Copyright 2005 Los Angeles Times. All rights reserved.
http://www.latimes.com/news/printedition/la-fi-grokster28jun28,1,3883087.story
THE SUPREME COURT
Firms Can Be Held Liable for Net Piracy
High court sides with the entertainment industry in the fight
against illegal file sharing.
By Jon Healey and David G. Savage
Times Staff Writers
June 28, 2005
WASHINGTON — The Supreme Court gave the entertainment industry a new
legal weapon against Internet piracy Monday, ruling that companies that
actively encourage people to download free copies of music or movies
can be held liable for their users' illegal acts.
The unanimous ruling sets a new standard for distinguishing legitimate
innovators from those who deliberately profit from online bootlegging.
This guideline is a landmark for copyrights in the Internet era. But
its practical effect on Internet piracy is likely to be limited because
large online sources of illegal music and movies remain unscathed.
Central to the case was how to balance the interests of two of
California's signature industries: entertainment and technology. The
studios and major record companies that brought the case against two
file-sharing networks had asked for a list of changes to copyright law
that could have altered how consumer electronics, computer and
high-tech companies develop and market their products.
Although some companies and consumer advocates said Monday's decision
gave Hollywood too much power, others praised the court for protecting
copyrights without stifling technological innovation.
"The green light to develop cool and new technologies is still there,"
said Markham Erickson, executive director of a high-tech trade group.
The justices did not actually decide the entertainment industry's
claims against two file-sharing companies, StreamCast Networks Inc. of
Woodland Hills and Grokster Ltd. of the Caribbean island of Nevis.
Instead, they sent the case back to U.S. District Court in Los Angeles.
Still, by declaring that unauthorized downloading is illegal, the court
buttressed the entertainment industry's campaign to stop people from
bootlegging music and movies online. That campaign has included
educational programs and advertisements about the illegality of piracy
as well as more than 11,000 copyright infringement lawsuits against
individual users of file-sharing software.
"This decision [Monday] was meant to underscore … what is right and
what is wrong, what is legal and what is illegal by all of society's
basic norms. And the court did that today," said Andrew Lack, chief
executive of Sony BMG Music Entertainment.
Added former Grokster President Wayne Rosso: "This is a huge PR win for
the record industry in the fight for hearts and minds. If I'm running
the [Recording Industry Assn. of America], I'm filing a huge number of
consumer lawsuits this week just to drive that point home."
Rosso now runs Mashboxx, an industry-authorized file-sharing service.
Technology advocates aligned with StreamCast and Grokster argued that
the ruling only muddied the legal waters for innovators. They
complained that the decision would discourage small companies from
developing new digital products that might be used for piracy as well
as legitimate purposes, mainly because they couldn't afford to defend
their intentions in court.
"With this decision, the legal clarity has decreased, and the risk of
litigation has increased," said Michael Petricone, a top lobbyist for
the Consumer Electronics Assn. "From a competitive standpoint, that's
not a good thing."
The battle over file sharing began in 1999, when the original Napster
network made it simple for people to copy songs for free from each
other's computers. The major record companies and music publishers sued
Napster for copyright infringement within months of its debut, and the
U.S. 9th Circuit Court of Appeals in San Francisco held in early 2001
that the company was liable for its users' piracy.
After Napster's demise, millions of users flocked to a new generation
of file-sharing programs distributed by Grokster, StreamCast and
numerous other companies. Unlike Napster, these companies did not
maintain the indexes needed to find files on users' computers; instead,
they designed their software to form self-sustaining file-swapping
networks.
The new file-sharing programs generated revenue by pumping
advertisements and intrusive software onto users' computers. To the
major music companies and Hollywood studios, this was doubly offensive
— not only were the companies helping people copy songs and movies for
free, but they also were milking advertisers for access to a huge
audience of infringers.
With Metro-Goldwyn-Mayer Studios Inc. as the lead plaintiff, the major
record labels, movie studios and music publishers sued StreamCast and
Grokster for copyright infringement in October 2001. But U.S. District
Judge Stephen V. Wilson dismissed most of their claims in April 2003,
and the 9th Circuit upheld his ruling a year later.
Those rulings were based on the Supreme Court's landmark 1984 decision
in the Sony Corp. of America Betamax case, which held that technologies
capable of substantial legitimate uses were largely shielded from
liability even if they were used for piracy. Because StreamCast and
Grokster's programs had substantial legitimate uses, and because the
companies did not monitor or control what users did with the software,
the companies were not liable, Wilson and the 9th Circuit ruled.
In their appeal, the entertainment companies urged the Supreme Court to
limit the Betamax shield to products for which the principle or primary
use was legitimate. They also argued that StreamCast and Grokster
should be held liable because they actively encouraged piracy and did
not take "reasonable steps to prevent infringement."
Backed by an array of technology companies, consumer electronics
manufacturers and advocacy groups, StreamCast and Grokster responded
that they should be judged based on their current products, not on
technologies that could have given them more control over their users.
Nor should the court consider whether they actively encouraged piracy,
the companies said, because that issue was still pending in District
Court.
Writing for the Supreme Court, Justice David H. Souter held that the
9th Circuit misread the Sony decision. Companies that encourage people
to use their products for piracy, "as shown by clear expression or
other affirmative steps taken to foster infringement," are not
protected by the decision, even if those products have legitimate uses
too, Souter wrote.
Exactly what the court meant by actively inducing piracy remains to be
fleshed out by the lower courts. But Souter pointed to a number of
pieces of evidence in the case that could be used against StreamCast or
Grokster, including promotional messages to users, internal
communications and their decisions not to try to block illegal copying.
"There is substantial evidence in MGM's favor on all elements of
inducement," Souter added.
Lawyers for StreamCast and Grokster said they expected to win the case
on the second go-around. When all the evidence in the case comes out,
they said, they will not be held liable even under the new standard.
"I think we'll be able to show that we did nothing to actively
encourage infringement," said Michael Page, Grokster's attorney.
Beyond that, several analysts and anti-piracy experts said the decision
was not likely to make a dent in online piracy. Not only are there
dozens of file-sharing networks — including several major ones that
have no corporate sponsor, just a large collection of users — but
downloaders also shift quickly from network to network in response to
industry crackdowns.
In addition, a recent survey by the Pew Internet & American Life
Project found that about half of the downloaders interviewed had found
ways to swap files outside of peer-to-peer networks such as Grokster.
These include copying songs from friends' portable music players and
exchanging them via e-mail or instant messages.
Nevertheless, the decision was hailed by numerous segments of the
entertainment industry, including Hollywood studios, major record
companies, musicians' unions and book publishers. To these groups, the
ruling promised to strike a death blow to companies like StreamCast,
helping online music stores and other authorized outlets get a foothold
in the market.
"It now becomes undesirable for people to invest money in these
illegitimate services because they're going to be held accountable,"
said Zach Horowitz, president and chief operating officer of Universal
Music Group. "Advertising will dry up. They're not going to be able to
create a business model where they will be able to secure an acceptable
financial return."
There was sharp disagreement among technology advocates over the
general effect of the ruling on innovation, but most praised the high
court for not giving the entertainment industry two things it had
sought in the appeal. The court left the Sony protections intact,
declining to limit them to technologies primarily used for legitimate
purposes. And in a key footnote, Souter said a company could not be
held liable for inducement solely for deciding not to include
anti-piracy protections, such as filters to block unauthorized copying.
William W. "Terry" Fisher, a Harvard law professor who had urged the
Supreme Court not to alter the Sony ruling, said the ruling might force
technology companies to spend more time with their lawyers as they
develop products, putting "a lot of sand in the gears" of innovation.
Still, he said, the opinion struck a good balance.
"There's only one thing that will clearly get you in trouble after this
opinion, and that is actively promoting or marketing it for illegal
purposes," Fisher said.
Healey reported from Los Angeles, Savage from
Washington.