Zhu 1 Gordon Zhu Fall 2007 Technology and Law in the Music Recording Industry I.

Introduction In 1999, Shawn Fanning, a student at Northeastern University, single-handedly started the file-sharing craze. Though he was eventually put out of business by the Ninth Circuit Court of Appeals in a suit brought forth by the recording industry, his creation has had lasting effects on technology and the music industry. In 2005, the United States Supreme Court heard an offshoot of the Napster case, Metro-Goldwyn-Meyer Studios Inc. v. Grokster, Ltd. [1]. When the Supreme Court ruled in favor of the recording industry, critics split into two opposing camps. Some described the decision as a critical blow to technological innovation while others described it as a landslide victory for the music industry. This article will argue that the Supreme Court’s ruling in the Grokster case achieved a fair balance between the competing interests of copyright protection and technological innovation. The first part of this article will address the general criticisms put forth by technology supporters and suggest that far from being a fatal blow to technological progress, the Supreme court’s decision may even have some positive effects. The second part will assess the weight of the recording industry’s apparent victory. II. Why the decision is not as damaging as it seems for technology Upon a quick search of internet news and blog sites, results such as “Grokster is Dead, Long Live Grokster” [2], and “Grokster Loss Sucks for Tech” stick out [3]. Even Stanford Law professor Lawrence Lessig chimed in with his article “A Rotten Ruling” [4]. However, the likelihood that the Supreme Court’s ruling will stifle innovation as much as these technology companies, consumer groups, and academics imply is difficult to believe. The basic argument supposed by these pro-technology groups is that through the Supreme Court’s ruling, technology companies will have to cautiously tread upon new and uncharted territory. To protect from liability, many firms will be overly cautious and small firms may not want to take the risk of liability at all and cease innovation. For example, a piece in the Northwestern Journal of Technology and Intellectual Property argues that the Supreme Court’s decision in Grokster was “fraught with potential negative effects on technological development and difficulties that may arise within intellectual property legal practice” [5]. In evaluating such analyses, it is worthwhile to examine the precursor to this case, Napster. This case is similar to Napster in many ways. Grokster and StreamCast Networks both distributed file-sharing programs very much like Napster, and the basic premise of these file-sharing programs is the same. Users download software that puts them in a network where files are shared. While connected to this network of users, customers are free to share copyrighted and uncopyrighted files (Justice Bryer, in his concurring opinion, cites the user who is looking for classical music, Shakespeare, Project Gutenberg electronic books, or various public domain works). There is however, a distinct difference between Napster and the case at hand. This difference lies in the

Zhu 2 software’s system design: whereas in Napster, all users transmitted their files through a centralized network maintained by Napster, this new generation of file-sharing programs is decentralized. For this reason, there is no way that Grokster can regulate or know of specific acts of infringement. There is no main server through which all shared files are transmitted. Rather, each individual user acts as both the server and the client (the server is the host that is being searched and the client is the computer that is searching for a particular file). Following a search, if the requested file is available on another computer in the network, the user is directly connected “peer-to-peer” with the other user who has the desired file [1]. This technical nuance was enough to impress the Ninth Circuit Court of Appeals [6]. This very slight technical difference, the lack of a central server, ingeniously overstepped the ruling in the Napster case. In making this ruling, the lower court and the Ninth Circuit relied on Sony Corp. of America v. Universal City Studios, Inc, one of the only precedents in the matter of secondary copyright infringement. Whether or not it was intentionally devised, this difference became the crucial piece upon which the lower court and Ninth Circuit Court of Appeals relied in holding that Grokster was not liable under the Sony “safe harbor” rule [6]. The Sony case dealt with the introduction of Sony’s Betamax, better known as the VCR. Universal City Studios alleged that Sony’s distribution of the Betamax constituted contributory infringement. To be liable for contributory infringement, Sony had to have knowledge of direct infringement and contribute to it materially. There was no doubt that Sony knew that some people used the VCR to copyright infringe. However, the allegation that they contributed to this was less clear. The court went on to say that one cannot be liable for distributing a product that has the capability to infringe if the product has the potential for non-infringing uses. Thus, the same court that had condemned Napster a few years earlier similarly held that “distribution of a commercial product capable of substantial non-infringing uses could not give rise to contributory liability for infringement unless the distributor had actual knowledge of specific instances of infringement and failed to act on that knowledge” [1]. The plaintiffs appealed the decision and it was later granted certiorari by the United States Supreme Court. Though the Ninth Circuit was impressed with Grokster’s technical argument, the public is not concerned with slight nuances in technology. For the United States Supreme Court, siding with Grokster would give the green light to users who want to download copyrighted files. On the other hand, siding with MGM could have a detrimental effect on the legitimate exchange of information via such file-sharing programs as Grokster. In a 9-0 majority opinion, the United States Supreme Court struck down the summary judgment granted to Grokster by the Ninth Circuit of Appeals. In light of the Betamax decision, why was there so much controversy once the Grokster case came to the Supreme Court? At first, the Ninth Circuit’s summary judgment in favor of Grokster looked like a no-brainer. Grokster and StreamCast Networks’ Morpheus have legitimate non-infringing uses, and even if they are not substantial, they surely satisfy the requirement of having the “potential for non-infringing use.” This part is undisputed. Why then did the Supreme Court find that the Ninth Circuit’s decision was in error? First of all, the Betamax case was decided almost 20 years ago when the technological arena was very different than it is today. Universal

Zhu 3 City Studios was worried that Betamax users would tape television programs or copy videotapes that they would then sell and distribute. But another potential use was simply to have them to watch at a later time. This latter use (so called “time-shifting”) was declared fair use by the deciding court. In contrast, Grokster and Morpheus were being used to transfer files over the internet on a massive scale. While the primary use of the Betamax was found to be time shifting, it was apparent to the Court and even conceded by Grokster that the primary use of this new generation of file-sharing programs was copyright infringement. In the Supreme Court’s examination, Justice Souter explains why the Ninth Circuit’s decision was made in error. The Supreme Court found no issues with the Betamax ruling itself, but it held that the Ninth Circuit applied the Betamax decision in error. The Ninth Circuit Court of Appeals read the Betamax case as limiting any liability whatsoever for a distributor whose product has substantial non-infringing uses. The Supreme Court found that the Ninth Circuit did not account for whether Grokster and StreamCast had “an actual purpose to cause infringing use” and ignored any evidence of intent to infringe or profit from it [1]. This idea was justified by the Court’s theory of inducement. The Court defines inducement of infringement as “active steps . . . taken to encourage direct infringement” [1]. Behind evidence of inducement of actual infringement must lie the specific intent to infringe. Both were present in the case of Grokster. Grokster’s distribution of the software was not contentious. It was their activities independent from distribution that caused trouble. The classic case of inducement is advertising that encourages someone to infringe a copyright. It is well documented that Grokster and StreamCast both marketed their products as the next Napster and went so far as to advertise the number of Top 40 songs that were available through their software [1]. Furthermore, they gained from the infringement of their users by “profiting from direct infringement while declining to exercise to stop or limit it” [1]. This inducement rule seems perfectly fitting for another reason. Many technologists praise the Sony substantial non-infringing use clause for its protection of future innovations. They should be mindful of the fact that this logic was borrowed from patent law which says, “Distribution of a component of a patented device will not violate the patent if it is suitable for use in other ways” [1]. Similarly, the inducement rule was also borrowed from patent law. For that reason, technologists should not be surprised by its use here. The use of an inducement rule creates a natural extension of the substantial non-infringing use rule. Upon first examination of this legal situation, the average person is prone to appeal to gut instinct. For some time, there was a substantial number of people who were so taken aback by file-sharing technology that they became addicted to the idea of getting music for free. Many young adults today grew up with Napster and saw nothing wrong with downloading copyrighted works. In its public awareness campaign, the RIAA has sought to combat this mentality and has attempted to spread the word that downloading copyrighted files is akin to stealing. As the world of file-sharing is a very new phenomenon, even this mindset took time to evolve. Now, however, there is little dispute among the public. The fact that downloading copyrighted files for free is illegal is well ingrained in the public psyche. Those who disagree with the Supreme Court’s ruling must look to the Napster rule for guidance. When there is no material difference, save for

Zhu 4 a subtle system change, one cannot expect Grokster to escape liability. One could even surmise that Grokster and StreamCast attempted to sidestep Napster’s ruling by decentralizing their software. Furthermore, one must consider the possibility that if the case were instead decided in Grokster’s favor, the music industry would undoubtedly seek legislative changes; these would have the potential to be much stricter than the Supreme Court’s ruling here. One law review article theorizes that this decision may soon fade as the Napster case did before into a “toothless tiger” and have few positive or negative implications for peer-to-peer technologists [8]. This “toothless tiger” scenario proposes that this case will simply be a new “teaching manual for future iterations of Napster/Grokster on how to avoid liability” [8]. In addition, since the holding essentially addresses only the marketing behavior of the company, Justice Scalia commented, “If the next generation of peer-to-peer developers and distributors simply sell or give away their software, without saying or doing anything publicly or behind the scenes about their hopes that illicit filesharers will be attracted to their wares, liability for inducement will evaporate, but the problems for the content industry will persist” [8]. Taken this way, the Supreme Court’s ruling can even be considered lenient. Just as the Supreme Court made important concessions for future technological growth in the Sony case, it again made special conditions that sought to protect innovators in Grokster. For example, though the Court considered the “defendants’ internal and external communications, Grokster’s choice of name, advertisements—even if the ads were never shared with the public,” the Court stipulated that such evidence is not a crime itself, but only when taken together as a whole with other factors of the case (Hancock 204). In the Berkeley Technology Law Journal, Galen Hancock points out the significance of footnote 12 in the Grokster opinion. Here the Court explicitly controls how future courts may interpret malicious intent, holding that “a product distributor need not include content filtering features to avoid liability, at least as long there is no other evidence of an unlawful objective of causing infringement” [9]. By saying that the failure to filter out copyrighted materials is not enough by itself to hold a company liable under the inducement rule, the court is telling potential litigators that it is unlikely that they will find liability unless they have generous supporting evidence. Though they did not explicitly outline the requirements for this new inducement rule, if patent law is any predictor, the charge will be difficult to prove and would likely require proof of direct infringement by a third party, active inducement of third parties to infringe, and knowledge that such actions would induce infringement as stipulated by patent law [10]. Even as the Supreme Court sided with the record industry in this case, they had technological growth in mind. This is evidenced by their preservation of the Betamax rule. In essence, they simply gave Grokster a slap on the wrist for bad behavior. Legitimate devices cannot be marketed for their illegal uses. By concentrating only on the infringing intent of Grokster and not on their technology, the Supreme Court successfully solved the problem of infringement on a massive scale and at the same time preserved the technology protections inherent in the Sony safe harbor rule. Staunch technologists need not be alarmed at this ruling. Far from the extreme accusations brought on by some regarding the potentially inhibiting effects on technological growth, the Supreme Court did not cede to the record labels. With slight modification to the

Zhu 5 Betamax rule, technology companies who responsibly market products with substantial non-infringing uses should not be worried about potential litigation. III. Why the decision is not as good as it seems for record labels In many ways, MGM’s celebration upon hearing the court’s ruling was premature. The media furthered the victorious sentiment with headlines such as “Hollywood triumphs in piracy fight” in what Berkeley law professor Pamela Samuelson called “MGM’s media blitz” [7]. This is understandable. Who can blame the recording industry for spinning the story into a black and white victory? Unfortunately for them, the evidence says they are bluffing. Upon further evaluation, the decision does not seem to be such a great success for the plaintiffs. Going into the case, MGM wanted the Supreme Court to reevaluate the Sony Betamax ruling. The plaintiffs were counting on the Court to make a decision under the substantial non-infringing use clause of the Sony case. Their hope was that in light of the fact that the primary use of Grokster’s and StreamCast’s products was overwhelmingly to copyright infringe (estimates reach to about 90%), the Court would reconsider whether Grokster could find refuge under the defense of substantial non-infringing use [6]. Their ultimate goal was to have the Court substitute the substantial non-infringing use rule with a stricter rule [7]. For example, adoption of a rule requiring that products with both non-infringing and infringing uses have a majority share of legitimate use would take the guesswork out of secondary liability. Since estimates of the non-infringing use of the products in question were about 10% [6], the defendants would be held liable under this requirement. Such a bright line rule would make contributory infringement easier to prove for MGM not only in this case but also in future cases. Never eager to diverge from precedent, however, the Court kept the Sony ruling intact and completely avoided the issue by applying its new inducement rule. Not only did the Court leave the Sony substantial non-infringing use rule untouched, but its new creation, the inducement rule, does not give future litigants a strong basis for proving liability for secondary copyright infringement. In the first place, proving a case of inducement to infringe copyright seems to pose a range of problems. Unless there is gross evidence of malicious intent, such as advertisements and memos explicitly impelling customers to illegal activities, the charge will be hard to prove [7]. Furthermore, since the Court in its decision basically laid out a strategy guide to avoid infringement by inducement, companies will be quick to adopt these new procedures to protect themselves against liability in the goal of avoiding the fate of Napster and StreamCast Networks. In a comprehensive outline, Hancock advises software companies to shield themselves from liability by being careful not to target and advertise to known infringers, having awareness of internal communications, public statements, and business decisions that may show intent to infringe, and not creating features that make infringing activity especially easy [9]. In the ideal instance for the entertainment industry, the Court would replace the substantial non-infringing use rule with a rule that requires a primary non-infringing use [7]. With such a rule, the plaintiffs could unequivocally hold Grokster liable based on statistical data. Instead, now companies can continue to distribute peer-to-peer software identical to Grokster and Morpheus and be free from liability as long as they are careful

Zhu 6 in their marketing practices. This is far from the ideal situation for MGM or any other parties who seek to strengthen copyright protection. Just as “Sony’s rule is strongly technology protecting” [1] by shielding products with legitimate uses and making it difficult for them to be found secondarily liable, the inducement rule created here likewise does not make it easy for litigants to hold technologists liable for secondary copyright infringement. In this continuing conflict between the music and technology industries, MGM has merely won a battle against a singular enemy behind which stand many others who are willing to take its place. IV. Future Implications What remains to be seen is the case in which copyright infringement occurs on a similarly large scale, but there is no evidence of inducement. In such a case, the Court would have similarly strong interests in ceasing the distribution of such a product but would also be controlled by the substantial non-infringing use rule derived from the Sony case. In that instance, based on the cases discussed here, the Court would have to finally examine Sony and define requirements for substantial non-infringing uses or simply hold the defendant not liable and wait for legislators to solve the problem. This may be the best solution available since the legislature is better suited to deal with the issue of secondary liability. Furthermore, courts are ill-suited to deal with facts of a technical nature. For example, expecting the Justices to discern what fraction of a device’s use must be non-infringing, or requiring certain technological safeguards or filters are out of the purview and expertise of the court. The Ninth Circuit expressed this concern when it stated, “We live in a quicksilver technological environment with courts ill-suited to fix the flow of internet innovation” [6]. In the interim, as the issue of secondary copyright evolves in the court system, recording companies should continue to use alternative remedies such as suing individuals for direct infringement. In suing individuals, there are none of the difficulties that come with proving contributory copyright infringement as there were in Grokster. Moreover, this tactic has done a great deal to create a new public understanding that such infringing activity is a serious offense. Record companies can even use technology to their advantage by creating new “devices that will help curb unlawful infringement” [1]. With the major file-sharing companies out of business, existing strategies such as flooding file-sharing networks with bogus files should prove even more effective as the number of real users declines. The inconvenience and inconsistent quality of the files on these networks may steer users to other sources. Together with the legitimization of filesharing via new services such as iTunes, Realnetworks’ Rhapsody, and even the new and legal Napster, the public will seek out illegal services less and less as they are presented with better legal alternatives. V. Conclusion Instead of ceding to record companies or giving a free pass for file-sharing companies, the Supreme Court created a fair balance by both extending copyright protection and preserving the technology-friendly Betamax rule. By focusing on the marketing behavior of Grokster and StreamCast rather than the software, the Court was able to achieve these ends. For these reasons, criticisms that deem the ruling a blow to

Zhu 7 technology or a victory for the recording industry are off the mark. Upon closer examination, the evidence does not suggest that the ruling will pose a hindrance to technologists. Many, such as Justice Scalia, have pointed out the flexibility and leniency of the ruling. Grokster lost the case, but peer-to-peer technology as a whole lost little. From MGM’s perspective, the seeming victory is largely immaterial and short-lived. MGM’s request for stricter interpretation of the Sony substantial non-infringing use requirement was ignored. Furthermore, the difficulty inherent in proving inducement liability limits the usefulness of the rule in future cases. MGM should use this case to further public awareness of the problem of copyright infringement and steer music listeners to legitimate new and existing music downloading services.

Zhu 8 References [1] METRO-GOLDWYN-MAYER-STUDIOS-INC., ET AL., PETITIONERS V. GROKSTER, LTD., ET AL. No. 04-480. Supreme Court of the United States. 27 June 2005. [2] Krupp, Alex. "Grokster is Dead, Long Live Grokster!" Kuro5hin. 28 June 2005. 24 Oct. 2007 <http://www.kuro5hin.org/story/2005/6/27/16033/6308>. [3] Dean, Katie. "Grokster Loss Sucks for Tech." WIRED. 27 June 2005. 5 Nov. 2007 <http://www.wired.com/print/entertainment/music/news/2005/06/68018>. [4] Lessig, Lawrence. "A Rotten Ruling." WIRED. Sept. 2005. 2 Nov. 2007 <http://www.wired.com/wired/archive/13.09/posts.html?pg=7>. [5] Wooten, Julie A. "Times May Have Changed, But the Song is Still the Same Why the Supreme Court Was Incorrect to Stray From Sony's Reasoning in Metro-Goldwyn Mayer Studios, Inc. V. Grokster, Ltd." Northwestern Journal of Technology and Intellectual Property 5 (2007): 351-364. [6] METRO-GOLDWYN-MAYER V. GROKSTER. No. 03-55894. United States Court of Appeals for the Ninth Circuit. 3 February 2004. [7] Samuelson, Pamela. "Three Reactions to MGM V. Grokster." Michigan Telecommunications and Technology Law Review 13 (2006): 1-20. 15 Nov. 2007 <http://www.mttlr.org/volthirteen/samuelson.pdf>. [8] Zimmerman, Diane L. "Symposium: the Unintended Consequences of Legislating Technology: the Digital Millenium Copyright Act: Recent Development: Daddy, are We There Yet? Lost in Grokster-Land." New York University Journal of Legislation and Public Policy (2006): 1-24. [9] Hancock, Galen. "Metro-Goldwyn-Mayer Studios Inc. V. Grokster, Ltd.: Inducing Infringement and Secondary Copyright Liability." Berkeley Technology Law Journal 21 (2006): 189-212. [ 10] Robert Gajarsa & Benjamin Dryden, "Induced and Contributory Infringement Claims Before the International Trade Commission," 337 Reporter (forthcoming 2008)

Sign up to vote on this title
UsefulNot useful