9 th Cir. 2004) the plaintiffs owned or controlled the vast majority of copyrighted motion pictures and sound recordings in the United States. Defendants Grokster Ltd. and StreamCast Networks, Inc. were and are companies that freely distribute software that allows users to share computer files with each other, including digitized music and motion pictures. No central hub or network, as in Napster, is involved. The copyright owners alleged that over 90% of the files exchanged through use of the defendants peer-to-peer file-sharing software offered by the Software Distributors involved copyrighted material. Once again, the copyright owners argued, that Grokster and StreamCast were liable for vicarious and contributory copyright infringement. The Ninth Circuit stated that the three elements required to prove a defendant liable under the theory of contributory copyright infringement were: (1) direct infringement by a primary infringer, (2) knowledge of the infringement, and (3) material contribution to the infringement. The element of direct infringement was undisputed in the Grokster case. Grokster, 380 F.3d at Further, if the product at issue is not capable of substantial or commercially significant noninfringing uses, then the copyright owner need only show that the defendant had constructive knowledge of the infringement. On the other hand, if the product at issue is capable of substantial or commercially significant noninfringing uses, then the copyright owner must demonstrate that the defendant had reasonable knowledge of specific infringing files and failed to act on that knowledge to prevent infringement. Grokster, 380 F.3d at In Grokster, the district court found it undisputed that the software distributed by each defendant was capable of substantial noninfringing uses: (1) to the facilitate the sharing of works authored by persons who permit their works to be distributed via the software, or (2) to distribute public domain works. Id. In the Ninth Circuit s view, in 3

4 order for safe harbor of Sony to apply, a product need only be capable of substantial noninfringing uses. It was enough for Grokster and StreamCast to show that their software products were capable of substantial or commercially significant noninfringing uses, no matter what other (infringing) activities were enabled by their software. Grokster, 380 F.3d at The Ninth Circuit recognized that its holding in Grokster was at odds with the Seventh Circuit, which read Sony s substantial noninfringing use standard differently. In re Aimster Copyright Litig., 334 F.3d 643, 651 (7th Cir. 2003). The Seventh Circuit determined that an important additional factor is how probable the noninfringing uses of a product are. Id., 334 F.3d at 653. The Ninth Circuit readily dismissed the reasoning of Aimster, because in that case no evidence whatsoever was tendered of any noninfringing product use. Grokster, 380 F.3d at 1162, n. 9. The Ninth Circuit also found that the Grokster and StreamCast did not materially contribute to the direct copyright infringement by users of their software. This was because the software providers did not provide the site and facilities for infringement, and do not otherwise materially contribute to direct infringement. Infringing messages or file indices do not reside on the defendants computers, nor do defendants have the ability to suspend user accounts. Grokster, 380 F.3d at In short, Grokster and StreamCast were not clones of Napster, and thus the Ninth Circuit freed them from contributory liability. With respect to vicarious copyright infringement liability, the Ninth Circuit held that three elements were required: (1) direct infringement by a primary party, (2) a direct financial benefit to the defendant, and (3) the right and ability to supervise the infringers. The elements of direct infringement and a direct financial benefit, via advertising revenue, were undisputed by the software vendors. Grokster, 380 F.3d at However, neither of the defendants had the ability to block access to individual users, and none of the communication between defendants and the end users provided a point of access for filtering or searching for infringing files. Unlike Napster, Grokster and StreamCast did not operate and design an integrated service, which they monitored or controlled. Therefore, there was no separate blind eye theory or element of vicarious liability on which the plaintiffs could rely. Grokster, 380 F.3d at The Supreme Court took the Ninth Circuit to task for mis-applying Sony. In this case, the defendants distributed their peer-to-peer file sharing software with the very obvious intent to cause the users of their software to trade in copyrighted files without authorization. Slip Op. at 24. This, said the Court, distinguishes the case from the safe harbor of Sony, and potentially subjects the defendants to contributory liability under the theory of active inducement. Slip Op. at 17. In Grokster, the Supreme Court was careful to balance the interests of copyright holders against the need for the development of new technologies. Slip Op. at 11 and 15. The balance in this case tipped in favor of the copyright owners, given the massive infringements being enabled by Grokster s and StreamCast s software. Slip Op. at 12. 4

5 The balance tipped in favor of the video recorder manufacturing defendants in Sony because of the substantial non-infringing uses time shifting being enabled by their technology, and the absence of the defendants active steps to encourage infringement by end users. Slip Op. at The Ninth Circuit simply went too far in its application of Sony, to preclude secondary liability from infringement merely when an article of commerce is capable of a substantial lawful use without looking at any of the surrounding facts. Slip Op. at 16. Where the evidence goes beyond the product s characteristics, and leads to proof of knowing encouragement of others to engage in infringement, the limitations of Sony do not apply. Slip Op. at 17 and 19. As the Supreme Court found, the evidence of the defendants unlawful intent was manifest, and included: (1) encouragement to acquire former customers of the shut-down Napster service, (2) the absence of any effort to develop filtering tools or mechanisms to diminish the infringing activities of end-users, and (3) the increased advertising revenue obtained by the defendants as their services gained in popularity. Slip Op. at The Supreme Court vacated the Ninth Circuit s decision, and remanded the case for further proceedings. Slip Op. at 24. Sony and Grokster may now be seen as two opposite extremes of a spectrum. Merely providing a staple article of commerce that others can use to engage in infringement will not, without more, subject a technology company to secondary liability on the theory of contributory infringement. However, where there is additional evidence of an intent to actively induce others to infringe with the provided technology, liability will be found under this theory. A cohesive and detailed theory of vicarious copyright liability (profiting from direct infringement, but not exercising the right to stop or limit it) will have to wait for another day, as the Supreme Court declined the invitation to address this theory in Grokster. Slip Op. at n. 9. For further inquiries regarding the Grokster, decision, please contact Jonathan Hudis at jhudis@oblon.com or