Lawyer Article

Published in the July 26, 2005 issue of Southeast Tech Wire

Matthew Howell, a summer associate in the firm's Atlanta office, wrote this article with supervision provided by Mr. Claypoole, a member of the firm's Intellectual Property Practice Group.

As technology advances, those benefiting from current business models fight against new products that threaten their income streams. The film industry fought introduction of video recording technology like VCRs and DVDs, and now twenty years later, generates much of its income from these technologies. The music industry has been fighting digital file sharing technology, and the U.S. Supreme Court recently ruled that such technology can be stopped if its creators are intentionally inducing copyright infringement.

The Supreme Court’s recent ruling in MGM v. Grokster,¹ is the latest step to combat copyright infringement opportunities created by online software providers. Grokster is primarily used to distribute infringing compressed digital music (MP3) and movie (E.g. Mpg, Mov, Quicktime.) files through a Peer-to-Peer network. The Court maintained the delicate balance between technology and copyright, finding in favor of copyright holders, while at the same time maintaining the status quo of the Sony decision as applied to contributory infringement. In refusing to rule on the technological merits of the Grokster software under Sony, the Court instead instituted the patent concept of inducement into copyright law. One who induces under the new holding is defined as anyone distributing 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.

Sony and Video Tape Recorders, Where This All Started

Until Grokster, U.S. courts looked to the United States Supreme Court opinion in Sony Corporation of America v. Universal Studios² when deciding all infringement decisions involving a software provider aiding access to infringing copyright files. In Sony, television program copyright holders programs brought infringement actions against home Video Tape Recorder (VTR) manufacturers. VTRs are a precursor to modern day VCR’s. The copyright holders argued that, since VTRs could be used to record shows from television illegally, that they should be illegal. However, the Supreme Court disagreed, since the only contact between Sony and VTR users occurred at the moment of sale. Instead, the Court asked whether VTRs were capable of commercially significant non-infringing uses, since Sony was not actively inducing infringement. The Court found time shifting – recording a television program for later viewing – to be a substantially non-infringing use and thus there was no infringement.

The Digital Wave: Napster and MP3s.

Following Sony, the first major case to address file swapping in peer-to-peer networks, A&M Records v. Napster,³ involved MP3 transfers resulting in mass-scale infringement and resulted from the combination of rapidly increasing high-speed internet access (especially to students on college campuses) with more efficient digitally compressed music formats. MP3 files transferred easily and quickly over college and Peer-to-Peer (P2P) networks, sufficiently replicating a CD’s output with a slight quality differential, especially when played over computer speakers or cheap dormitory stereos. A major impediment to the spread of these files, however, was access. Most students were limited only to what was available on the computers of other students at the same school on the same network.

Napster, however, erased these limitations when it created a program that allowed for computers across the country to exchange music files through P2P networks without charging its users a cent. This resulted in massively widespread copyright infringement; the exchanging of files was simple and efficient, whereby one could “download” an MP3 file from another person or “upload” an MP3 file to another resulting in nearly instant transfer resulting in 10,000 identical copies of music files transferred per second.⁴ In granting a preliminary injunction, the Ninth Circuit Court of Appeals in California held that Napster was contributorily liable because it knew or had reason to know of direct infringement. The court additionally found Napster materially contributed to infringing activity in providing the site and facilities for direct infringement. Much of this was due to the storing of a file name index on its own system by Napster. The Ninth Circuit distinguished Napster from Sony, saying Napster had actual knowledge that specific infringing material was available using its system and that it could block access to the system by suppliers of the infringing material and also that it failed to remove that material. The Ninth Circuit decision supported the District Court’s grant of an injunction, finding Napster had both actual and constructive knowledge of users exchanging copyrighted music. Also, the 9th Circuit concluded there is not a requirement of knowledge of specific acts of infringement for a software provider’s liability. Further, if a computer system operator learns a specific infringing material is available on its system and fails to purge such material from the system, the operator knows of and contributes to direct infringement.

Creating Conflict: The 7th Circuit Holds Sony To A Different Standard Than The 9th.

Sitting in Chicago, The Seventh Circuit in In re: Aimster,⁵ also ruled on the merits of Sony, but took a stricter view of the company enabling infringement than did the Ninth Circuit. In deciding against Aimster, the software provider, the Seventh Circuit used a high standard for a non-infringing use, disfavoring technology, finding Aimster failed to produce any evidence its services were ever used for non-infringing use, despite a showing of five examples of possible non-infringing uses. Further, the court also decided that if infringing uses of the software are substantial, that in order to avoid liability as a contributory infringer, the provider of the service must show disproportionate cost in eliminating or at least substantially reducing infringing uses of the software.

Back To Grokster, But Away From Sony

Grokster, like Napster, was argued in the Ninth Circuit. However, here the Court ruled in favor of the software company enabling copyright infringement. In granting summary judgment, the Ninth Circuit held that (1) Grokster was capable of substantial or commercially significant non-infringing uses, and (2) the software distributors were not access providers, did not provide file storage or index maintenance like Napster and instead the users of the software, not the providers, who created the network and provided access. The court further articulated failure to alter software located on another’s computer is not akin to failure to delete a file name from one’s own computer, failure to cancel the registration name and password of a particular user from one’s user list, or modifications to software on one’s one computer. Further favoring technology, the Court found Grokster had numerous other uses significantly reducing distribution cost for the public domain works such as permissibly shared art and speeches.

The Three-Tier System Of The Ninth Circuit

The Ninth Circuit previously instituted a three-tier technology distinction. The first tier in similar situations to Napster: an infringing program either stores or stored references to infringing files on its servers. In this instance, the company providing the program could be held contributorily or vicariously liable. The second instance regards using a supernode which uses a computer away from the software’s main servers to store the infringing files. The third of such examples is analogous to Grokster, using a peer-to-peer system where computer users communicate directly to each other.

The Supreme Court Overrules The Ninth Circuit

The Supreme Court disagreed with the Ninth Circuit’s holding. Importantly, it declined to support the technological loophole created by the Ninth Circuit, finding instead the Ninth Circuit had misinterpreted Sony. Additionally, the Court introduced a new weapon into the hands of copyright holders: an inducement theory borrowed from patent law in order to further stabilize both music, movies, and other transferable copyrights over the internet in order to adjust to this new technology.

Sony Will Have To Wait For Another Day

By ignoring the three-tier distinction and instead utilizing an inducement theory, the Supreme Court left for another day deciding on the technological distinction with regard to Sony. This is important for a number of reasons. The first is that it eliminates a loophole created when a company intentionally allows other’s infringement in order to make money, yet precludes itself from liability because of its technical setup. Second, the Supreme Court, as Justice Breyer noted in his concurrence has, as it has traditionally done, left to Congress the ability to pass laws distinguishing technology and further maintain the balance of copyright law. The Supreme Court, by its ruling, gave Congress time to pass new legislation while at the same time ebbed an incoming tide of infringers created by the use of P2P networks. The Supreme Court has noted several times, including the end of the Grokster decision, the need for Congress to pass legislation to broadly adapt copyright law to changes in technology. Since Congress has not yet acted, it is important the Supreme Court ruled, yet still allowed Congress enough room to create law. At the same time, the Supreme Court avoided impeding flow of technology until potential legislation is passed or Sony is revisited. Managers of recent P2P programs, such as Bittorrent are not liable under Grokster unless its creators intentionally induced infringement, even though infringing uses are possible. This decision falls in line with the overall principle of copyright: to create a balance between technology and creative innovation, where both are encouraged.

The Horizon Of Music Sharing

Justices Breyer and Ginsberg in their concurrences see the landscape of technological change. While Justice Breyer believes, based on the present inducement decision, there is no need to reevaluate the teachings of Sony; Justice Ginsberg finds a need for Sony to be applied more strictly. By her interpretation of the present facts, Grokster would have no substantial non-infringing uses, despite several of such which are mentioned in the record. This strict interpretation of Sony favors copyright holders in a strong way by severely limiting technology capable of substantial non-infringing uses. Justice Breyer disagrees with such an approach, finding it unduly chills the advance of technology. To revisit Sony may not be necessary, given that Congress could pass legislation in order to maintain the balance of copyright. The Grokster ruling gave copyright holders an important weapon to battle infringers, especially in the light of new technological developments regarding P2P networks and fast access internet services. Regardless of this new weapon, a time may soon come when Sony will be reevaluated to accommodate rapidly advancing technology.

Notes

¹ 2005 WL 1499402 (U.S.), 75 U.S.P.Q.2d 1001 (2005)
² 464 U.S. 417 (1984), and commonly referred to “The Betamax Cases”
³ 239 F.3d 1004 (9th Cir. 2001)
⁴ A & M Records, Inc. v. Napster, Inc., 114 F.Supp.2d 896, 902 (N.D. Cal. 2000)
⁵ 334 F.3d 643 (7th Cir. 2003)