Peer-to-Peer Companies Win in Court

A U.S. federal appeals court ruled in favor of peer-to-peer software makers this week, stating that the companies behind the Grokster and Morpheus services are not liable for copyright infringement due to the actions of their users.

A three-judge panel of the 9th U.S. Circuit Court of Appeals unanimously backed a lower court ruling that Grokster, Streamcast Networks (maker of the Morpheus service), and Musiccity.com are not responsible for users who illegally copy or share content such as music and movies over their services.

"The peer-to-peer file-sharing technology at issue is not simply a tool engineered to get around" previous rulings against the Napster file-sharing service, wrote Judge Sidney R. Thomas in a ruling for the panel. "The technology has numerous other uses, significantly reducing the distribution costs of public domain and permissively shared art and speech, as well as reducing the centralized control of that distribution."

Latest Setback

The ruling is a further setback for the plaintiffs, including the Motion Picture Association of America, the National Music Publisher's Association of America, and the Recording Industry Association of America, which were appealing an April 2003 ruling by U.S. District Court Judge Stephen Wilson.

The MPAA and RIAA both say in separate statements that they are reviewing the next legal steps to take, and they are widely expected to appeal the ruling to either the full 9th Circuit Court or to the U.S. Supreme Court.

Groups supporting the P-to-P networks, such as Electronic Frontier Foundation and Public Knowledge, hailed the decision.

"This is a victory for innovators of all stripes," says EFF Senior Intellectual Property Attorney Fred von Lohmann in a statement from the group, which had argued on behalf of Streamcast. "The court's ruling makes it clear that innovators need not beg permission from record labels and Hollywood before they deploy exciting new technologies."

Substantial Decision

Though the ruling was not a surprising one, it will carry a lot of weight and make it difficult for representatives of the entertainment industry to successfully sue companies running decentralized P-to-P networks, says Evan Cox, an intellectual property attorney at the San Francisco office of Covington & Burling, who followed the case closely.

In its first incarnation, Napster allowed data to flow through servers that it operated, and in 2001 courts ruled that practice did directly infringe on the rights of copyright holders. However, the technology has since evolved, and companies such as Grokster and Streamcast use networks that Thomas's ruling recognized as "truly decentralized." As a result, P-to-P companies would have no direct knowledge of individual file transfers, making them unable to directly stop the transfer of content, legal or otherwise, the court says.

"It was a very well reasoned opinion and I would guess that the music and movie industries would have difficultly convincing the full 9th Circuit Court or the U.S. Supreme Court that it was wrong," says Allonn Levy of the San Jose, California, law firm Hopkins & Carley.

Both Cox and Levy pointed out that in his ruling, Thomas took pains to reinvigorate the 1984 Universal City Studios vs. Sony case, known as the "Betamax case," after Sony's home video recording technology. In that case, the Supreme Court ruled that Sony could not be held liable for violating the copyright of media companies because the Betamax technology had "substantial noninfringing uses" that did not result in copyrights being violated.

Both attorneys added that there appears to be little appetite in the Supreme Court itself for revisiting its decision in the Betamax case. "You can't go out and sue Canon [the maker of the Canon copier machine] because I've copied an article from my local newspaper, and the reasoning is the same here. There is a good reason 'Betamax' has been law for 20 years," Levy says.

Money Matters

Despite the ruling, the entertainment industry most likely will push for an appeal as well as pursue other avenues of recourse. Cox says they could sue the P-to-P companies for financial damages for instances in the past when they were not yet using the completely decentralized systems. "That may take a number of years to pursue, but a big financial judgment against them could put those relatively small P-to-P companies out of business," Cox says.

If copyright holders are to get more legal power to stop the distribution of their materials on P-to-P networks, it would have to be done through new laws passed by the U.S. Congress, Thomas wrote. "It is prudent for courts to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent present magnitude. Indeed, the Supreme Court has admonished us to leave such matters to Congress," Thomas wrote.

A bill that would do this has been is already before Congress, sponsored by the Republican Senator from Utah, Orrin Hatch, and backed by the RIAA. The bill, which would allow artists and entertainment companies to sue creators of products that "induce" copyright violations, is backed by a variety of powerful leaders within the Senate, including Senate Majority Leader Bill Frist, a Tennessee Republican, Senate Minority Leader Tom Daschle, a South Dakota Democrat, and Judiciary Committee ranking Democrat Patrick Leahy of Vermont.

"I believe that such legislation by the Congress is the only way you are going to see a change in the status quo now, " Cox says.

Cox adds that the judgment by Thomas is conspicuous for giving no solace to the entertainment industry about how serious the problem of copyright infringement has become.

"Most of the tone of this opinion was skeptical from the viewpoint of holding the technology companies responsible," Cox says.

Levy also says the lack of rhetorical support for the entertainment industry marked a shift within the courts. "It appears that Thomas wanted to make it clear to the technology industry that there is nothing legally wrong with this technology," he says.