U.S. Supreme Court Justices rule on music downloads

(This article orginally ran in Lawyers Weekly USA, Boston, MA, another Dolan Media publication.)

Peer-to-peer file sharing companies may be liable for the distribution of copyrighted material by their consumers, the U.S. Supreme Court has ruled.

The decision, which came on the final day of the court's 2004- 2005 term, was one of the most highly anticipated, with implications for the entertainment, music and technology industries.

Movie studios and music companies sued two Internet companies, alleging that their decentralized peer-to-peer (P2P) networks were contributorily and/or vicariously liable for the copyright infringement committed by end users.

But in a surprising outcome, the court side-stepped an interpretation of its leading copyright case, Sony Corp v. Universal Studios (104 S.Ct. 1619 (1984)), and established a new form of copyright liability: inducement.

Writing for a unanimous court, Justice David Souter said 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.

Technology advocates expressed disappointment at the decision.

We went to the Supreme Court for clarity and now we have a whole new muddle, Cindy Cohn, legal director for the Electronic Frontier Foundation, told Lawyers Weekly USA.

The EFF, a non-profit digital rights organization based in San Francisco, represented defendants Grokster and Streamcast before the Supreme Court.

Cohn said lower courts must now attempt to sort out the various factors the court used in discussing inducement liability, including knowledge that users are infringing; attempts to gain customers from a previously infringing company (here, Napster); filtering out infringing users; marketing and advertising that encourage infringement; and whether and how much the company profits from infringement.

None of these things standing alone would do it, but taken together, they could demonstrate an unlawful objective, she explained.

John Palfrey, Executive Director of the Berkman Center for Internet and Society, said there is no question that this ruling will prompt further litigation. We won't know the full effect until other cases are brought, and it's up to the next set of courts to apply the test to the next generation of technology.

In a statement, CEO and Chairman of the Recording Industry Association of America (RIAA) Mitch Bainwol said his organization was very pleased with the holding.

The law is now clear - businesses that encourage theft are liable for the acts of theft committed by their users, he said, adding that the real winners in the decision were creators and fans.

Inducement Liability

An outgrowth of the infamous Napster software, Grokster and Streamcast distinguished themselves from their predecessor as decentralized systems where users connect directly with each other, without the server's control or knowledge.

But the 28 plaintiffs, a group of movie studios, recording companies and individual copyright holders, argued that the servers' willing blindness to the majority of end users' activities made them liable as well.

MGM filed suit in 2001, seeking to hold Grokster and Streamcast vicariously and/or contributorily liable for copyright infringement based on their file-sharing software.

A U.S. District Court in California granted summary judgment for the defendants in 2003, a decision that was affirmed on appeal by the 9th Circuit.

But the U.S. Supreme Court reversed and remanded.

The court discussed the Sony doctrine, but declined to apply it to the defendants.

Because Sony did not displace other theories of secondary liability, and because we find below that it was error to grant summary judgment to the companies on MGM's inducement claim, we do not revisit Sony further... 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 common law, the court said.

Looking to patent law, the court then adopted a model for inducement liability.

The inducement rule ... premises liability on purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate commerce or discourage innovation having a lawful purpose, Souter wrote.

The court said the evidence of the defendants' unlawful objective is unmistakable. ... First, each company showed itself to be aiming to satisfy a known source of demand for copyright infringement, the market comprising former Napster users. ...Second, this evidence of unlawful objective is given added significance by MGM's showing that neither company attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software. ... Third ... Since the extent of the software's use determines the gain to the distributors, the commercial sense of their enterprise turns on high-volume use, which the record shows is infringing.

In two concurrences, the justices split 3-3 on the future of Sony.

Justices Stephen G. Breyer, John Paul Stevens and Sandra Day O'Connor agreed that the Sony test achieved the proper balance between encouraging innovation and protecting copyright holders, and should be retained.

But Justices Ruth Bader Ginsburg Anthony M. Kennedy and Chief Justice William H. Rehnquist disagreed, suggesting that new standards be developed as technology evolves.

The court remanded the case for reconsideration of the plaintiffs' motion for summary judgment.

What Now?

Because the new test remains unclear, Cohn said copyright cases will join patent litigation as notoriously costly.

At the end of the day, this decision will bring a lot of litigation, she said. Not only in this case, but for all plaintiffs' copyright lawyers.

And that potential for litigation could decrease innovation, she added.

We worry about a chill in innovation, she said. As a consumer, you will see less cool stuff, because not very many tech companies will be willing or able to undergo what it takes to release a new product.

In addition, Cohn said, the opinion changes the leverage entertainment companies have against tech companies.

However, she predicted that both Grokster and Streamcast will pass the inducement test at an evidentiary hearing on remand.

Although neither program had a filtering system in place, she said the opinion made it clear that companies are not expected to completely re-design their products.

But Palfrey expressed some skepticism that the defendants would survive the test.

Given the reference to the gigantic amount of infringement, the court wasn't saying this was good news for the defendants, he said.

Cohn also said the decision will do little to decrease piracy.

This is a hollow victory [for the entertainment industry], she said. Now, people will just get their software from offshore companies.

Bainwol recognized the decision is not an immediate panacea for copyright holders.

But it clearly does represent a pivot point in the story of digital music, he said.

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