Court finds evidence of Grokster’s clear intent to induce infringement, its affirma- Supreme Court’s Inducement tive steps to promote infringing activities, and underlying direct infringement by Theory in Grokster Grokster’s users. In anticipation of the Grokster opinion, some critics argued that previous decisions Creates Uncertainty such as Sony do not properly balance the competing interests of copyright owners and peer-to-peer software distributed by defen- technology developers. However, an advan- dants Grokster and Streamcast (collectively tage of the Sony safe harbor protection referred to as “Grokster”). Grokster’s against secondary liability is its certainty. system is unlike the system implicated in Technology companies such as peer-to-peer the recent Napster litigation,2 because software producers continue to innovate Grokster’s system does not include a cen- knowing that, as long as their software is tral index of the files available for sharing “merely capable of substantial noninfring- on the system. Rather, Grokster’s system ing uses,” they will not be held liable for employs a decentralized structure, in which contributory infringement. Proponents a search for a particular file, typically Robert A. Kalinsky Gregory A. Sebald argue that Sony’s “bright line” test is nec- music or video, is broadcast through other essary for such innovation to flourish. users’ computers running Grokster’s soft- BY ROBERT A. KALINSKY AND GREGORY A. SEBALD, The Grokster opinion, by its own MERCHANT & GOULD, P.C. ware, rather than a central index, to identify account, does not disturb the Sony safe har- the file being sought. Evidence indicates bor. However, the Court’s articulation of the Robert A. Kalinsky is an associate with that billions of files have been shared using active inducement theory for secondary lia- Merchant & Gould who practices intellectual the Grokster system, with at least ninety bility may blur the line between lawful and property law with a special concentration on percent of these files including copyrighted unlawful conduct. This blurring is accentu- software and biomedical device patents. material. ated in view of the facts before the Court in Gregory A. Sebald, a shareholder with the The District Court for the Central the Grokster decision. The egregious con- firm, practices intellectual property law with District of California granted summary duct of Grokster and the fact-intensive an emphasis on client counseling on patent judgment in Grokster’s favor, finding that inquiry involved in making an intent deter- and copyright matters. Sebald chairs the Grokster’s system falls under the safe har- mination allow the Court to highlight cer- firm’s Copyright and Entertainment Law bor provision of the Supreme Court’s Sony tain evidence, while providing little Committee. Merchant & Gould is a national opinion3 because the system is capable of guidance of what other evidence would be intellectual property and litigation law firm substantial noninfringing uses. The Ninth relevant for an intent determination in with more than 110 attorneys in offices in Circuit affirmed. On June 27, 2005, the future disputes. Atlanta, Denver, Minneapolis, Seattle, and Supreme Court issued its unanimous deci- For example, when examining intent, the Washington, DC. The authors wish to thank sion,4 both vacating the District Court’s rul- Court identifies promotional materials Thomas R. Johnson, also with Merchant & ing in Grokster’s favor and stating the new showing Grokster’s intent to become the Gould, for his contributions to this article. active inducement theory for secondary lia- “next” Napster. The Court specifically The opinions expressed herein are of the indi- bility in copyright law. In its decision, the highlights a Grokster advertisement touting vidual authors and not the firm of Merchant Court articulates the test for active induce- itself as the “#1 alternative to Napster” as & Gould. ment as follows: indicative of the evidence to consider when [O]ne who distributes a device with making the intent determination under the n Metro-Goldwyn-Mayer Studios, Inc. v. the object of promoting its use to active inducement theory. However, the 1 Grokster, Ltd., commonly referred to as infringe copyright, as shown by clear Court fails to emphasize that it is unclear Ithe Grokster decision, the United States expression or other affirmative steps whether these advertisements were ever Supreme Court adopts a new “active taken to foster infringement, is liable publicly released. This material may illus- inducement” theory for secondary liability for the resulting acts of infringement trate potential bad faith on the part of in copyright law. The Court’s decision by third parties. Grokster. However, the factual inquiry emphasizes particularly stark evidence that The Court identifies evidence that it should also ask why such material might it finds would support liability for active feels would support Grokster’s liability not have been released. It is possible that inducement. However, the opinion leaves under the new inducement theory. This evi- Grokster decided against running the uncertainty regarding what other activity dence ranges from internal memoranda and advertisements. Such a decision could be might trigger liability under the new theory. advertisements showing Grokster’s desire indicative of an intent to act lawfully, rather This uncertainty will require further litiga- to become the next Napster, to Grokster’s than unlawfully. tion to define the metes and bounds of business model and the lack of filtering The Court also looks to Grokster’s busi- active inducement in copyright law. software to stop infringing content from ness model as evidence showing an intent At issue in the Grokster decision is elec- being shared on Grokster’s system. Based to induce infringement. For example, the tronic file sharing over the Internet using on the limited record before the Court, the Court focuses on Grokster’s revenue stream

12 INTELLECTUAL PROPERTY TODAY AUGUST, 2005 that is based on maximizing the number of its users to which it can stream advertise- ments. The Court finds such a business model to be indicative of intent because Grokster knows that an increase in the number of users will result in an increase in infringement. However, it is difficult to dif- ferentiate Grokster’s business model from that of any other company—to maximize its customer base. Such a business model, in and of itself, does not appear to be flawed, and the Court’s emphasis of this evidence may result in increased scrutiny of similar models for future alleged infringers. Other evidence highlighted by the Court in determining Grokster’s intent is its fail- ure to make an effort to filter copyrighted material from users’ downloads. The Court prefaces analysis of these facts with a dis- claimer that such evidence alone is not enough to find intent if the device at issue has substantial noninfringing uses, because such a holding “would tread too close to the Sony safe harbor.” However, the Court does not address the realities of the technology at issue. There appears to be ample evi- dence that Grokster has no control over its users and cannot filter content, even if it so desired. For example, the Ninth Circuit notes that Grokster’s software, unlike its predecessor Napster, is based on a decen- the middle between the two extremes, and may find that the world after the Grokster tralized architecture and that Grokster has the Grokster decision provides little guid- decision is a more dangerous place. The little control of its product once it is down- ance for courts faced with such cases. bright line of the Sony safe harbor no longer loaded by end users. Grokster’s failure to For example, future technology compa- acts as an absolute shield for technology employ filters has less probative value for nies will probably attempt to avoid much of capable of substantial noninfringing uses. an intent determination once the technolog- the conduct highlighted in the Grokster The new inducement theory will likely ical realities are factored into the analysis. decision, such as the advertisements induc- require years of litigation and intrusive dis- Although one can argue about whether ing users to infringe. However, it is difficult covery to flesh out exactly what conduct is the evidence examined by the Court is pro- to see how companies can avoid the basic sufficient to show intent to induce others to bative of an intent to induce infringement, business model associated with maximizing infringe. Until then, companies can try to one probable result of the Court’s new the- customers. In addition, future peer-to-peer do the right thing, avoid the conduct the ory of liability is an onslaught of discovery technology appears to be moving towards Court focused on in Grokster. IPT in future cases directed to these issues. further decentralization, making it difficult Intent is, by its nature, a fact-intensive or impossible to employ devices to stop ENDNOTES inquiry and difficult to prove without exten- infringing conduct. Will this evidence be 1. 125 S. Ct. 2764 (2005). sive discovery. The Court’s decision will 2. A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 sufficient to expose the producer of the (9th Cir. 2001). lead to increased litigation costs in the form next-generation peer-to-peer system to lia- 3. Sony Corp. of Am. v. Universal City Studios, Inc., of more intrusive discovery focused at find- bility under the inducement theory articu- 464 U.S. 417 (1984). ing any and all evidence probative of intent. lated in Grokster? Similarly, what other 4. Although all of the Justices agree upon the new active inducement theory, the Court is anything In addition, future discovery costs may technologies capable of both infringing and but unified regarding the future viability of the increase due to uncertainty surrounding noninfringing uses may fall prey to an Sony safe harbor. The majority opinion of the what other types of evidence should or inducement theory of liability because of a Court touches upon the Sony decision, but argues should not be determinative of a finding of carelessly worded advertisement? These that the inducement theory neither supplants nor is inconsistent with the Sony safe harbor. A first intent to induce. There is a large gap questions will only be answered with time. concurrence argues that Grokster’s system does between the conduct examined and found The Court states that mere knowledge of not have substantial noninfringing uses and there- to be lawful in Sony and the flagrant con- infringement is insufficient. Under the fore does not fall under the Sony safe harbor pro- duct supporting inducement examined in Court’s inducement rule, there must be vision. A second concurrence reaches an opposite conclusion in its treatment of Grokster’s system Grokster. It is likely that future disputes will “purposeful, culpable expression and con- under Sony, finding that Grokster’s system is include defendants falling somewhere in duct.” Nevertheless, technology companies capable of substantial noninfringing uses.

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