For other versions of this document, see http://wikileaks.org/wiki/CRS-RL31998
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                                                   Order Code RL31998




                  CRS Report for Congress
                                      Received through the CRS Web




                         File-Sharing Software and
                            Copyright Infringement:
                  Metro-Goldwyn-Mayer Studios, Inc.
                                    v. Grokster, Ltd.


                                            Updated July 18, 2005



                                                      Brian T. Yeh
                                                        Law Clerk
                                             American Law Division

                                                    Robin Jeweler
                                               Legislative Attorney
                                             American Law Division




Congressional Research Service ~ The Library of Congress
   File-Sharing Software and Copyright Infringement:
   Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd.

Summary
      In Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., the Ninth Circuit Court
of Appeals decision considered allegations of contributory and vicarious copyright
infringement by companies which distribute peer-to-peer file-sharing software. The
software facilitates direct copyright infringement by its users. It was the first
decision to reject infringement claims against and find in favor of companies
distributing the software. Other digital media file-sharing software decisions found
in favor of the copyright holders, most notably A & M Records, Inc. v. Napster, Inc.
and In re: Aimster Copyright Litigation. But in Grokster, the court granted summary
judgment for the software companies. The court thus became the first to accept the
"substantial, noninfringing uses" defense to copyright infringement liability, a
defense developed by the U.S. Supreme Court in connection with use of VCRs in
Sony Corp. of America v. Universal City Studios, Inc.

      In a unanimous 9-0 decision, the U.S. Supreme Court reversed the Ninth Circuit,
finding that it had misapplied Sony. It articulated a new standard for the imposition
of secondary liability for copyright infringement, namely "inducement." The 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."
Although firmly rooted in the common law, the Court imported the "inducement"
theory to copyright law much as it had adopted the safe harbor from infringement
liability in Sony from patent law.

      The Court was careful to preserve the safe harbor for dual use technology
established by Sony. Sony bars 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. Inducement of copyright infringement may be demonstrated when an
actual purpose to cause infringing use is shown by evidence independent of design
and distribution of the product.

      This report examines the background and holding in Grokster and the doctrinal
relationship between Sony and Grokster. It will not be updated.
Contents
      Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
      Substantial, Noninfringing Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
      MGM Studios, Inc. v. Grokster, Ltd. in U.S. District Court . . . . . . . . . 4
      Grokster in the Ninth Circuit Court of Appeals . . . . . . . . . . . . . . . . . . . 4
      The United States Supreme Court Decision in Grokster . . . . . . . . . . . . 6
      Implications of Grokster . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
           File-Sharing Software and Copyright
           Infringement: Metro-Goldwyn-Mayer
                Studios, Inc. v. Grokster, Ltd.

     Background. When the Supreme Court held that distributors of peer-to-peer
(P2P) file sharing could be secondarily liable for copyright infringement, it marked
a milestone in a long line of cases addressing P2P technology. File-sharing software
programs that create P2P network connections between computers enable the
transmission of data and communications over the Internet. A variety of P2P
programs, such as those offered by Grokster, Ltd., StreamCast Networks, Inc., and
Kazaa BV, are typically available for free download from the distributors' websites.
After installing a P2P program (called a "client application") onto the computer, the
user runs the application to connect to the computers of other users of that particular
P2P software who are currently "on-line." The client application allows users to
"share" files located on their computer hard-drives. Once users make files available
for sharing with each other, anyone who uses the same company's software to
connect to the respective P2P network may locate and download desired files easily
and at no cost. For example, a user of the Grokster software can directly access files
saved on another Grokster user's computer hard-drive. Or a user can search for a
particular file name, such as an MP3 song title, across all users' computers connected
to the Grokster network, and then download a copy of that file onto his or her
computer.

      The motion picture and music recording industries brought several legal actions
alleging copyright infringement against companies that distribute file-sharing
software. Prior to the lower courts' decisions in Grokster, nearly all of the cases
found in their favor, including A & M Records, Inc. v. Napster, Inc.1 and In re:
Aimster Copyright Litigation.2 However, in Metro-Goldwyn-Mayer Studios, Inc.
(MGM) v. Grokster, Ltd.,3 the Ninth Circuit Court of Appeals held that the defendant
software distributors were not liable for copyright infringement. Grokster was the
first P2P file-sharing case involving allegations of music piracy where a court
shielded P2P software companies from liability. In a decisive 9-0 opinion, the U.S.
Supreme Court reversed the Ninth Circuit, importing a new theory of "inducement"
as grounds for secondary liability for copyright infringement.4



1
    239 F.3d 1004 (9th Cir. 2001).
2
    334 F.3d 643 (7th Cir. 2003), cert. denied, 124 S.Ct. 1069 (2004).
3
 259 F.Supp.2d 1029 (C.D. Ca 2003) aff'd, 380 F.3d 1154 (9th Cir.), cert. granted,125 S.Ct.
686 (2004).
4
    125 S.Ct. 2764 (2005).
                                         CRS-2

     Grokster Compared to Napster and Aimster. In the Napster and Aimster cases,
the courts of appeals found that the plaintiff record companies would likely prevail
on their contributory and vicarious infringement claims and granted preliminary
injunctions against the defendant companies.5 The distinction in the lower courts'
analyses in Grokster was based, in large part, on the technological differences in the
design of the file-sharing networks in question and, to some extent, judicial
uncertainty over the reach of the standards articulated by the U.S. Supreme Court in
Sony Corp. of America v. Universal City Studios, Inc., discussed below.6

     P2P Network Architecture. Unlike Napster and Aimster, Grokster and
Morpheus software users connect to file-sharing networks with no central database
server. Instead, Grokster provides for dynamic "root supernodes," which are a group
of randomly chosen computers which are connected to the P2P network at a
particular time. The Grokster software "self-selects" its supernode status for the day;
a user's computer can function as a supernode one day and not on the following day.7
As a supernode, a connected P2P user's computer acts as an index server, collecting
information about shared files located on other users' computers. "Normal" Grokster
clients connect to their "neighborhood" supernode to perform searches for files.8
This creates a "two-tiered" organizational distribution structure for the P2P network,
with groups of regular Grokster users clustered around a single supernode.9 All
search traffic and information passes through these personal computers acting as
supernodes, none of which are owned or controlled by Grokster.

      StreamCast's Morpheus network operates in an even more decentralized
fashion. While Grokster licenses proprietary FastTrack networking technology from
Sharman Networks, StreamCast bases its Morpheus program on a non-proprietary,
"open-source"10 technology called Gnutella.11 The Gnutella P2P network can be
accessed using not only Morpheus software, but also other Gnutella-based software
distributed by companies such as "BearShare" and "LimeWire." Unlike Grokster's
supernode architecture, search requests on the Gnutella network quickly pass from
user to user until a matching file is found or until the search request expires. The



5
 The Aimster service was renamed "Madster" in January 2002, after a ruling by the National
Arbitration Forum panel that the Internet domain name "aimster.com" violated the
trademark for America Online (AOL)'s instant messaging service. To avoid confusion, this
report will continue to refer to the file-sharing service as "Aimster." See
[http://www.usatoday.com/tech/news/2002/02/01/aimster-now-madster.htm].
6
    464 U.S. 417 (1984).
7
    Grokster, 259 F.Supp.2d at 1040.
8
 [http://www.grokster.com/us/help/faq/supernodes.html]. Only connected computers that
are particularly powerful or have fast Internet connections are chosen as "supernodes."
9
    Grokster, 259 F.Supp.2d at 1040.
10
 Open-source refers to any software program whose "source code" (the software
programming language) is made freely available to the public for use or modification by
other software developers. See [http://www.opensource.org/docs/definition.php].
11
     Grokster, 259 F.Supp.2d at 1041.
                                           CRS-3

query can reach over 8,000 other computers on the Gnutella network before
expiring.12

      While Aimster and Napster actively assisted their end-users in locating specific
files and facilitating the download transactions, Grokster did not. Aimster provided
an illustrated tutorial on its website which "methodically demonstrated how to
transfer and copy copyrighted works over the Aimster system."13 The Court of
Appeals in Aimster referred to this tutorial as "an invitation to infringement," overtly
encouraging Aimster users to infringe copyrights.14 Aimster also offered its users a
$4.95 monthly subscription service called "Club Aimster," which presented a list of
the "top forty" most frequently downloaded songs by Aimster users. This list
included a "play" button next to each song that allowed users to click on it to
download the music file from wherever it was located in the Aimster network to the
requesting member's computer.15

     Napster similarly provided substantial assistance to its users through its server,
maintained as a collective directory of shared MP3 files available on each connected
user's computer. Any Napster user could run a search on this centralized index for a
desired song title in order to transfer a copy of the file from the "host user" (the
individual sharing the file) to the requesting user's hard-drive.16

     Therefore, when the Napster network was terminated, its demise prevented any
further P2P file-sharing among its users. But, because Grokster and StreamCast
operate decentralized networks, "if either [company] closed their doors and
deactivated all computers within their control, users of their products could continue
sharing files with little or no interruption."17 According to the district court in
Grokster, this is a "seminal distinction" between Grokster/StreamCast and Napster
which formed the basis for its judgment that the defendants did not materially
contribute to infringing activity.18

     Substantial, Noninfringing Use. In Sony Corp. of America v. Universal City
Studios, Inc., the U.S. Supreme Court found that despite the fact that video cassette
recorders (VCRs) could be used by consumers to infringe copyrights, the manufacturer
was not liable for contributory copyright infringement because the VCR was also
capable of "substantial noninfringing uses."19 The Court identified private,
noncommercial "time-shifting" of broadcast television as a noninfringing fair use of



12
     See [http://computer.howstuffworks.com/file-sharing.htm/printable].
13
     Aimster, 252 F.Supp.2d at 643.
14
     Aimster, 334 F.3d at 651.
15
     Ibid. at 652.
16
     Napster, 239 F.3d at 1012.
17
     Grokster, 259 F.Supp.2d at 1041.
18
     Ibid.
19
     Sony, 464 U.S. at 456.
                                           CRS-4

the technology.20 It emphasized that the primary use of the VCR was fair, and, in
addition, it had the potential to be used for time-shifting sports, educational, religious
and other programming that was authorized for copying or was copied without
objection from the copyright holder.21

     As a result of Sony, "substantial, noninfringing uses" became a judicially
recognized defense to claims of contributory infringement. The defense arises from the
Court's statement that "[t]he sale of copying equipment, like the sale of other articles
of commerce, does not constitute contributory infringement if the product is widely
used for legitimate, unobjectionable purposes... [I]t need merely be capable of
substantial noninfringing uses."22

      MGM Studios, Inc. v. Grokster, Ltd. in U.S. District Court. Plaintiffs,
twenty-eight organizations in the motion picture and music recording industries, sued
several P2P companies for contributory and vicarious copyright infringement. The
plaintiffs and defendant companies Grokster and StreamCast Networks filed cross-
motions for summary judgment because "the only question before the [c]ourt (as to
liability) is a legal one: whether [d]efendants' materially undisputed conduct gives rise
to copyright liability."23

      The court granted a summary judgment determining that defendant companies,
Grokster and StreamCast, were not secondarily liable for copyright infringement
committed by users of their P2P software (called Grokster and Morpheus,
respectively).24 Finding no evidence that the defendants had any material involvement
in their users' infringing conduct, the court held that Grokster and StreamCast were not
liable for contributory infringement.25 Summary judgment was also warranted on the
vicarious infringement claim, the court reasoned, because there was no evidence
showing that the P2P companies had the right or ability to supervise the conduct of
end-users of their products.26

      Grokster in the Ninth Circuit Court of Appeals. At the outset, the court
noted that the question of direct infringement, although undisputed, was not before it.
Rather, the issue was one of secondary, i.e., contributory and/or vicarious copyright
infringement liability, and it fully concurred in the district court's "well reasoned
analysis" that defendants were not liable under either theory.



20
  Time-shifting refers to the practice of recording a broadcast television program to view it
at a later time, and then erasing it afterwards. See Sony, 464 U.S. at 423.
21
     Ibid., at 444.
22
     Ibid., at 442.
23
     259 F.Supp.2d at 1031.
24
 This summary judgment only applies to software offered by defendants Grokster and
StreamCast Networks. Another defendant, Sharman Networks, distributor of Kazaa Media
Desktop software, was not a party to these summary judgment motions. See ibid., at 1033.
25
     Ibid., at 1043.
26
     Ibid., at 1046.
                                            CRS-5

     Contributory Infringement. The three elements required to prove contributory
copyright infringement are (1) direct infringement by a primary infringer, (2)
knowledge of the infringement, and (3) material contribution to it. The Court of
Appeals generally tracked the reasoning of the lower court and concluded that the
architecture of the P2P systems precluded the defendants from having requisite
knowledge of and making a material contribution to copyright infringement.

      The court invoked the "staple article of commerce" doctrine from patent law, cited
by the Supreme Court in Sony, for the proposition that "it would be sufficient to defeat
a claim of contributory copyright infringement if the defendant showed that the product
was <capable of substantial' or <commercially significant noninfringing uses.'"27 With
respect to the "knowledge"element, as interpreted by the Ninth Circuit in its Napster
decision, this means

         [I]f a defendant could show that its product was capable of substantial or
         commercially significant noninfringing uses, then constructive knowledge of the
         infringement could not be imputed. Rather, if substantial noninfringing use was
         shown, the copyright owner would be required to show that the defendant had
         reasonable knowledge of specific infringing files.28

Because the court found it "undiputed" that P2P software is capable of substantial
noninfringing uses, it would not impute constructive knowledge of infringement by
others to the defendants. They must have "reasonable knowledge of specific
infringement" to satisfy the knowledge requirement. And, the copyright owners needed
to establish that the software distributors had specific knowledge of the infringement
at a time in which they contributed to it and failed to act upon their knowledge. This
knowledge standard was not met by the plaintiffs' after-the-fact notices of
infringement. By the time they arrived, the software distributors could not prevent it.

      In the court's view, the software distributors did not, indeed, could not materially
contribute to infringing activity as a consequence of the P2P program structure. The
distributors do not provide a "site and facility" for the infringement, the infringing
material does not reside on the defendants' computers, nor do they have the ability to
suspend user accounts.

      Vicarious Infringement. In order to establish vicarious infringement, a
copyright owner must demonstrate (1) direct infringement by a primary party, (2) a
direct financial benefit to the defendant, and (3) the right and ability to supervise the
infringers.29 Concurring with the district court, the Court of Appeals found it to be
undisputed that there was both direct infringement and the defendants benefitted
financially from the software via advertising revenue. But "the right and ability to
supervise infringers" was missing. The court reiterated the lower court's finding that
the communication between the defendants and their users does not provide a point of
access for filtering or searching for infringing files since infringing material and index
information do not pass through the defendants' computers.

27
     Grokster, 380 F.3d at 1160.
28
     Ibid. (Citations omitted.)
29
     Ibid., at 1164.
                                                CRS-6

      The Court of Appeals considered and rejected the argument that "a right to
supervise" could be interpreted to mean that the distributors had a responsibility to alter
the software to prevent users from sharing copyrighted files. Only where one has
already been determined to be liable for vicarious infringement does a duty to exercise
"police" powers arise. It also rejected what it characterized as a "blind eye" theory of
liability for vicarious infringement. Copyright owners argued that "turning a blind eye
to detectable acts of infringement for the sake of profit" should give rise to liability.30
But the court found that there is no separate "blind eye" theory or element of vicarious
liability that exists independently of the traditional elements of liability.

    In closing, the Court of Appeals echoed the district court in declining to interpret
copyright liability law to achieve public policy goals that might protect copyright
owners' economic interests but alter general copyright law in profound ways with
unknown ultimate consequences. That function is a prerogative best left to the
Congress.31

      The United States Supreme Court Decision in Grokster. In a decisive
9-0 opinion written by Justice Souter, the Court reversed the Ninth Circuit Court of
Appeals. At the outset, the Court noted that the subject of the case is the "tension
between the competing values of supporting creativity through copyright protection and
promoting technological innovation by limiting infringement liability[.]"32 To resolve
the conflicting interests, it articulated a new standard for the imposition of secondary
liability for copyright infringement.

      Although the general principle of "inducement" as a basis for secondary liability
has its roots in the common law, it had not heretofore been statutorily or judicially
applied in a copyright context. Hence, the Court mirrored its previous adoption of
patent law's "staple article of commerce" doctrine in Sony as a model for a copyright
infringement safe-harbor rule by adopting an "inducement" rule, also codified in patent
law,33 as a basis for imposing secondary liability for infringement.:

         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


30
     Ibid., at 1166.
31
     Ibid., at 1167.
32
     Metro-Gold-Mayer Studios Inc. v. Grokster, Ltd, 125 S.Ct. 2764, 2780.
33
     35 U.S.C. § 271.
                                              CRS-7

         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.34

    The Court's analysis of the doctrinal relationship between the two is discussed
below.

      The Court reviewed the evidence adduced in the trial court record supporting
Grokster's successful motion for summary judgment. Although Grokster challenged
petitioner MGM's assertion that nearly 90% of the files available for download were
copyrighted works, the Court nonetheless concluded that the evidence gave reason to
think that the vast majority of users' downloads were acts of infringement and that the
probable scope of copyright infringement is "staggering."35 Indeed, the P2P services
conceded infringement in most downloads and actual knowledge of such from time to
time from their users' e-mail questions. But there the Court parted dramatically from
the Court of Appeals' conclusion that actual knowledge was legally insufficient to
support a finding of liability since it did not arrive in a time or manner that allowed the
P2P service to stop the infringing activity.

      The Ninth Circuit had misapplied Sony, which it read as limiting secondary
liability quite beyond the circumstances to which the case applied, the Court explained.
Sony bars 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. But the Ninth
Circuit 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. The rule of Sony, however, is not that broad. Inducement of copyright
infringement may be demonstrated when an actual purpose to cause infringing use is
shown by evidence independent of design and distribution of the product.

      At trial on the merits in Sony, evidence showed that the principal use of the VCR
was for "time shifting," which the Court found to be a fair use. 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."36 Once sold, the
distributor had no control over the device. In other words, the fact that the VCR
promoted copying, much like a photocopy machine, did not suffice to impute to the
distributor an intent that the device be used for copyright infringement. The majority
of television content is, in fact, copyrighted content. But, because the primary use of
the device was for permissible copying meant that the fact that Sony knew that it could
or would be used for unauthorized copying as well was not sufficient to establish
secondary liability for infringement solely from the sale of the product. The Sony
doctrine "absolves the equivocal conduct of selling an item with substantial lawful as
well as unlawful uses and limits liability to instances of more acute fault than the mere




34
     Ibid., at 2780. (Citations omitted; emphasis added.)
35
     Ibid., at 2772.
36
     Ibid., at 2777.
                                               CRS-8

understanding that some of one's products will be misused. It leaves breathing room
for innovation and a vigorous commerce."37

      Conversely, in Grokster, the evidence of culpable intent to induce infringement
by the P2P file-sharing services was great. The record indicated that Grokster used
advertising -- a classic means of inducement -- to stimulate others to commit
copyright infringement. The Court reviewed at length the efforts of StreamCast and
Grokster to market to Napster users when that service was "under attack" for
facilitating massive infringement. It cited internal communications at StreamCast
discussing ways to market to Napster users that demonstrated "unequivocal indications
of unlawful purpose."38 Whether the internal communications were communicated
outside of the company was immaterial because they functioned, under an inducement
theory, "to prove by a defendant's own statements that his unlawful purpose
disqualifies him from claiming protection." The Court reviewed three features of
inculpatory evidence:

       ! Each company showed itself to be designed to satisfy a known source of
           demand for copyright infringement, the market for former Napster users. This
           evidenced a principal intent to bring about infringement;

       ! Neither company attempted to develop filtering tools or other mechanisms to
           diminish the infringing activity using their software; and

       ! Both companies used a business model premised on increased advertising
           revenues commensurate with increased use of their software. Hence their
           profits depended upon high volume use of their software to infringe.

     The Court was careful to note that neither factor alone would necessarily prove
"inducement." For example, in a footnote, it noted that there is no absolute duty of a
manufacturer to provide filtering tools:

         Of course, in the absence of other evidence of intent, a court would be unable to
         find contributory infringement liability merely based on a failure to take
         affirmative steps to prevent infringement, if the device otherwise was capable of
         substantial noninfringing uses. Such a holding would tread too close to the Sony
         safe harbor.39

It made a comparable observation with respect to the business model evidence.

     In reversing the Ninth Circuit and remanding for action consistent with its
opinion, the Court reiterated the continuing sound precedent of Sony:

         In sum, this case is significantly different from Sony and reliance on that case to
         rule in favor of StreamCast and Grokster was error. Sony dealt with a claim of
         liability based solely on distributing a product with alternative lawful and unlawful


37
     Ibid., at 2778.
38
     Ibid., at 2781.
39
     Ibid., at fn. 12.
                                               CRS-9

         uses, with knowledge that some users would follow the unlawful course. The case
         struck a balance between the interests of protection and innovation by holding that
         the product's capability of substantial lawful employment should bar the
         imputation of fault and consequent secondary liability for the unlawful acts of
         others.

         MGM's evidence in this case most obviously addresses a different basis of liability
         for distributing a product open to alternative uses. Here, evidence of the
         distributors' words and deeds going beyond distribution as such shows a purpose
         to cause and profit from third-party acts of copyright infringement. If liability for
         inducing infringement is ultimately found, it will not be on the basis of presuming
         or imputing fault, but from inferring a patently illegal objective from statements
         and actions showing what that objective was.40

     Concurring Opinions. Both Justice Ginsburg and Justice Breyer wrote a
separate concurring opinion, each joined by two other Justices. Their opinions might
be characterized as a colloquy over the methodology contemplated by Sony to
determine whether a product is capable of substantial or commercially significant
noninfringing uses. Both subscribed to the inducement theory of secondary liability
adopted by the Court, but they differed in their views of how Sony should be applied
to determine whether the product -- the software in this case -- was capable of
substantial noninfringing use. Since it appears highly unlikely that Grokster and
StreamCast will avoid secondary liability under the newly articulated inducement
theory, the theories advanced in concurring opinions respecting Sony's applicability to
them may ultimately be dicta.

     Justice Ginsburg's opinion, with which Chief Justice Rehnquist and Justice
Kennedy concurred, focused on and took issue with the evidence of substantial
noninfringing use utilized by the lower courts to support and uphold the grant of
summary judgment. Justice Ginsburg noted that, in Sony, the Court came to a
conclusion about the VCR's respective use "enlightened by a full trial record."41 To
do so, it considered whether a significant number of potential uses of the VCR were
noninfringing. Finding that the recorders were used primarily for time-shifting or for
permissive copying, "there was no need in Sony to `give precise content to the question
of how much [actual or potential] use is commercially significant.' Further
development was left for later days and cases."42

     In Grokster, however, the lower courts found it "undisputed" that there were
substantial noninfringing uses for the software. Justice Ginsburg's review of the
record, however, indicated that there had been no finding of any fair use and only
anecdotal evidence of noninfringing uses, all of which was almost exclusively based
on evidence introduced by the defendants. She noted that in Sony, the plaintiff's
owned less than 10 percent of the copyrighted television programing, and that
testimony indicated that owners of at least another 10 percent of programing expressly
consented to its home recording. But in Grokster, evidence suggested that between 75


40
     Ibid., at 2782.
41
     Ibid., at 2783.
42
     Ibid., at 2784. (Footnote omitted.)
                                               CRS-10

and 90% of the files traded were owned or controlled by the plaintiffs. That left
approximately 10% of files exchanged as presumptively noninfringing. There was no
evidence about the software's use for copying authorized by copyright holders.
Anecdotal evidence about public domain material or promotional music that was
available for file sharing by permission was not, in her view, sufficient to support a
motion for summary judgment. And in addressing the issue of use, she focused
narrowly, distinguishing between the software at issue and P2P technology in general:

         Even if the absolute number of noninfringing files copied using the Grokster and
         StreamCast software is large, it does not follow that the products are therefore put
         to substantial noninfringing uses and are thus immune from liability. The number
         of noninfringing copies may be reflective of, and dwarfed by, the huge total volume
         of files shared. Further, the District Court and the Court of Appeals did not
         sharply distinguish between uses of Grokster's and StreamCast's software
         products (which this case is about) and uses of peer-to-peer technology generally
         (which this case is not about).43

She concluded that if, on remand, summary judgment was not granted in favor of
MGM based on a finding of "inducement," then a fuller record of the software's use
would be necessary to determine whether the Sony product distribution's safe harbor
would or could be met.

      Justice Breyer, in an opinion concurred in by Justices Steven and O'Connor,
agreed with the majority that the distributor of a dual-use technology may be liable for
infringing activities of third parties where they actively seek to advance or induce the
infringement. He took issue, however, with Justice Ginsburg's conclusion that the
lower court record was insufficient to support a motion for summary judgment finding
that the defendants' software had substantial noninfringing uses. He preferred not to
"revisit" Sony and rejected what he characterized as Justice Ginsburg's "stricter"
interpretation of the case.44

       He read the evidence in Sony as establishing that "of all the taping actually done
by Sony's customers, only around 9% was of the sort the Court referred to as
authorized."45 Hence, by analogy, he contends, that the showing in Grokster that as
little as 10 percent of files shared were noninfringing was adequate to support a motion
for summary judgment on the issue of demonstrating that the company's product is
capable of substantial noninfringing use:

         Importantly, Sony also used the word "capable," asking whether the product is
         "capable of" substantial noninfringing uses. Its language and analysis suggest that
         a figure like 10%, if fixed for all time, might well prove insufficient, but that such
         a figure serves as an adequate foundation where there is a reasonable prospect of
         expanded legitimate uses over time. ... And its language also indicates the




43
     Ibid., at 2786. (Emphasis added.)
44
     Ibid., at 2787.
45
     Ibid., at 2788.
                                               CRS-11

         appropriateness of looking to potential future uses of the product to determine its
         "capability."46

The opinion goes on to suggest the existence of a significant future market for
noninfringing uses of Grokster-type P2P software. He acknowledged other now-
unforseen noninfringing uses that may develop for P2P software, just as the home-
video rental industry developed for the VCR. To the end of protecting the legal climate
for developing technologies, Justice Breyer argues against any perceived modification
of Sony that could have the effect of chilling new technology development:

         As I have said, Sony itself sought to "strike a balance between a copyright holder's
         legitimate demand for effective -- not merely symbolic -- protection of the
         statutory monopoly, and the rights of others freely to engage in substantially
         unrelated areas of commerce." Thus, to determine whether modification, or a strict
         interpretation, of Sony is needed, I would ask whether MGM has shown that Sony
         incorrectly balanced copyright and new-technology interests. In particular: (1) Has
         Sony (as I interpret it) worked to protect new technology? (2) If so, would
         modification or strict interpretation significantly weaken that protection? (3) If so,
         would new or necessary copyright-related benefits outweigh any such weakening?47

      Justice Breyer concludes that Sony, as he interprets the case, has provided
entrepreneurs with needed assurance that they will be shielded from copyright liability
as they bring valuable new technologies to market. He fears that a modified rule, one
which requires a defendant to produce concrete evidence of use to avoid liability, or
relies on a case-by-case balancing approach, would undercut Sony's protection; it
would increase the legal uncertainty that surrounds the creation of new technology
capable of being put to infringing use and assert a chilling effect on technology
development in general.

     The majority opinion, however, does not specifically modify Sony. It leaves
further consideration of Sony for a day when that may be required.48 Instead, it imports
into copyright law a new theory of secondary liability independent of Sony's
"substantial noninfringing use," that is, the "inducement" of copyright infringement as
shown by clear expression or other affirmative steps taken to foster infringement by
third parties. Such a cause of action is tailored to the claims of the plaintiffs in MGM
v. Grokster. Thus, despite conflicting interpretations of Sony expressed in the opinions
of Justices Ginsburg and Breyer, Grokster can only signal views regarding any future
revisions of the Sony doctrine.

    Implications of Grokster. During the 108th Congress, some members of
Congress reacted to the Court of Appeals Grokster decision by introduction of S.
2560, the Inducing Infringement of Copyrights Act of 2004, 108th Cong., 2d sess.
(2004). This bill would have codified criteria to establish secondary liability for
copyright infringement. In view of the Court's express adoption of an inducement



46
     Ibid., at 2789.
47
     Ibid., at 2791. (Citations omitted.)
48
     Ibid., at 2779.
                                          CRS-12

standard as a basis for secondary liability for copyright infringement, the need and
legislative momentum for such legislation are doubtful.

     The majority opinion clearly affirms the technology-protective standard
established by Sony. Distributors of dual-use technology capable of both infringing and
noninfringing uses continue to have a high level of protection from secondary
copyright infringement liability. This is particularly so for durable goods such as
digital music recording devices that work in conjunction with authorized music
sources, even if they may be used with an unauthorized source as well.49

      Never overtly discussed, but implicit in Grokster, is an emergent legal treatment
of divergent functional attributes of durable consumer goods versus software.
Nowhere in the three opinions do any Justices express the view that software is to be
treated differently from other fungible goods for liability purposes. Arguably, however,
the inducement theory has, of necessity, been adopted to address business models using
a more flexible software platform designed to promote "willful blindness" to the
infringing activities of its users. So, for example, compression technologies as such
may not be thwarted, but services designed to promote unauthorized digital transfer of
motion pictures over the Internet will most certainly be affected by Grokster.

      Supporters of the Ninth Circuit's interpretation of Sony may bemoan the loss of
what many believe was a bright line test to determine whether a distributor is guilty of
secondary liability for copyright infringement. Inducement is intent specific. Hence,
a manufacturer's advertising, business model, and product design may be examined
when challenged -- as the Court did to those of Grokster and StreamCast. But, as both
Justice Breyer and Ginsburg noted explicitly, P2P file-sharing technology was not on
trial in Grokster, rather it was the use of the technology by two P2P services. The
Court attempted to balance a need for effective protection of copyright with the need
to promote technological innovation. To many, its decision in Grokster will promote
this balance by continuing to offer considerable protection for dual-use technology
while limiting the ability of a technology-user to ignore the consequences of business
modeling predicated on the infringing use of technology.




49
  Justice Breyer's concurring opinion states quite specifically that "Sony's rule shelters
VCRs, typewriters, tape recorders, photocopiers, computers, cassette players, compact disc
burners, digital video recorders, MP3 players, Internet search engines, and peer-to-peer
software. But Sony's rule does not shelter descramblers, even if one could theoretically use
a descrambler in a noninfringing way." Ibid., at 2791 -2792. (Emphasis in original.)

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For other versions of this document, see http://wikileaks.org/wiki/CRS-RL31998