U.S. Supreme Court Limits Scope of Permissible Copying of Copyrighted Media

Published June 27, 2005

On June 27, 2005, the U.S. Supreme Court handed down the MGM v. Grokster decision that was awaited eagerly by producers of motion pictures, audio recordings, and other owners of copyrighted media. In Grokster the Supreme Court unanimously held that the defendants Grokster and StreamCast, who had distributed free peer-to-peer file-sharing software (used for locating and exchanging computer files of sound recordings and movies) over the Internet, were liable for acts of copyright infringement by their Internet customers, notwithstanding possible lawful uses of the software. Thus, the Supreme Court appears to have established a basis for copyright owners to sue distributors of software that could be used for infringing activity, rather than the copyright owners having to enforce their copyrights directly against customers who obtained the software and used it in individual acts of copyright infringement.

Prior summary judgment in U.S. District Court was in favor of Grokster and co-defendant StreamCast, even though most of the media material actually exchanged over the Internet using their software was copyrighted. The District Court concluded that the defendants did not have levels of knowledge of impending infringement by their Internet customers sufficient to support a finding of contributory infringement by the defendants. The District-Court judgment was upheld on appeal to the U.S. Court of Appeals for the 9th Circuit.

Both lower courts relied on the “Sony-Betamax” principle set forth in the 1984 Supreme Court decision in Sony v. Universal City Studios. In Sony a designer and distributor of video-recording equipment was held not secondarily liable for copyright infringements perpetrated by its customers so long as the subject technology was “capable of substantial non-infringing uses.”

The facts in Grokster, in contrast with Sony, were egregiously against the defendants. Specifically, the defendants had promoted their software to previous Napster customers (whose operation was previously terminated by a federal court ruling); the defendants had actual knowledge of their users’ actual infringement because the defendants helped their users gain access, without permission, to known copyrighted works; and defendants made no attempts to stop or prevent copyright infringements by their users. In addition, defendants made no effort to add a feature (e.g., a filter) to their software that would have inhibited infringement; and defendants derived great financial reward from high Internet traffic in shared files by users of defendants’ software because the greater the number of users, the higher the fees that defendants could charge their advertisers. In other words, defendants did much more than merely distribute the software.

In view of these facts, the Grokster Court overturned the judgments in the lower courts and imposed a limit on the scope of the Sony-Betamax principle by ruling, “One who distributes a device with the object of promoting its use to infringe copyright . . . is liable for the resulting acts of infringement by third parties using the device . . . .” Although the Sony-Betamax principle was preserved in Grokster, the principle does not require a court to ignore evidence of intent, and it does not eliminate fault-based liability for copyright infringement if the evidence supports a finding that a defendant’s actions actually promoted infringement. Thus, Grokster opens a way for a company to be liable for its customers’ copyright infringements even though the company itself may not be directly infringing. Distributors of immensely popular peer-to-peer file-sharing software and other services now face a greater risk of a lawsuit based on their customers’ infringements of known copyrighted material.

In Grokster the Supreme Court endeavored to balance promoting technological advancement on one hand against reducing the volume of copyright infringement on the other hand. To such end, the Court set forth criteria for determining whether a company distributing devices or software usable for infringing activity (including devices or software usable primarily for infringing activity) could be liable for its users’ third-party infringements. The criteria focused heavily on the company’s intent underlying its distribution of the devices or software and on the particular uses, as intended by the company, of its devices or software. For liability to be found, the company must be specifically aiming to satisfy a demand for copyright infringement, must be making substantially no attempt to impede its users’ copyright infringements, and must have profited from sales of the devices. However, a company’s profit from sales or other marketing of its devices or software is not the sole factor in the determination of liability, especially if there is sufficient evidence showing that the company intended and/or encouraged its customers to engage in third-party infringement.

The Supreme Court remanded the Grokster case to the District Court for a determination, in view of the Court’s holding, of whether summary judgment should be granted to the copyright owners.

Two concurring opinions also address the importance of both copyright protection and technological advancement. In her concurrence, Justice Ginsburg criticized the lower courts for granting and upholding summary judgment in the absence of supporting evidence other than declarations of anecdotal and second-hand nature submitted by the defendants. Justice Ginsburg pointed out the overwhelming number of infringing uses of defendants’ peer-to-peer software compared to the very limited non-infringing uses of the software, and discussed the need for greater protection for copyright holders. Justice Breyer’s concurrence places less emphasis on the vast numbers of infringing uses and more emphasis on the need for a rule promoting and protecting technological advancement while still providing protection for copyright owners. With the Grokster ruling, the Supreme Court provides lower courts with more latitude in finding actionable copyright infringement. Grokster likely will generate more litigation by copyright owners seeking to enforce their copyrights against growing numbers of infringers, especially over the Internet.

Grokster generated a substantial amount of commentary (mostly in support of the decision) on Capitol Hill. Legislative response may await the results of the remand.