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June 27, 2005

Grokster Supreme Court Ruling

Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd, Case No. 04-480. (US Supreme Court June 27, 2005).

What Happened

The Supreme Court unanimously reversed the Ninth Circuit’s upholding of summary judgment for the defendants, sending the case back to the lower courts to either consider MGM’s motions of summary judgment (which the court signals should be granted) or to conduct a trial.

There are three opinions: (1) the majority opinion, joined by all justices (9-0), finding that summary judgment for the defendants was inappropriate because MGM showed enough facts of “inducement” to defeat summary judgment, (2) a Ginsburg concurrence (representing the opinion of 3 justices), where she says that the defendants should lose under Sony, and (3) a Breyer concurrence (representing the opinion of 3 justices), saying that the defendants should have qualified under Sony.

Why Did It Happen

I think the Supreme Court reached the only logical result. It had to find for the plaintiffs. I say this because there was simply no way for the Court to ignore that Grokster and Streamcast were facilitating massive copyright infringement. As the court says, “the probable scope of copyright infringement is staggering” and “there is evidence of infringement on a gigantic scale.” If it ignored these facts, it was simply going to force Congress to act.

On the other hand, the Supreme Court had to acknowledge that the rights of copyright owners can go too far in limiting technological innovation. The majority touches on this briefly in the beginning of its opinion, but more telling is the relatively narrow ruling—and careful drafting—of its basis for reversing the Ninth Circuit. The Court really tried to make sure that it found a way to get Grokster and Streamcast without opening up too much new liability.

In particular, the fact that the Court simply sidestepped any broad pronouncements about Sony is telling. Although the opinion was unanimous that the Ninth Circuit should be reversed, the court appeared badly fractured on the meaning and application of the Sony rule. Thus, it simply tried to leave Sony for another day. One can almost imagine the discussion in chambers: there must have been clear agreement that the defendants should lose, but no agreement on how or why. As a result, the Court seized on an “inducement” theory as a way to avoid clarifying Sony.

The Inducement Theory

Is “inducement” a new basis of liability? I don’t think it's a radical new doctrine. Under standard articulations of the contributory copyright infringement doctrine, a defendant is contributorily liable when it, “with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another.” Gershwin Publishing Corp. v. Columbia Artists Mgmt., 443 F.2d 1159, 1162 (2d Cir. 1971).

So “inducement” was already part of contributory copyright infringement. One way to read this opinion is that the court merely amplified a new definition of what the word “induces” meant from Gershwin. The court’s definition: “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.”

However, this definition does a couple of things to extend contributory infringement. Most specifically, the court is a little cagey about the knowledge requirement from Gershwin. As we saw in the lower court opinions in Grokster, there were plenty of questions about knowledge of what and when.

The court sidesteps all of those questions, but in doing so, I’m not sure it really overstates the rule. I think the court clearly interpolates some intent of infringement—a higher level of scienter than knowledge.

This is where the Sony rule should kick in—knowledge or intent should be irrelevant if the device-maker is protected by the staple article of commerce doctrine. The court handles the Sony rule bizarrely and in a way that is sure to spawn hundreds of law review articles. It recharacterizes Sony as merely offering/removing presumptions. The court says “Sony barred secondary liability based on presuming or imputing intent to cause infringement solely from the design or distribution of a product capable of substantial lawful use, which the distributor knows is in fact used for infringement.”

I think the court is trying to say that Sony permitted defendants to argue against any presumption of “knowledge” under Gershwin—and without knowledge, defendants are not contributorily liable. With this recasting, now, the court is suggesting that we don’t need to worry about the knowledge prong (or, alternatively, we can infer that knowledge exists) when the defendants induce infringement.

While we might obsess about the nuances of each word, conceptually I’m not sure the court’s semantic jujitsu really changes much of anything. I still think contributory copyright infringement requires scienter + actus reus. The scienter is still knowledge (or intent) of the infringements, and the actus reus is still some type of contribution/facilitation. Under inducement, the actus reus is building and marketing of the device as a way to infringe.

Did the Defendants Induce?

While I think the legal standard of inducement is not a radical restatement of the law, it could have a significant impact depending on how courts apply the doctrine to the facts. This is where I think the court went out of its way to make sure that Grokster and Streamcast lost. The evidence that supports that Grokster and Streamcast induced infringement was questionable. Abstracting from the facts, the court's basic thread seems to be:

· Napster was a bad actor
· Grokster and Streamcast tried to capitalize on Napster’s customer base after Napster’s demise
· It was wrong of Grokster and Streamcast to try to woo Napster’s customers knowing that Napster was a bad actor

In the end, the defendants appear to suffer a “taint by association”—by having been associated with the Napster collapse, they get tarred by the same brush.

Some of the specific facts that the court references:

· the defendants picked names that implicitly invoked Napster in customers’ heads
· the defendants offered the same basic services to customers that Napster offered
· internal StreamCast correspondence that the company was targeting former Napster users (which proves intent regardless of whether the messages ever reached consumers)

These facts are all ridiculously laughable. These are so defendant-specific and lightweight that it’s hard to take them seriously. Instead, the fact that the court showcases these facts reinforces that the court wants to make sure that Grokster and Streamcast lost in a narrow opinion.

The court also notes other facts that are more problematic from a precedent standpoint:

(1) the defendants aimed “to satisfy a known source of demand for copyright infringement” (i.e., former Napster customers). This factor again is Grokster/StreamCast-specific, although in theory this could be true of any technology provider whose products can be used to infringe. However, I'm not sure we'll find situations again where a company aggregates a group of infringing-hungry users, goes out of business due to copyright concerns and then is supplanted by companies targeting those users. As a result, so long as the courts don't overinterpret this fact, I'm not sure we'll see the fact pattern very often.

(2) Neither company tried to deploy filtering tools. The court says that this failure evidences that the defendants had no desire to reduce users’ infringement because filters would have reduced the software’s attractiveness to its users. However, in FN 12, the court says “in the absence of other evidence of intent, a court would be unable to find contributory infringement liability merely based on a failure to take affirmative steps to prevent infringement, if the device otherwise was capable of substantial noninfringing uses.” So the court goes out of its way to say that merely failing to filter does not equal liability. However, it is possible that lower courts will misinterpret the court’s words here and treat a defendant’s failure to proactively filter against the defendant.

(3) The defendants continued to make money based on infringing activity by serving banner ads to software users. Normally, “direct financial interest” is a factor under vicarious copyright infringement; here, the court points to it as evidence of contributory infringement. I have always been troubled by the defendants' business model (banner ads over infringing P2P activity), so I’m not surprised that the court picked up on it. Further, as evidence that the defendants promoted the software as a way to infringe, this factor does provide some insight into the business model. However, merely making money off infringing activity is not per se infringement, so again it’s possible that lower courts will misinterpret this fact.

One obvious question that the court does not address—when does someone who at one point induced infringement stop being an inducer? In other words, what could Grokster and StreamCast change in their business practices or marketing today that would cut off any future liability? I don’t have an answer to this question. Maybe there is no way to stop being an inducer. At least in this case, the “taint by association” with Napster pervades the defendants, so I think that there’s no way that these particular defendants could change their behavior to satisfy the Supreme Court. However, in future cases, I think it would be helpful to know how a defendant becomes a former inducer, and I cannot tell from this opinion what that would entail.

Predictions, Consequences and Open Questions

While the case is interesting and will spawn plenty of discussion (some intelligent, some insipid), I think the Supreme Court successfully took care of Grokster/StreamCast without going too far. As a result, I think the practical consequences of this case are not that great. With the exception of Grokster and StreamCast as corporate entities (and their employees), I think this case will affect almost no one’s behavior.

Prediction: on remand, Grokster/StreamCast will lose in the courts. In all likelihood, the lower court will grant the plaintiff’s motion for summary judgment (the Supreme Court practically instructs them to do so). I further think that Grokster and StreamCast will be hit with enormous damages that will overwhelm their financial resources. As a result, I don’t see a bright future for these companies.

However, users will keep using their software, so the practical effect of this ruling on their users will be minimal. I also think that users generally will not change their file-sharing ways due to this opinion, so file-sharing will continue as if nothing happened.

Prediction: other P2P file sharing services will not change their behavior based on the ruling. The reasons why Grokster and StreamCast induce are so company-specific that very few other P2P file sharing services will feel like it affects them. Further, new file-sharing technologies will emerge that will not promote themselves as tools for infringement, thus carefully avoiding the same “taint by association” that snared Grokster and StreamCast.

Open Question: This case offers us little insight about how these other P2P file sharing services will fare in the courts so long as they don’t promote themselves as tools for infringement.

Prediction: I think the Supreme Court practically guaranteed that copyright owners and technology producers will square off in another major litigation over P2P file sharing service lawsuit. Indeed, I think it’s practically inevitable that the Supreme Court will revisit copyright liability for file sharing services in 10 years or less.

Prediction: Congress will not attempt to disturb this ruling. I think the Supreme Court successfully struck a middle ground that will keep Congress from getting involved. The copyright owners won the case, so Congress won’t be that sympathetic to their requests. Further, the copyright owners got a Supreme Court pronouncement on “inducement,” so that will substantially relax any pressure they could put on Congress to give them an inducement doctrine.

At the same time, the opinion is relatively narrow and does not put technology providers automatically on the hook for how their technology is used. I don’t think Congress would be all that excited about giving technology providers a safe harbor under any circumstance, but I certainly think this case is narrow enough that it does not put pressure on Congress to create a new safe harbor for technology. Perhaps if lower courts repeatedly misconstrue this case, technology providers will have more ammunition to get Congressional protection; for now, I don’t think this opinion is extreme enough to make Congress want to get involved.

How Did I Do With My Pre-Opinion Prediction?

I don’t consider myself an especially good prognosticator, but I think I did OK here. On June 16, I made the following (nervous) predictions:

“Supreme Court reverses the Ninth Circuit, but writes a narrow opinion that effectively limits itself to the Grokster facts--thus avoiding broad pronouncements on contributory liability generally or a major recasting of the Sony doctrine. Whatever the Supreme Court rules, I further predict that Grokster--and all of us--lose eventually. Either the Supreme Court reverses the Ninth Circuit or I predict that Congress will reverse the Supreme Court statutorily. Personally, I'd favor a narrow Supreme Court reversal over seeing Congress screw up any effort to draw lines between legitimate and illegitimate contributions to infringing activity.”

I feel pretty good about this prediction. The court did tinker with the Sony doctrine by characterizing how it affects presumptions, but the court avoided broad pronouncements about Sony—specifically, what the words “capable of substantial non-infringing uses” mean. I feel very good about the prediction that the defendants lose this case. I also think I got what I wanted—a narrow Supreme Court opinion and little likelihood of Congressional action to screw it up.

I should stop making any new predictions. I’m sure I’ve used up my prediction karma.

UPDATE (Nov. 8, 2005): Grokster settled the lawsuit for $50M and shut down its P2P file sharing service. AP story. NYT article. Washington Post article.

Posted by Eric at June 27, 2005 01:09 PM | Copyright , Derivative Liability

Comments

Posted by: Matthew Goeden at June 27, 2005 03:29 PM

Posted by: Eric Goldman at June 27, 2005 05:25 PM

Posted by: Smitty at June 27, 2005 06:10 PM

Posted by: Eric Goldman at June 27, 2005 06:42 PM

Posted by: Lily at July 4, 2005 07:48 PM