Tuesday, June 28

MGM v Grokster Ruling (w/multiple commentaries)

Well, I was initially horrified, but based on my own experience in this area, as well as that of those whom I trust, this is hardly the slam-dunk for the entertainment industry that the newspapers and tv shows will likely proclaim. In fact, they're likely to find it quite dissappointing, which technologists will likely be quite reassured. The heart of the Sony decision was unanimously upheld, and if you read the Breyer concurrence, there are plenty of good interpretations about copyright's proper place. To wit:

Sony's rule is clear. That clarity allows those who develop new products that are capable of substantial noninfringing uses to know, ex ante, that distribution of their product will not yield massive monetary liability. At the same time, it helps deter them 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).

Sony's rule is strongly technology protecting. The rule deliberately makes it difficult for courts to find secondary liability where new technology is at issue. It establishes that the law will not impose copyright liability upon the distributors of dual-use technologies (who do not themselves engage in unauthorized copying) unless the product in question will be used almost exclusively to infringe copyrights (or unless they actively induce infringements as we today describe). Sony thereby recognizes that the copyright laws are not intended to discourage or to control the emergence of new technologies, including (perhaps especially) those that help disseminate information and ideas more broadly or more efficiently. Thus Sony's rule shelters VCRs, typewriters, tape recorders, photocopiers, computers, cassette players, compact disc burners, digital video recorders, MP3 players, Internet search engines, and peer-to-peer software. But Sony's rule does not shelter descramblers, even if one could theoretically use a descrambler in a noninfringing

Given the nature of the Sony rule, it is not surprising that in the last 20 years, there have been relatively few contributory infringement suits--based on a product distribution theory--brought against technology providers

To require defendants to provide, for example, detailed evidence--say business plans, profitability estimates, projected technological modifications, and so forth--would doubtless make life easier for copyrightholder plaintiffs. But it would simultaneously increase the legal uncertainty that surrounds the creation or development of a new technology capable of being put to infringing uses.

I do not doubt that a more intrusive Sony test would generally provide greater revenue security for copyright holders. But it is harder to conclude that the gains on the copyright swings would exceed the losses on the technology roundabouts.

For one thing, the law disfavors equating the two different kinds of gain and loss; rather, it leans in favor of protecting technology. As Sony itself makes clear, the producer of a technology which permits unlawful copying does not himself engage in unlawful copying--a fact that makes the attachment of copyright liability to the creation, production, or distribution of the technology an exceptional thing.

Moreover, Sony has been the law for some time. And that fact imposes a serious burden upon copyright holders like MGM to show a need for change in the current rules of the game

In any event, the evidence now available does not, in my view, make out a sufficiently strong case for change.

Will an unmodified Sony lead to a significant diminution in the amount or quality of creative work produced? Since copyright's basic objective is creation and its revenue objectives but a means to that end, this is the underlying copyright question. See Twentieth Century Music Corp. v. Aiken, 422 U. S. 151, 156 (1975) ("Creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad public availability of literature, music, and the other arts"). And its answer is far from clear.

The extent to which related production has actually and resultingly declined remains uncertain, though there is good reason to believe that the decline, if any, is not substantial.

As today's opinion makes clear, a copyright holder may proceed against a technology provider where a provable specific intent to infringe (of the kind the Court describes) is present.

From: Tim Wu
To: Walter Dellinger, Dahlia Lithwick, and Charles Fried
Subject: Grokster Dies, iTunes Lives
Monday, June 27, 2005, at 2:22 PM PT

Grokster was the case everyone (but Dahlia) has been waiting for, because everyone and their dog has either downloaded music or knows someone who has. And despite all the technological buzz, the court's opinion is old school. Justice David Souter, joined by the entire court, in essence says this: If you run a crooked business, we will shut you down. The defendants were explicitly relying on illegal copying to run their peer-to-peer file-sharing business—one of the P2P companies went so far as to make Top 40 songs available for free. And that, said the court, just isn't kosher. "One who distributes a device with the object of promoting its use to infringe copyright," Souter wrote, "is liable for the resulting acts of infringement by third parties."

But what about the Sony BetaMax rule—which saved the VCR on the grounds that it can be used for legal as well as illegal purposes? The Sony rule is central: It is what makes it legal to sell the TiVo, the photocopier, and even the typewriter, though each in its own way might be used for evil deeds. All the Grokster-watchers wanted to know what the court would do with Sony.

The most interesting part about Grokster is that it purports to leave Sony untouched, while adding this new cautionary against operating a crooked business. In other words, the court is saying that it's all about the marketing. By this logic, if Xerox in the 1970s had said,"Don't buy that textbook—photocopy it!" the photocopier, just like that, would have become contraband.

If a rule that's based on marketing seems odd, that's because it is. Can we really know, by looking at a company's ads, whether they're up to no good? The aftermath of Grokster will be a long debate over what exactly it means to "promote" violations of copyright. One reading of Grokster is that it creates a new safe harbor. The opinion suggests that by taking affirmative steps to stop infringement, Grokster and StreamCast might have stayed out of trouble. "Neither company attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software," Souter pointed out. Yet the court also maintains that companies don't have to so diminish—after all, the VCR itself did nothing to prevent illegal uses. In short, by encrypting its offerings, making a deal with the recording industry, or taking some other copyright-friendly step, the court suggests a new P2P service could stay out of copyright trouble.

What the court is doing boils down to asking judges to be on the watch for monkey business. In the eyes of the justices, companies like KaZaA and Grokster were clearly up to no good, but iTunes—now there's a respectable operation. What the court is trying to do, however awkwardly, is prevent copyright from killing new technologies while at the same time preventing scofflaws from getting away with the technological equivalent of murder. The result is almost like a rule of etiquette—yes, you can sell something that will destroy the recording industry, as long as you don't flaunt it. That's a lesson that's already been learned by Steve Jobs' iTunes, the leading legitimate music download service. The court, in short, has cursed KaZaA, blessed iTunes, and told us that TiVo is OK, too. And while today's decision nominally declares victory for the recording industry, I doubt there will be much celebration going on in industry headquarters tonight.

Supreme Court Sows Uncertainty
June 27, 2005

Let's measure today's opinion against the chief issues mentioned in the "Grokster Reader's Guide" last week.

* It's Not About P2P: It's still not about P2P. Whether or not today's ruling unleashes new litigation against innovators, it will have no effect on the tens of millions of Americans who continue to use P2P file-sharing software, nor will it deter off-shore programmers living beyond the reach of US copyright laws. Hilary Rosen is right: giving music fans a compelling legitimate alternative, whether through collective licensing or simply competing with free, is the only solution.

* No Matter What, We've Won: There is reason to celebrate in today's ruling. It could have been much worse. As many have noted, the Court rejected many of the more extreme positions that the entertainment industry argued for in the courts below. As discussed below, the Court left intact several important legal bulwarks for innovators. While the Court didn't shore them up, it also didn't tear them down.

* Main Event #1: Sony Betamax. The Supreme Court left the Betamax defense intact by essentially refusing to say anything about it, although the sniping between the two concurrences suggests that a future battle may be coming. Neither side can declare total victory on this score and future cases are probably inevitable (especially where well-advised companies use today's decision as a roadmap for avoiding any hint of inducement).

* Main Event #2: Vicarious Liability. The Court chose to punt on this issue, choosing to base its decision on inducement instead of addressing the entertainment industry's "you could have designed it differently" theory of vicarious liability. The Court's exposition of inducement, however, suggests that it would be hostile to any theory that imposed a free-floating obligation to redesign (without any evidence of inducement) on technologists. That's good news.

* Main Event #3: Inducement. The Court conjured a new form of indirect copyright liability, importing inducement from patent law. Lawyers will be reading the tea leaves here for years to come, trying to divine the precise boundaries of this new form of copyright liability (and, contrary to what the patent lawyers will tell you, patent precedents don't resolve all the questions). The opinion suggests that copyright plaintiffs must show some overt act of inducement; the design and distribution (along with the usual incidents of distribution) of a product, by itself, are not enough. But the Court's opinion may lead lower courts to conclude that once you find an overt act, however small, virtually everything else becomes relevant to divine your "intent." That would be a bonanza for entertainment lawyers eager to foist huge legal costs on defendants. Reminiscent, in some ways, of the securities class actions that have bedeviled high tech companies for years.

Public Knowledge statement from their president Gigi Sohn:

Today's Court decision in the Grokster case underscores a principle Public Knowledge has long promoted -- punish infringers, not technology. The Court has sent the case back to the trial court so that the trial process can determine whether the defendant companies intentionally encouraged infringement. What this means is, to the extent that providers of P2P technology do not intentionally encourage infringement, they are exempt from secondary liability under our copyright law. The Court also acknowledged, importantly, that there are lawful uses for peer-to-peer technology, including distribution of electronic files 'by universities, government agencies, corporations, and libraries, among others.'

The Court is clearly aware that any technology-based rule would have chilled technological innovation. That is why their decision today re-emphasized and preserved the core principle of Sony v. Universal City Studios -- that technology alone can't be the basis of copyright liability -- and focused clearly and unambiguously on whether defendants engaged in intentional acts of encouraging infringement. The Court held expressly that liability for providing a technological tool such as the Grokster file-sharing client depends on 'clear expression or other affirmative steps taken to foster infringement.' What this means is, in the absence of such clear expression or other affirmative acts fostering infringement, a company that provides peer-to-peer technology is not going to be secondarily liable under the Copyright Act.

Lichtman: Hollow Victory in Grokster

MGM won on paper today, but my first reading of the opinion makes me wonder whether the victory will have any bite outside of this specific litigation. Intent-based standards, after all, are among the easiest to avoid. Just keep your message clear -- tell everyone that your technology is designed to facilitate only authorized exchange -- and you have no risk of accountability.

That is not the standard I was hoping for. As I wrote in the amicus brief, I would have allowed liability to be based exclusively on objective evidence, for example a party's failure to alter its technology in a way that would significantly reduce infringing behavior without significantly interfering with legitimate.

Legality of Design Decisions, and Footnote 12 in Grokster

As a technologist I find the most interesting, and scariest, part of the Grokster opinion to be the discussion of product design decisions. The Court seems to say that Sony bars liability based solely on product design (p. 16):

Sony barred secondary liability based on presuming or imputing intent to cause infringement solely from the design of distribution of a product capable of substantial lawful use, which the distributor knows is in fact used for infringement.

And again (on p. 17),

Sony’s rule limits imputing culpable intent as a matter of law from the characteristics or uses of a distributed product.

But when it comes time to lay out the evidence of intent to foster infringement, we get this (p. 22):

Second, this evidence of unlawful objective is given added significance of MGM’s showing that neither company attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software. While the Ninth Circuit treated the defendants’ failure to develop such tools as irrelevant because they lacked an independent duty to monitor their users’ activity, we think this evidence underscores Grokster’s and StreamCast’s intentional facilitation of their users’ infringement.

It’s hard to square this with the previous statements that intent is not to be inferred from the characteristics of the product. Perhaps the answer is in -footnote 12, which the court hangs off the last word in the previous quote:

Of course, in the absence of other evidence of intent, a court would be unable to find contributory infringement liability merely based on a failure to take affirmative steps to prevent infringement, if the device otherwise was capable of substantial noninfringing uses. Such a holding would tread too close to the Sony safe harbor.

So it seems that product design decisions are not to be questioned, unless there is some other evidence of bad intent to open the door.

The Court closed the door on this sort of inquiry, however. As the opinion makes clear, evidence of unreasonable product design can be considered only if there is also smoking-gun evidence of intent. Indeed, even outlandish design desicions are off limits without the relevant precursor.

Surely the Court realizes that well-advised bad actors rarely leave smoking guns lying about. Hence the victory here looks hollow, and in my view the legal rule seems poorly crafted.

From Eric Goldman's Technology Law Blog

Why Did It Happen

I think the Supreme Court reached the only logical result. It had to find for the plaintiffs. I say this because there was simply no way for the Court to ignore that Grokster and Streamcast were facilitating massive copyright infringement. As the court says, “the probable scope of copyright infringement is staggering” and “there is evidence of infringement on a gigantic scale.” If it ignored these facts, it was simply going to force Congress to act.

On the other hand, the Supreme Court had to acknowledge that the rights of copyright owners can go too far in limiting technological innovation. The majority touches on this briefly in the beginning of its opinion, but more telling is the relatively narrow ruling—and careful drafting—of its basis for reversing the Ninth Circuit. The Court really tried to make sure that it found a way to get Grokster and Streamcast without opening up too much new liability.

In particular, the fact that the Court simply sidestepped any broad pronouncements about Sony is telling. Although the opinion was unanimous that the Ninth Circuit should be reversed, the court appeared badly fractured on the meaning and application of the Sony rule. Thus, it simply tried to leave Sony for another day. One can almost imagine the discussion in chambers: there must have been clear agreement that the defendants should lose, but no agreement on how or why. As a result, the Court seized on an “inducement” theory as a way to avoid clarifying Sony.

The Inducement Theory

Is “inducement” a new basis of liability? I don’t think it's a radical new doctrine. Under standard articulations of the contributory copyright infringement doctrine, a defendant is contributorily liable when it, “with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another.” Gershwin Publishing Corp. v. Columbia Artists Mgmt., 443 F.2d 1159, 1162 (2d Cir. 1971).

So “inducement” was already part of contributory copyright infringement. One way to read this opinion is that the court merely amplified a new definition of what the word “induces” meant from Gershwin. The court’s definition: “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.”

However, this definition does a couple of things to extend contributory infringement. Most specifically, the court is a little cagey about the knowledge requirement from Gershwin. As we saw in the lower court opinions in Grokster, there were plenty of questions about knowledge of what and when.

The court sidesteps all of those questions, but in doing so, I’m not sure it really overstates the rule. I think the court clearly interpolates some intent of infringement—a higher level of scienter than knowledge.

This is where the Sony rule should kick in—knowledge or intent should be irrelevant if the device-maker is protected by the staple article of commerce doctrine. The court handles the Sony rule bizarrely and in a way that is sure to spawn hundreds of law review articles. It recharacterizes Sony as merely offering/removing presumptions. The court says “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.”

I think the court is trying to say that Sony permitted defendants to argue against any presumption of “knowledge” under Gershwin—and without knowledge, defendants are not contributorily liable. With this recasting, now, the court is suggesting that we don’t need to worry about the knowledge prong (or, alternatively, we can infer that knowledge exists) when the defendants induce infringement.

While we might obsess about the nuances of each word, conceptually I’m not sure the court’s semantic jujitsu really changes much of anything. I still think contributory copyright infringement requires scienter + actus reus. The scienter is still knowledge (or intent) of the infringements, and the actus reus is still some type of contribution/facilitation. Under inducement, the actus reus is building and marketing of the device as a way to infringe.

Did the Defendants Induce?

While I think the legal standard of inducement is not a radical restatement of the law, it could have a significant impact depending on how courts apply the doctrine to the facts. This is where I think the court went out of its way to make sure that Grokster and Streamcast lost. The evidence that supports that Grokster and Streamcast induced infringement was questionable. Abstracting from the facts, the court's basic thread seems to be:

· Napster was a bad actor
· Grokster and Streamcast tried to capitalize on Napster’s customer base after Napster’s demise
· It was wrong of Grokster and Streamcast to try to woo Napster’s customers knowing that Napster was a bad actor

In the end, the defendants appear to suffer a “taint by association”—by having been associated with the Napster collapse, they get tarred by the same brush.

Some of the specific facts that the court references:

· the defendants picked names that implicitly invoked Napster in customers’ heads
· the defendants offered the same basic services to customers that Napster offered
· internal StreamCast correspondence that the company was targeting former Napster users (which proves intent regardless of whether the messages ever reached consumers)

These facts are all ridiculously laughable. These are so defendant-specific and lightweight that it’s hard to take them seriously. Instead, the fact that the court showcases these facts reinforces that the court wants to make sure that Grokster and Streamcast lost in a narrow opinion.

While the case is interesting and will spawn plenty of discussion (some intelligent, some insipid), I think the Supreme Court successfully took care of Grokster/StreamCast without going too far. As a result, I think the practical consequences of this case are not that great. With the exception of Grokster and StreamCast as corporate entities (and their employees), I think this case will affect almost no one’s behavior.

Prediction: on remand, Grokster/StreamCast will be hit with enormous damages that will overwhelm their financial resources. As a result, I don’t see a bright future for these companies.

However, users will keep using their software, so the practical effect of this ruling on their users will be minimal. I also think that users generally will not change their file-sharing ways due to this opinion, so file-sharing will continue as if nothing happened.

Prediction: other P2P file sharing services will not change their behavior based on the ruling. The reasons why Grokster and StreamCast induce are so company-specific that very few other P2P file sharing services will feel like it affects them. Further, new file-sharing technologies will emerge that will not promote themselves as tools for infringement, thus carefully avoiding the same “taint by association” that snared Grokster and StreamCast.

Prediction: Congress will not attempt to disturb this ruling. I think the Supreme Court successfully struck a middle ground that will keep Congress from getting involved. The copyright owners won the case, so Congress won’t be that sympathetic to their requests. Further, the copyright owners got a Supreme Court pronouncement on “inducement,” so that will substantially relax any pressure they could put on Congress to give them an inducement doctrine.



Charles R. Nesson said in an interview on Monday night that he now supports the entertainment industry's effort to hold file-sharing networks liable for copyright infringement by their users, who include many college students, even though he had filed a brief in support of the defendants in the case, Grokster and StreamCast Networks Inc. StreamCast is the creator of a file-sharing program called Morpheus.

"I ... got persuaded that Grokster should lose," said Mr. Nesson, who is also the faculty co-director at Harvard's Berkman Center for Internet & Society.

The case was argued before the Supreme Court in March. During those arguments, Mr. Nesson said, he became sympathetic to the view that file-sharing networks should be held accountable for business plans that promote what he labeled "piracy tools" at the expense of copyright holders.

As it turned out, the Supreme Court found that Grokster and StreamCast had marketing strategies designed to attract people who infringe on copyrights, and therefore could be held liable.

"It is a good decision because it says you can't be a total predator," Mr. Nesson said.

In his brief to the Supreme Court, Mr. Nesson argued that a ruling in support of the entertainment industry could stifle a Berkman Center plan to build a digital library. But on Monday he said he no longer harbored that fear. The Grokster decision means that subsequent courts would consider a library's nonprofit status, and whether it tried to keep piracy at a minimum, he said.