MANUFACTURERS AND DISTRIBUTORS OF TECHNOLOGY PRODUCTS MAY BE HELD LIABLE FOR “ACTIVELY PROMOTING” COPYRIGHT INFRINGEMENT BY THIRD-PARTY USERS

June 30, 2005

The grokster decision: MANUFACTURERS AND DISTRIBUTORS OF TECHNOLOGY PRODUCTS MAY BE HELD LIABLE FOR “ACTIVELY PROMOTING” COPYRIGHT INFRINGEMENT BY THIRD-PARTY USERS

In a unanimous opinion, the U.S. Supreme Court has held that marketers and distributors of technology who actively promote the use of their products for purposes of infringing copyright may be held liable for third-party infringements using that technology. At the same time, the Court confirmed the prior standard under Sony Corp. v. Universal City Studios, that no secondary liability should be imposed on a manufacturer or distributor of a product capable of substantial lawful purpose without such active promotion, even where the manufacturer or distributor knows that the product is in fact used for an unlawful purpose.

The Supreme Court’s June 27, 2005, decision in Metro-Goldwyn-Mayer Studios, Inc. et. al., v. Grokster, Ltd., et al., was a victory for the motion picture and recording industries, which had claimed that the companies Grokster and StreamCast should be held liable for vast amounts of copyright infringement made possible through third parties’ use of the companies’ peer-to-peer file-sharing computer software.

The lower court had denied secondary liability for the software companies, on the grounds that their products were capable of substantial non-infringing uses.

Adopting an “inducement” rule from patent law, the Court held that the Sony standard did not apply in instances in which the manufacturer or distributor of the technology actively promoted infringing activity. A classic example of inducement, the Court said, would be by advertisements or solicitations that send a message designed to stimulate others to commit violations. The mere knowledge of infringing potential or of actual infringing uses, or ordinary acts incident to product distribution — such as offering technical support or product updates — would not be enough to subject a manufacturer or distributor to liability. However, the Court also noted that mere distribution of a product, without specific encouragement of infringement, could give rise to inducement liability where evidence shows that the distributor intended and encouraged the product to be used to infringe.

Grokster Assessment

Many feel that the Grokster decision ultimately will be good for legitimate technology companies, as it confirms that they will not be held liable for incidental infringements made by third parties using their technology. The Court confirmed in its decision that it should not be interpreted to hinder technological development or discourage innovation having a lawful purpose. The decision likely will also be good for content developers, as it confirms their ability to hold parties liable where such parties’ business models and actions clearly signify intent to facilitate infringement, even where the direct infringement is committed by third parties.

Doubtless much discussion, and litigation, will follow the question of what constitutes “active promotion” and “inducing” of infringing actions. The vagueness of the inducement standard may lead to uncertainty in the short term as technology companies encounter risk associated with their business and revenue models until the definitions of “active promotion” and “inducement” become more clear.

Grokster Summary

Defendants Grokster and StreamCast distributed software enabling users to share files over peer-to-peer networks. In response to the Napster decision, Grokster and StreamCast decentralized their music indexes, and either placed file indexes on network computers beyond defendants’ control (Grokster) or contained no centralized index at all (StreamCast). They took further steps to eliminate features of their services that allowed them to control users’ access to their networks and to terminate acts of known infringers.

The plaintiff copyright owners, who included the Motion Picture Alliance of America, the Recording Industry Association of America and numerous other entertainment industry companies, allegedly owned 70 percent of the material exchanged over defendants’ networks, and sued for contributory and vicarious copyright infringement.

In the district court, MPAA submitted evidence that at least 90% of the activities on the Grokster and StreamCast systems was infringing; that the defendants were aware of the massive infringement; that they created, designed and expanded their services to encourage the infringement; and that they received a direct financial benefit from the infringement through their advertising connected to it.

The district court, relying on the rule in the 1984 Sony Corporation v. Universal City Studios case and the “substantial non-infringing use” technology standard, held for Grokster and StreamCast. The Ninth Circuit affirmed, holding that under Sony, the issue was whether the services were “capable of substantial non-infringing uses.” Referring to Sony and the prior Napster decision, the Ninth Circuit said there would not be contributory infringement unless the copyright owner could show that the defendant had “reasonable knowledge of specific infringing files.” The Court found that Grokster and StreamCast did not have the necessary knowledge under the Napster test.

The Supreme Court held that the Ninth Circuit incorrectly applied Sony, by holding that distribution of a product capable of substantial noninfringing uses could not give rise to contributory copyright liability unless the distributor had actual knowledge of specific instances of infringement and failed to act on that knowledge. Instead, the Court said that the Sony rule, which limits imputing culpable intent as a matter of law from the characteristics or uses of a product, does not require courts to ignore evidence of intent to promote infringement. The Court adopted the patent theory of inducement of infringement for application in the copyright context, 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.” It said further that mere knowledge of infringing potential or of actual infringing uses would not be enough to subject a distributor to liability, but that the inducement rule “premises liability on purposeful, culpable expression and conduct, and does nothing to compromise legitimate commerce or discourage innovation having a lawful promise.”

The Supreme Court noted that the classic case of inducement is by advertising or solicitations that are designed to encourage others to commit violations, and said the record was replete with evidence that Grokster and StreamCast acted with a purpose to cause copyright infringement. It noted, particularly, that both Grokster and StreamCast identified themselves as aiming to satisfy a known source of demand for copyright infringement, by directing their services to former Napster users; that neither company took steps to develop filtering technology or other mechanisms to limit infringing activity using their software; and that both parties’ business model was based on financial gain from the high-volume use of their products, which the record showed was infringing. The Supreme Court remanded the case for reconsideration of MGM’s motion for summary judgment.

Please contact Karen S. Frank (kfrank@howardrice.com), Simon J. Frankel (sfrankel@howardrice.com) or your usual Howard Rice attorney at 415-434-1600 to learn more about the MGM v. Grokster decision and how it may relate to your particular circumstances.

Recent Alerts:

Related Groups:

Click here to unsubscribe from these Alerts.