Ninth Circuit Affirms That Peer-To-Peer Software Providers Are Not Secondarily Liable For Illegal File Sharing Of Copyrighted Material Over The Internet

In a unanimous three-judge panel decision, the United States Court of Appeals for the Ninth Circuit affirmed a federal district court ruling in Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., 259 F. Supp. 2d 1029 (C.D. Calif. 2003) (“Grokster I”) (Update, April 30, 2003), aff’d, CV-01-08541-SVW, slip op. (9th Cir. Apr. 19, 2004) (“Grokster II”), holding that peer-to-peer (“P2P”) software providers Grokster and StreamCast (provider of Morpheus P2P software) were not secondarily liable for copyright infringement when an individual directly infringes copyright by using defendants’ P2P software to improperly share or download copyrighted material, such as MP3 music files, over the Internet.

The Ninth Circuit cast the decision as part of the historical opposition by the music industry to technological change, beginning with the development of the player piano. Three years ago, the music industry obtained a significant victory when it obtained an injunction shuttering the original music-sharing Napster service. A&M Records, Inc. v. Napster, Inc. 239 F.3d 1004 (9th Cir. 2001). Liability in Napster turned on the architecture of Napster’s P2P network which was built around Napster’s own centralized servers that maintained indices of available content files through which all user searches passed. Control over the indexing function meant Napster knew that it was enabling illegal transfers of copyrighted material and could halt infringements. In contrast, Grokster’s P2P software placed indices and search features on users’ individual computers that were outside of Grokster’s control. Thus, Grokster could not prevent file sharing in the same way that the original Napster could, and also had no ability to prevent an infringement or even gain knowledge of any infringement until after being notified by an owner that an infringement occurred. As a result, the appeals court affirmed the lower court’s ruling that defendant P2P software providers were not secondarily liable for copyright infringements under theories of contributory infringement or vicarious liability.

Contributory Liability. Under earlier Supreme Court precedent in Sony Corp. of America, Inc. v. Universal City Studios, Inc., 464 U.S. 417 (1984) (“Betamax”), and the Ninth Circuit’s decision in Napster, in order for a party to be secondarily liable as a contributory infringer, that party must have both knowledge of and material involvement in another’s direct infringing conduct. Betamax established the rule that technology providers would not be contributorily liable if their products had substantial non-infringing uses. Because the specific versions of the Grokster and Morpheus P2P file sharing technology at issue had substantial non-infringing uses (for publications and musical works the authors want to be freely distributed and downloaded) the court of appeals agreed with the district court that Grokster did not have sufficient knowledge of any particular infringement to be contributorily liable. The Grokster defendants could only have knowledge of an infringement after the fact of an illegal file transfer. By contrast, Napster’s centralized P2P architecture allowed Napster to take steps prior to a file transfer to prevent a user’s copyright infringement. The Grokster and Morpheus P2P software utilized decentralized indexing functions and the Grokster defendants had no knowledge of or ability to control what, if any, copyrighted files were actually being transferred.

The Court also affirmed the lower court’s ruling that defendants did not materially contribute to the copyright violations of the users of their P2P networks. Neither Grokster nor Morpheus provided the “site or facilities” that Napster’s centralized indexing architecture utilized. On the Grokster and Morpheus networks, the copyrighted files and search indices resided on users’ PCs. Furthermore, unlike Napster, defendants’ software design did not permit them to suspend user accounts for illegal activity. For these reasons, the Court affirmed the lower court’s ruling that neither Grokster nor StreamCast were contributory infringers.

Vicarious Liability. In order for a party to be vicariously liable for copyright infringement, that party must have the right and ability to supervise the infringing conduct, and obtain a direct financial interest in that conduct. There was no dispute in the lower court that Grokster and StreamCast obtained a direct financial benefit through the substantial advertising they sold, so the issue on appeal was whether the lower court correctly concluded that the defendants did not have the right and ability to supervise the users of their P2P software.

In Napster, because of that P2P network’s centralized indexing, the defendant had the ability to terminate user access to the index, and also had the ability to block transfers and filter infringing content. Due to the decentralized nature of the Grokster defendants’ P2P indices, neither Grokster nor Morpheus had the ability to supervise individuals using their software or the indices. Neither network had a registration or log-in process that could exclude offending users and the index/search functions were entirely located on users’ computers, so defendants had no ability to filter content that other users were searching for. For these reasons, the court, in affirming the lower court, concluded that “[t]he sort of monitoring and supervisory relationship that has supported vicarious liability in the past is completely absent in this case.”

Although in the Grokster litigation the content owners were seeking a “re-examination of the law in light of what they believe to be proper public policy,” both the lower court and the Ninth Circuit refused to extend the law, as the Supreme Court in Betamax admonished courts to allow Congress to make the necessary legislative changes to address technological advances impacting copyrights.

Implications. The Grokster II decision is likely to be a significant part of the ongoing and controversial legislative debate over liability for sharing digital content. Legislation was introduced earlier this year by Senator Hatch (S.2560, the “Inducing Infringement of Copyrights Act of 2004,” also known as the “Induce Act”) to overrule Grokster I and Betamax by making parties liable for copyright infringement if they “induce” another to infringe copyright. It is likely copyright owners will point to Grokster II as indicating an urgent need for passing a law like the “Induce Act” now and opponents, who have already lined up against the bill, will point to the decision as a defense of new technologies against hasty over-regulation.

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