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.



If you want other stories on this topic, search the Archives at latimes.com/archives.
Copyright 2005 Los Angeles Times