Supreme Court Rules in MGM v. Grokster

June 27, 2005. The Supreme Court issued its unanimous opinion [55 pages in PDF] in MGM v. Grokster, reversing the judgment of the U.S. Court of Appeals (9thCir) regarding vicarious copyright infringement by the distributors of peer to peer (P2P) systems. The Supreme Court held that "one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties."

See also, related story titled "Reaction to the Supreme Court's Opinion in MGM v. Grokster" in TLJ Daily E-Mail Alert No. 1,163, June 28, 2005.

The Supreme Court did not overturn or criticize its 1984 opinion in Sony. Rather, it clarified Sony, and the law of vicarious infringement, and held that the 9th Circuit misapplied Sony. This is a victory for the music and movie industries, and some other copyright holders.

Background. Metro Goldwyn Meyer (MGM), and other movie companies, and various record companies, filed a complaint in the in the U.S. District Court (CDCal) against Grokster, Streamcast and Kazaa alleging copyright infringement, in violation of 17 U.S.C. § 501. They alleged contributory and vicarious infringement. In addition, professional songwriters and music publishers filed a class action complaint against the same defendants alleging contributory and vicarious infringement. The two actions were consolidated. No individual infringers are parties in these actions.

The Supreme Court wrote that "MGM.s evidence gives reason to think that the vast majority of users' downloads are acts of infringement, and because well over 100 million copies of the software in question are known to have been downloaded, and billions of files are shared across the FastTrack and Gnutella networks each month, the probable scope of copyright infringement is staggering."

Moreover, the Court wrote that "The record is replete with evidence that from the moment Grokster and StreamCast began to distribute their free software, each one clearly voiced the objective that recipients use it to download copyrighted works, and each took active steps to encourage infringement."

The factors the the Court cited included the quantity of infringement, the proportion of available works that infringe copyrights, the marketing of the P2P software, the advertising based business model employed by Grokster and Streamcast, and the absence of attempts to filter out infringing works.

The parties filed cross motions for summary judgment in the District Court regarding software provided by Grokster and Streamcast. On April 25, 2003, the District Court issued its opinion holding that Grokster's and Streamcast's P2P networks do not contributorily or vacariously infringe the copyrights of the holders of music and movie copyrights. See also, story titled "District Court Holds No Contributory or Vicarious Infringement by Grokster or Streamcast P2P Networks" in TLJ Daily E-Mail Alert No. 650, April 28, 2003

On August 19, 2004, the U.S. Court of Appeals (9thCir) issued its opinion [26 pages in PDF], affirming the District Court, and holding that Grokster's and Streamcast's P2P networks do not contributorily or vicariously infringe the copyrights of the holders of music and movie copyrights. See, story titled "9th Circuit Holds No Vicarious Infringement in Grokster Case" in TLJ Daily E-Mail Alert No. 963, August 20, 2004. The 9th Circuit's opinion is reported at 380 F.3d 1154.

The Office of the Solicitor General (SG) submitted a brief with the Supreme Court urging reversal. See, story titled "Petitioners, Solicitor General, & Amici Urge Supreme Court to Reverse in MGM v. Grokster" in TLJ Daily E-Mail Alert No. 1,063, January 26, 2005.

Holding of the Supreme Court. Justice David Souter writing for a unanimous Court, reversed the judgment of the Court of Appeals.

The Supreme Court commented that "The more artistic protection is favored, the more technological innovation may be discouraged; the administration of copyright law is an exercise in managing the trade-off. ... The tension between the two values is the subject of this case ..." It also stated that "When a widely shared service or product is used to commit infringement, it may be impossible to enforce rights in the protected work effectively against all direct infringers, the only practical alternative being to go against the distributor of the copying device for secondary liability on a theory of contributory or vicarious infringement."

It wrote that "One infringes contributorily by intentionally inducing or encouraging direct infringement, ... and infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it, ... " The Court also stated that "these doctrines of secondary liability emerged from common law principles and are well established in the law".

The Supreme Court also addressed its early opinion in Sony at length. It held in Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), that the "sale of video cassette recorders (``VCR´´s) did not subject Sony to contributory copyright liability, even though Sony knew as a general matter that the machines could be used, and were being used, to infringe the plaintiffs' copyrighted works. Because video tape recorders were capable of both infringing and ``substantial noninfringing uses,´´ generic or ``constructive´´ knowledge of infringing activity was insufficient to warrant liability based on the mere retail of Sony’s products."

In the present opinion, the Supreme Court did not overturn Sony. Rather, it distinguished the facts in Sony from those in the present case. It wrote that "There was no evidence that Sony had expressed an object of bringing about taping in violation of copyright or had taken active steps to increase its profits from unlawful taping."

The Court continued that "On those facts, with no evidence of stated or indicated intent to promote infringing uses, the only conceivable basis for imposing liability was on a theory of contributory infringement arising from its sale of VCRs to consumers with knowledge that some would use them to infringe. ... But because the VCR was capable of commercially significant noninfringing uses,. we held the manufacturer could not be faulted solely on the basis of its distribution."

The Court held that the 9th Circuit "misapplied" Sony. The Court elaborated that "Sony barred secondary liability based on presuming or imputing intent to cause infringement solely from the design or distribution of a product capable of substantial lawful use, which the distributor knows is in fact used for infringement. The Ninth Circuit has read Sony's limitation to mean that whenever a product is capable of substantial lawful use, the producer can never be held contributorily liable for third parties. infringing use of it; it read the rule as being this broad, even when an actual purpose to cause infringing use is shown by evidence independent of design and distribution of the product, unless the distributors had .specific knowledge of infringement at a time at which they contributed to the infringement, and failed to act upon that information´´... Because the Circuit found the StreamCast and Grokster software capable of substantial lawful use, it concluded on the basis of its reading of Sony that neither company could be held liable, since there was no showing that their software, being without any central server, afforded them knowledge of specific unlawful uses."

"This view of Sony, however, was error," wrote the Supreme Court. It added, "we do not revisit Sony further", and "It is enough to note that the Ninth Circuit's judgment rested on an erroneous understanding of Sony and to leave further consideration of the Sony rule for a day when that may be required."

The Court elaboratd that "Sony's rule limits imputing culpable intent as a matter of law from the characteristics or uses of a distributed product. But nothing in Sony requires courts to ignore evidence of intent if there is such evidence, and the case was never meant to foreclose rules of fault-based liability derived from the common law." The Court added that "Thus, where evidence goes beyond a product's characteristics or the knowledge that it may be put to infringing uses, and shows statements or actions directed to promoting infringement, Sony's staple-article rule will not preclude liability."

Then, the Court offered the following concise statement of its holding. "For the same reasons that Sony took the staple-article doctrine of patent law as a model for its copyright safe-harbor rule, the inducement rule, too, is a sensible one for copyright. We adopt it here, holding that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties. We are, of course, mindful of the need to keep from trenching on regular commerce or discouraging the development of technologies with lawful and unlawful potential. Accordingly, just as Sony did not find intentional inducement despite the knowledge of the VCR manufacturer that its device could be used to infringe, ... mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor to liability. Nor would ordinary acts incident to product distribution, such as offering customers technical support or product updates, support liability in themselves. The inducement rule, instead, premises liability on purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate commerce or discourage innovation having a lawful promise."

The Court then applied the facts of Grokster and Streamcast cases to this legal principle. It found ample evidence of their unlawful intent.

The Court also noted that one cannot be held liable for inducement of infringement unless there is also actual infringement. In a single paragraph, the Court concluded that "there is evidence of infringement on a gigantic scale" in the present cases.

Concurring Opinions. Justice Ruth Ginsburg wrote a concurring opinion, in which Chief Justice William Rehnquist and Justice Anthony Kennedy joined. She wrote that the District Court should not have granted summary judgment, because, under Sony, there was a genuine issue of material fact as to whether there was "a reasonable prospect that substantial or commercially significant noninfringing uses were likely to develop over time."

Justice Stephen Breyer wrote a separate opinion, in which Justice Sandra O'Connor (who wrote the majority opinion in Sony) and Justice John Paul Stevens joined. It is labeled "concurring". At the outset, he wrote that "the distributor of a dual-use technology may be liable for the infringing activities of third parties where he or she actively seeks to advance the infringement." However, he then went on to write in detail about the evolving noninfringing uses of P2P systems. But for his opening, his "concurring" opinion carries many attributes of a dissent.

Justice Breyer advanced arguments for not restricting new technologies that facilitate the distribution of information. Although, he was not enthusiastic about protecting the defendants in the present cases.

He argued that Justice Ginsburg's conclusion regarding noninfringing uses is incorrect. He wrote that "When measured against Sony's underlying evidence and analysis, the evidence now before us shows that Grokster passes Sony's test -- that is, whether the company's product is capable of substantial or commercially significant noninfringing uses."

He went on to enumerate and discuss at length the noninfringing uses of P2P systems, including the distribution of electronic books in the public domain, the distribution of research information, and as of yet unforeseen uses.

Justice Breyer then wrote that "The real question here, I believe, is not whether the record evidence satisfies Sony." Rather, "the real question is whether we should modify the Sony standard." And, he concluded, the Court should not modify Sony. In particularly, it has worked to protect new technologies.