File Sharing and the Supreme Court

On the last day of the Supreme Court's June session, the unanimous verdict in the MGM versus Grokster case came in, ending years of waiting for entertainment companies, peer-to-peer enthusiasts, and tech watchers. The Supreme Court judged that lower courts had been in error when they sided with defendants Grokster and StreamCast, both distributors of P-to-P file-sharing software. The lower courts had ruled that these companies were not liable for secondary copyright infringement linked to the direct copyright infringement performed by individuals who use their products to illegally trade music and movie files.

Some proponents of Grokster and company's side of the argument promptly started moaning about the chilling effect the decision would have on tech innovation. Why? Because the court introduced a new standard for judging a company's liability when it makes products that can be (and then are) used to violate copyright. That new standard is "active inducement," which requires "evidence of active steps taken to encourage direct infringement." Grokster and StreamCast were judged to have actively induced copyright infringement in the way they targeted and released their products, and therefore should bear liability for the violations that occurred--although that will officially be settled by a lower court as it takes up the case again.

The potential chill comes from the fact that the general rules that will apply in determining active inducement in future cases leave room--arguably too much room--for interpretation. This creates uncertainties for companies and consumers as they contemplate new technologies, uncertainties that may prompt some firms to scrap plans for new products rather than risk lengthy and expensive lawsuits.

But is this modified standard a true disaster for entrepreneurs, tech innovators, and consumers? The short answer is no. Honestly, it could have been a heck of a lot worse.

The ruling here ties liability to the behavior and intent of the company that makes a given product, not the technology used in the product itself. That's the good part. But because liability is tied to company intent, this ruling does leave unanswered a number of questions that will influence tech development as we stumble through the determination of what, exactly, you need to show to prove that a company is actively inducing consumers to violate copyright.

Defining 'Intent to Induce'

In my April column, I noted that Grokster and StreamCast were likely guilty of something. The Supreme Court has now defined that something as active inducement. This is the same basic notion of secondary liability that Senator Orrin Hatch (R-Utah) wanted to codify explicitly with the bill he proposed last year, informally called the Induce Act (S. 2560).

Hatch's bill was quite short and didn't provide much guidance as to what it really means to induce a copyright violation; see my July 2004 column for more on this. The Supreme Court did better. And inducement as a concept in secondary liability isn't actually new at all (you'll find it in patent law and criminal law, for example), just new to being openly used in this way.

The ruling and majority opinion found the defendants demonstrated active inducement in three key ways: first, in the way they marketed their products; second, through their failure to include any technology to prevent copyright infringement; and third, by business models that depended on copyright infringement.

Of the three points, the way the defendants marketed their products was the most important evidence of active inducement. The court found multiple aspects of the companies' marketing show that their products were aimed at people who wanted to violate copyright and were looking to replace the old Napster, which was then infamous as a haven for illegal trade of copyrighted files. Communications to existing and potential users--in online ads, newsletters, and search engines, for example--reinforced that idea and highlighted the fact that one could find lots of desirable copyrighted works on their services. In StreamCast's case, internal documents about product marketing and target audience appeared to support the claim that the company anticipated illegal use as a selling point for its software.

The court said touting a product's potential for infringing use was one of two explicit ways to demonstrate active inducement; the other was by giving instruction on how to engage in an infringing use. Though the latter point did not apply in this case, it would apply squarely to makers of certain DVD copying programs. Makers of these products attempt to skirt copyright law by omitting a utility to decrypt copy-protected DVD movies, while including instructions on how to find and download such a utility and then how to use it with their programs. Of course, these software vendors say that the instructions are meant for users who don't live in a country where such activity is illegal, as it is in the United States.

So far, mostly clear.

The Court said the other two points--the failure to include any anti-infringement technology, and business models dependant on copyright infringement by users--provided ancillary evidence of active inducement. Neither Grokster nor StreamCast made any effort to include in its software a filtering or tracking tool that might have prevented copyrighted works from being traded. And the companies' ad-driven business models depend on widespread distribution of their software--which, the court said, is most likely to occur if their networks are chock-full of copyrighted works.

A handy footnote in the ruling goes on to explicitly state that, taken alone, neither the simple act of including features that make it possible to use a product to violate copyright nor the failure to include filtering capability proves active inducement. That's good, clear news for many tech companies, which now don't have to worry that they must act to make copyright violations technically impossible in order to be safe from litigation. The court also spelled out that offering product updates and providing tech support don't in and of themselves demonstrate liability either (the studios had argued that supporting a product known to be used to violate copyright violations bolstered their case).

However, it is less clear whether having a business model that depends on the product's appeal to those deemed likely to use it to violate copyright would by itself demonstrate active inducement. It's a sucker bet that this will be a central question in future P-to-P (or other) cases. And what about cases that involve technologies with uses that are evolving from overwhelmingly infringing to noninfringing? You can argue that is the case with P-to-P networking, which is now being used by legitimate music sites. Future courts will have to be careful to make the same distinction that the Supreme Court made: You must judge the company, not the technology, punishing bad actors but not automatically punishing those who create products that use the technology without harming copyright holders.

Also, although the advertising standard for active inducement seems fairly clear, there is potential for abuse on both sides. I'd expect some companies to skirt the advertising issue in a nudge-nudge, wink-wink sort of way: They wouldn't openly or directly advertise their products for infringement, but everyone would still know that the products could be used that way. The Net makes it quite easy to spread such information anonymously. Conversely, overzealous content owners might take a more general statement of ability to copy--where what's copied might be under copyright or not--as evidence of advertisement of infringing use, and sue a company that creates products capable of being, but not actively intended to be, used to violate copyright.

The Good News

In the absence of other evidence leading to secondary liability, we're essentially left with the standards set by the Supreme Court in 1984's Sony Betamax ruling. That's good news for consumers and tech companies because those standards are both familiar and relatively clear.

In the case, Sony, maker of the Betamax video recorder, was accused of secondary copyright violation by Universal Studios and other entertainment companies, which claimed that the videocassette recorder let users break copyright law and Sony, as the product's manufacturer and distributor, should be held liable for that. This summer's ruling spells out that the secondary liability case against Sony hinged on showing that although the product has substantial or significant lawful use, it also allows copyright infringement to occur, and the company knows it in a general sense--direct control over or knowledge of specific instances of infringement as they occur was not required. That wasn't enough then, and it's not enough now.

Lower courts had applied the Sony Betamax guidelines in the Grokster/StreamCast case, focusing on the idea that peer-to-peer networks like those operated by the defendants have noninfringing uses, and that software distributors have no direct control over what consumers do with their products, and therefore should not be held liable. Where these courts erred, according to the Supreme Court, was in ignoring evidence of secondary liability stemming from other causes, namely active inducement.

The entertainment companies had made a case for broadening the Sony ruling in a number of ways. For instance, in their arguments, these firms discussed defining "substantial use" in quantifiable terms, such as a majority of the use. Also on the table (from the plaintiff's point of view): a revisit of the idea that if a company knows that copyright infringement is going on through use of its products, it is liable.

There were even hints that companies would have to accurately predict the balance of use (infringing versus noninfringing) or risk a lawsuit once the product was out if the scales tipped the wrong way. The court declined to revisit the Sony decision to this extent, though it leaves open the possibility that it will in the future. Count that as one big bullet dodged that would have forced tech firms to take up divination or keep a media representative on the company design board.

The Supreme Court in its decision says repeatedly (and various justices have said throughout the case) that it was aware of the need to balance copyright protection with progress and technical innovation. Generally, the ruling that came down is consistent with that, even though no one walks away 100 percent happy.

That will probably mean more attempts by both sides to get new laws passed to bolster future cases. What I'm still waiting for is either a case or a new law that sheds more light on fair-use rights. The Sony decision did that--the court found that the primary use of VCRs was taping programs to watch later, which it determined was a fair-use right. That finding bolstered Sony's case and gave consumers a little something, too, by explicitly defining a kind of copying or transfer that was allowed. Today's consumers--and the tech companies that want to cater to them--need that kind of clarity as they navigate turbulent digital copyright waters.

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