P2P Distribution

January 1, 2005

BY:

Richard A. Beyman

Grokster and the Balance Of Interests

The home page of the website www.morpheus.com contains seemingly conflicting statements about the legality of peer to peer (“P2P”) file sharing on the Internet. While asserting that “Morpheus is the only American P2P file sharing software ruled legal by the U.S. federal courts,” it also includes a separate disclaimer that “the uploading or downloading of copyrighted works without the permission or authorization of the copyright holders may be illegal….” Underlying these statements is the recent decision of the Ninth Circuit Court of Appeals concerning P2P, Metro Goldwyn Mayer, et al. v. Grokster, Ltd., et al., in which the company owning Morpheus was a co-defendant and which is now before the United States Supreme Court on appeal.

P2P distribution refers to an Internet network where information available as files for downloading does not reside in a central place or server, but is accessible directly from one user’s computer to another. P2P technology provides the software by which information on each individual computer is catalogued and indexed so that other users can find and access it directly. P2P has become the standard for file sharing on the Internet and therefore the focus of litigation efforts by the recording industry and other copyright owners to rein in unauthorized duplication of their works.

These efforts have had two litigation prongs: lawsuits against the users of P2P distribution for their unauthorized reproduction and distribution of copyrighted works, and lawsuits seeking to impose secondary liability (contributory or vicarious) on the distributors of the P2P software that makes such direct infringement possible. The music industry has had success in bringing actions directly against P2P users for infringement of copyright. However, doing so pits the industry against its own customer base, and because of the sheer number of users, enforcement must be selective and thus is costly and slow. On the other hand, lawsuits for secondary liability against those who make P2P distribution networks available, if successful, are a more efficient means to curtail the direct infringement by network users.

Until the Grokster decision, copyright owners enjoyed some success in imposing secondary liability on P2P software providers. For example, Napster was found liable because it had an active role in indexing, cataloging and controlling access to available downloads. The Napster service maintained a centralized index of available music and was required to prevent copyright infringement of specific music files for which it had been given notice. Aimster was enjoined even though its creators added an encryption feature to avoid having actual knowledge of specific files being made available and downloaded. In contrast, the software providers in Grokster were held to have no contributory or vicarious liability despite evidence that the vast majority of files downloaded using the software are in violation of copyright. This was a clear blow to the enforcement efforts of copyright owners.

At the heart of the battle is the 1984 landmark Sony Betamax case, which held that Sony was not a contributory copyright infringer for making home television video tape recorders (“VTRs”), even though they could be used for copyright infringement, because the product was capable of “commercially significant non-infringing uses.” Recording a copy of a television program by consumers to play at a later time (time shifting) was held to be a fair use and not infringing. The Court stated that if liability were to be imposed on Sony “it must rest on the fact that they have sold equipment with constructive knowledge of the fact that their customers may use that equipment to make unauthorized copies of copyrighted material.” The Court refused to find such “constructive knowledge,” analogizing the VTR to a “staple of commerce,” which could be used for substantial non-infringing uses and was therefore legal.

Applying Sony to P2P, the Ninth Circuit determined that if the software is capable of substantial or commercially significant noninfringing uses then constructive knowledge of infringement is not enough to impose secondary liability – the copyright owner must demonstrate that the defendant had reasonable knowledge of specific infringing files and failed to act to prevent infringement. In Napster, the plaintiffs were required to give notice of specific infringing music files. When Napster subsequently failed to prevent these files from being shared it was ordered shut down. The Seventh Circuit in Aimster interpreted the Sony ruling differently, to the effect that even where both non-infringing and infringing uses are possible, and even absent “specific knowledge” of wrongdoing, some consideration must be given to the magnitude of these uses and how “probable” they are. It was not enough that Aimster’s P2P software was capable of being used for substantial non-infringing purposes when there was no credible evidence that the software was meaningfully used that way. Although the Aimster software sent encrypted files to users which prevented Aimster from having specific knowledge of infringement, the Court found that “willful blindness” is equivalent to knowledge and could not be used to immunize a party who would otherwise be a contributory infringer.

The Grokster defendants fared better. The Ninth Circuit found that their software has the non-infringing capability to share public domain works and works authorized by copyright owners, and noted instances of actual non infringing uses. One example was the band Wilco which made an entire album available for free downloading as a means to build fan interest. Although there was evidence of widespread, unauthorized transmission of copyrighted works, bound by its own precedent in Napster, the Court determined that there had to be reasonable knowledge of a specific infringement at a time when the defendants could do something to stop it. Notice of infringing activities after they had taken place could not suffice to create such specific knowledge. Since Grokster maintains no real control over its P2P network, notice of infringement sufficient to enable Grokster to act before the infringement occurs realistically cannot be given. In fact, as the Court noted, if all computers within Grokster’s control were deactivated, users of the Grokster P2P software could continue sharing files with little or no interruption.

Now the Supreme Court will review the Grokster decision and try to clarify these issues. The Sony decision is 20 years old and relates to a technology which may seem quaint by today’s standards. P2P technology permits transmission of content on a massive scale which few could have foreseen. It appears obvious that P2P software providers have designed, and following Grokster, may continue to design software which seeks to reduce their legal exposure by decentralizing their controls, and avoiding the indexing and supervision of content.

Ultimately, finding a workable balance between copyright protection and fostering technological innovation in the era of P2P distribution will be up to Congress. While the decision in Grokster will impact the direction of any future laws, efforts to pass legislation had begun even before the Supreme Court decided to hear the case. During the last term of Congress, the socalled Inducing Infringement of Copyright Act (S.2560) was introduced by Senator Orrin Hatch to amend the Copyright Act to impose liability for intentional inducement of copyright infringement. In introducing the legislation, Senator Hatch noted that “[s]econdary liability should focus on intent to use indirect means to achieve illegal ends. A rule that punishes only control degenerates into an inane debate about which indirect means was used.” The bill was eagerly supported by copyright holders and also had the support of the Register of Copyrights, but faced vigorous opposition by the electronics industry, which argued it would stifle innovation. The bill stalled in the Senate Judiciary Committee when parties representing both sides of the debate failed to reach a consensus on what such a law should contain.

In the meantime, Morpheus’ statements are not inconsistent after all, as they can be read simply to say “we are not liable for offering P2P software to you but for all we know you might be violating the law when you use it.”