Copyrighted works and the traditional model of distribution is under threat is on old news. The rising prevalence of P2P Online Networks and the Online Direct Download market has made moving to an information infrastructure essential to operational effectiveness. Further, it has devalued the product and the value proposition of Compact Discs.

Analogously, the P2P litigation was valuable for its particular precedents regarding contributory and vicarious infringement on on-line networks and will be referred to as possibly influential to the development of the development of the contemporary online music sales strategy.

The copyright monopoly is limited with various exemptions and once an author creates a work and puts that creation into the world, it cannot be retrieved and protected as it once was. Copyright holders must rely on the courts to protect them from infringement of their copyrighted works and the past P2P litigation was an attempt to compensate the record industry for the distribution of their works utilising computer software.

Consequently, it is essential to look at the reasoning behind the decisions in Sony Corp of America v Universal City Studios, Inc U.S. (1984) and the recent Supreme Court decision in Metro-Goldwyn-Mayer Studios Inc v Grokster Ltd (2005) and the relevant precedents they provide to ascertain their bearing to the future of the online music industry.

Sony v Universal City Studios established the ground rules for secondary infringement of copyright, by utilisation of technology to reproduce copyrighted material. The U.S. Supreme Court held that use of technology (In this case a VCR) to copy copyrighted material, was by itself not sufficient to infer secondary copyright infringement. The court held that even though the VCR was capable of making infringing reproductions of copyright material, Sony was not held liable as the technology could be used for a number of legitimate activities. The U.S. Supreme Court accepted Sony’s defence that one of the principle purposes of the VCR was to permit the user to ‘time shift’ the viewing time of programmes. From this decision the scope of secondary infringement was effectively narrowed by the Supreme Court decision in the Sony case and was read as a significant in-road to the rights of copyright holders.

The Sony ruling was later to be referred to in the MGM v Grokster litigation . The two respondents were Grokster Limited and StreamCast Networks Inc who had created and distributed a software application that permitted users to share digital works across a Pier to Pier network. The Plaintiffs of the litigation were a group of affected copyright holders comprising Metro-Goldwyn-Mayer or MGM & others. The Plaintiffs alleged that the software distributed by the respondents allowed the distribution of the plaintiffs’ copyrighted works amongst its users without an appropriate licence. Further, the respondents knowingly and with intention distributed software to create a network for trafficking pirated music.

The software protocols that were distributed directed users’ computers to become super-nodes, operating as indexes for the purposes of listing available digital content, stored in a ‘shared folder’ on the users’ computer, to be viewed and downloaded. The software allowed users to search for digital content on the network and download the corresponding file from recipient super-nodes on the network.

As the network infrastructure indicated, neither Grokster nor Stream Cast operated a central server to mediate the transfer of the relevant copyrighted material and the respondents claimed that they had no ‘actual knowledge’ of particular transfers on the network and were therefore not liable for secondary infringement.

The Plaintiffs contested that claim and illustrated an overwhelming 90% of users used the respondents’ respective software for illegitimate distribution of copyrighted digital content. The empirical study was to be eventually accepted by both Grokster and StreamCast as an accurate portrayal of the prevalent illegitimate dissemination of copyrighted works on their network; however, they maintained that the network was decentralised and they had no ‘specific knowledge’ of individual acts of infringement for the purpose of establishing liability.

This was contested by the plaintiffs who referred to e-mails sent by users of the respondents’ software, received periodically, which entailed details of particular infringements and were answered by the respondents for the purpose of providing guidance. Secondly, MGM also notified the respondents of 8 million copyrighted files available through the utilisation of their distributed software .

The case revealed to be damning for Grokster and StreamCast as it was indicated that both respondents acted to encourage copyright infringement amongst their respective user base. As regards StreamCast, It distributed a software program entitled “OpenNap”, for the purpose of gaining the established Napster user base which amounted to nearly 50 million participants. The software was compatible with the existing Napster distributed software and aimed to both capture recipients’ e-mail addresses and advertise them as the predominant Napster alternative. Most significantly, Grokster also distributed software entitled “Swaptor”, including a set of instructions acting as a ‘hook’ directing users to their website for the purpose of selling their advertising. Finally, the respondents did not attempt to filter access to any relevant copyrighted material; such disclosures of the respondent’s business strategy indicated a continuing relationship between themselves and their user base, contrary to their claims, that indicated not only inferred knowledge but active encouragement on their part in the infringement of copyrighted works.

However, the Court of Appeal was to uphold the decision of the District Court and refused to establish liability for secondary infringement. The Court of Appeal referred to the Sony ruling that established that if the respondent distributed technology that was capable of “Substantial Non-Infringing Use” it will not evoke liability for contributory copyright infringement; Except If the respondent(s) had actual knowledge of specific instances of infringement of copyrighted material and omitted to act on that information.

The Court of Appeal held that the respondent’s could not be held contributorily liable as they operated a decentralised network which did not amount to ‘Specific knowledge’. In the hearing, the counsel for the respondents referred to page 1021 of the Napster ruling and the Sony case to suggest that just ‘notice’ was insufficient, but must be coupled with ‘material contribution’. It was the voluntary choice of the users themselves to ‘search’ and download copyrighted material, although the technology allowed users to search ‘Meta Data’ for Artists names and Song titles, it allowed legitimate downloading of digital content and the respondent’s provided examples of recordings from the band ‘Prodigy’ to the Bible. The Ninth Circuit Court of Appeal determined that as the software distributor operated a decentralised network, ‘knowledge’ could not be inferred. The Court of Appeal also held that the respondent’s could not be held vicariously liable as they did not monitor the use of their distributed software, users connected directly and It would be impossible to monitor and control user activities.

The Supreme Court decision in Grokster

The Supreme Court later reviewed the decision of the Appeal Court in Grokster. It determined that the Court of Appeal had given a particularly wide view of the ruling in Sony v Universal City Studios. That where a technology is capable of “Substantial Non-Infringing Use”, the designer and distributor of the technology can not be held liable for direct infringement by a third party, based on the adaptation of a patent law principle that when the technology is capable of nothing else but infringement, it is not unjust to impose liability on the software developer for the activities of the users of that technology. The Court ruled that the Court of Appeal’s decision had “rested on an erroneous understanding of Sony” .

The Supreme Court asked whether this criterion was appropriate to indicate liability, perceiving that the test as too wide, admitting technologies with potential legitimate uses that were at best ‘ad minimis’ and at worst blatantly constructed to take advantage of illegitimate copyright infringement.

The Supreme Court in Sony had established that a ‘proportionality standard’ based on numeric data was an incorrect standard by which to determine “Substantial Non-infringing use” and Sony escaped liability despite empirical evidence of 91% infringement . The court determined that the remaining legitimate use of the technology contributed individual commercial value to the product and would amount to a ‘substantial non-infringing use’. However, In the Sony case the Infringement was not preventable and the injunction sought by the Plaintiff would result in the cessation of that technology. Subsequently, the Court determined that the potential to infringe could not be separated from the technology and accepted the affirmative defence of ‘fair use’.

Comparable empirical evidence was also established in the Grokster litigation, and was also not relied on as a standard from which to infer liability. The Supreme Court was willing to accept technology that allowed Infringement by the majority of its users – for the purpose of envisaging the ‘capability of the technology’. This reasoning was based on the consideration of not undermining the development of new technology and innovation, with reference from the Judiciary to prior innovations that had led to copyright infringement at their conception but were realised later as important advancements in technology, from the Gutenberg press to the Apple Ipod.

Breyer J., who presided over the Supreme Court Grokster decision, acknowledged that the non-infringing component of the use of the Grokster and StreamCast software only accounted for the minority of the total use. He referred to the term “capable of” as contemplating the potential future uses of the technology. The Pier-to-Pier technology utilised by Grokster could of course be used significantly as part of a legitimate market If adopted by the entertainment industry, as the VCR was by the movie industry in the early eighties and nineties. The concern of the Supreme Court was to balance the dilemma that “the more artistic protection is favoured, the more technological innovation is discouraged: the administration of copyright law is an exercise in managing the trade-off.” Breyer J. admitted that if the Sony doctrine was more invasive it would undoubtedly protect copyright, however he was concerned about the negative impact this would have for innovation and the development of new technology.

The Supreme Court ruled that the Sony doctrine was miss-applied by the Court of Appeal. While it maintained the Sony ‘Safe harbour’ defence was still applicable, it was not appropriate for it to override all other considerations. Liability was found in the Supreme Court review of Grokster as the business model of the defendants had an unlawful objective. While the defendant’s did not have ‘actual knowledge’ of specific infringements by users of their software, and that the P2P software could have legitimate uses, there was evidence to the contrary that exemplified in their marketing of the software and their business model ‘intentionally’ encouraged the infringement of copyrighted material.

Grokster can continue to be distinguished from Sony, who had simply put a product into the market and profited from the sale of that product. Grokster had operated a business model that gave away their software through license agreements and retained their relationship with the customer to profit from advertising revenue. Grokster had maintained a business model with 90% infringement, when they had the ability to filter out unlicensed content.

Consequently, The Court formulated a new test to indicate liability, that where a respondent distributes technology with the purpose of copyright infringement, as shown by clear, ‘Purposeful, culpable expression and conduct’ then the respondent will be held liable for contributory copyright Infringement. This represents an initial vanguard movement against the erosion of the rights of copyright holders feared by the earlier decisions of Grokster.

The essential consequence of the final decision in Grokster for the music industry is the evidence of the respondent’s intent, that without ‘Purposeful, culpable expression and conduct’ to encourage copyright infringement amongst their users, they can still be protected by the Sony ‘safe harbour’ defence. As result of this development in contributory copyright infringement, “…in the absence of other evidence of intent, a court would be unable to find contributory infringement liability merely based on failure to take affirmative steps to prevent infringement, if the device otherwise was capable of substantial non-infringing uses.” In other words, unless the P2P service acted with the purpose, the subjective intent of encouraging or facilitating illegal infringement of copyrighted works, the courts will not establish liability.

Copyright Tony MacKelworth 2006. All Right Reserved