Us Supreme Court Rules Against P2p File-Sharing Software Providers

AUGUST 2005

US SUPREME COURT RULES AGAINST P2P FILE-SHARING SOFTWARE PROVIDERS

Some twenty-one years since its landmark decision in Sony v Universal Studios, last month's unanimous decision of the US Supreme Court in MGM v Grokster has been heralded by the music and film studios as a major victory in their bid to prevent the unauthorised copying of their works over the Internet.

Not surprisingly, the decision has also been hailed by the technology industry as a blow for creativity, likely to have a chilling effect on development of new technology.

However, given the particular facts of the case, it is difficult to see it as either.

Background

MGM v Grokster dealt with liability for copyright infringement arising from the provision of so called peer-to-peer (P2P) file- sharing software provided by Grokster.

Grokster created and distributed free P2P software, allowing users to make digital files available to others over the Internet. It then profited by selling Internet advertising space. Although P2P software may be used for distributing any type of digital file, the great majority of those who downloaded the software used it for the unauthorised copying and distribution of copyright works, such as music.

The question was whether or not Grokster should be liable for providing the technology through which file sharers were infringing copyright.

Grokster relied on the somewhat analogous Supreme Court decision two decades earlier of Sony v Universal Studios, which had dealt with the invention of the video cassette recorder. Despite being from a different technological era, the VCR had also provided technology that could be used for large-scale lawful and unlawful copying. The Supreme Court had held Sony not liable for secondary copyright infringement, even though there was evidence that many purchasers of its VCRs used them to infringe copyright. The key factor in Sony was that the VCR was capable of "commercially significant non-infringing uses", such as the permitted exception of timeshifting (ie recording a television programme to watch later).

In the lower courts Grokster had successfully argued against liability on the basis of Sony. It claimed that there were commercially significant non-infringing uses of P2P software, such as swapping personal digital files, or works where copyright had expired. It argued that it should not be held responsible for what uncontrolled uses its technology might be put to.

Continued overleaf ► Supreme Court decision

The Supreme Court was unsympathetic to Grokster. It distinguished Grokster's position from that of Sony, and unanimously held Grokster liable as a secondary infringer. The Court held that Grokster did more than create the new technology, it had actively intended, and profited from, the unlawful use of its P2P product.

In holding that Grokster had the intention that its users would infringe copyright, the Supreme Court relied on the following factors:

(a) Grokster actively promoted itself as satisfying the demand left following the demise of renowned file-sharer Napster;

(b) it made no attempt to develop any filtering tools or mechanisms to diminish infringement;

(d) having provided its software for free, Grokster's entire revenue was from selling advertising space, meaning that its income depended on attracting the greatest number of users. The result was that copyright works accounted for up to 90% of swapped files. As Justice Soutier dryly commented "while there is doubtless some demand for free Shakespeare, the evidence shows that substantial volume is a function of free access to copyrighted works … and Grokster translated that demand into dollars".

Grokster argued that non-infringing use of P2P software was on the increase, particularly for the swapping of personal files. This, it claimed, was evidence that the product had a commercially significant non-infringing use. However, in view of the factors above, the Court was unmoved.

The way forward

While finding against Grokster, the Supreme Court was careful to pay lip service to the "commercially significant non- infringing use" test in Sony, reassuring that it did not intend to discourage the development of technology merely because its use could (or even often would) be used to infringe copyright. Grokster appears to have been decided very much on its facts, with the Supreme Court toeing a careful policy line between copyright owners, and creators of new technologies.

Both Grokster and Sony involved the development of new technology that could be used for lawful or unlawful purposes – but in terms of the intended purpose of the technology they were poles apart, especially in terms of how the products were marketed, and profits derived. It is, therefore, of little surprise that the Supreme Court so easily distinguished the facts of the two cases. Understandably, the music and film industry has heralded the decision as a major victory for copyright holders; but the decision leaves unexplored the huge gulf between the circumstances of Grokster and Sony. The Supreme Court relied heavily on what the creator "intends" its technology to be used for – and in Grokster's case this was obvious. However, such evidence will not always be easy to come by. The Supreme Court may have committed this gulf to be explored through a spate of speculative litigation whenever equivalent technologies emerge.

Although there are significant differences between New Zealand and American approaches to copyright, Grokster is likely to have some impact on how the New Zealand courts treat new technology that can be used for both infringing and non- infringing purposes, and in particular how they interpret what amounts to "authorisation" of infringement in terms of the Copyright Act 1994. It is very likely that if faced with the same circumstances the New Zealand courts would have found their way to the same result in Grokster. The difficulty with Grokster is that, in factual terms, it was not a difficult case, and therefore sheds little light on what would be considered actively authorising infringement – the line will probably only become clear when someone tries something a lot closer to it.

Contacts

Earl Gray (partner) – [email protected] Richard Watts (senior associate) – [email protected]