SXSW Online Content Panel: Legal Summary of Grokster vs. Viacom in Plain’ish Eng. Pt.1
With our SXSW panel coming up, we are gearing up with content that sets the stage for the discussion and provides a plain English vector into the issues that face online content distributors in the coming years. The following two part breakdown of the two pillar cases driving the legal discussion, Groskter and Viacom, is designed to give everyone an easy to follow roadmap with actual case cites to the source material.
I. Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, LTD
1. Procedural Posture
In 2003, MGM Studios, together with a multitude of other copyright owners (hereinafter “MGM”), sued Grokster, and StreamCast Networks, distributors of peer-to-peer file-sharing software, for copyright infringement. MGM sought to hold Grokster and StreamCast liable for acts committed by users of these services who shared copyright-protected files across the networks. MGM Studios v. Grokster, 545 U.S. 913, 919-920 (2005). The District Court for the Central District of California granted summary judgment in favor of Grokster and StreamCast, and the Court of Appeals for the Ninth Circuit affirmed. The decisions were based on the standard articulated in Sony Corp v. Universal City Studios, under which Grokster and StreamCast lacked the requisite knowledge of specific acts of infringement on the peer-to-peer networks, products that could be used both lawfully and unlawfully. Id. at 927. The decision was appealed, and the United States Supreme Court granted certiorari. Id. at 928.
2. The Supreme Court Decision
The Court was presented with the question of whether liability for acts of copyright infringement committed by individual users could be imputed to the distributor of the software used to infringe, despite the fact that the software was capable of substantial noninfringing uses, a quality that can offer protection for product manufacturers under the Sony standard. Id. at 918-919. To be held contributorily liable, a party must “intentionally induce or encourage direct infringement,” and vicarious liability lies when a party is “profiting from direct infringement while declining to exercise a right to stop or limit it.” Id. at 930. Thus, the issue turned on the purpose of the software (i.e., whether the peer-to-peer software was capable of significant noninfringing uses), and the actions taking by respondents Grokster and StreamCast in distributing, promoting, and operating the software.
The Court, with Justice Souter writing for the majority, spent a considerable amount of time introducing the basic technology behind the Grokster and StreamCast peer-to-peer networks. Users on the networks communicated and shared files directly with other users. Grokster and StreamCast did not use any system of centralized servers to monitor file transfers or evaluate content. While Grokster and StreamCast both acknowledged that the networks were utilized mostly to obtain copyright-protected files, it was practically impossible to determine precisely how often the software was employed to circumvent copyright protection. Id. at 923. Furthermore, the software could clearly be used lawfully. Grokster and StreamCast pointed to the distribution and reproduction of freely available unprotected works on the network. Id. at 933. The District Court and the Court of Appeals considered this sufficient, under Sony, to absolve Grokster and StreamCast of liability. Id. at 934.
The Supreme Court took issue with the Circuit Court’s application of Sony to the case at hand. According to the Court, the software may have significant noninfringing uses, but such a quality should not immunize Grokster and StreamCast. Courts ultimately reserve the right to hold parties liable based on actions, intent, and general blameworthiness. Id. at 934-935. Accordingly, the Court evaluated the culpability of StreamCast and Grokster based on the extent to which each company induced (i.e., took active steps to encourage, promote and foster) infringement on their networks. The Court recognized the potential chilling effect of this new inducement standard on innovation and commerce, and explained that the target would be on parties who intentionally encouraged infringement. Legitimate manufacturers and businesses that don’t affirmatively induce copyright infringement would not possess the required level of culpability under this rule. Id. at 937.
Applying the inducement rule, the Court focused on three qualities of the StreamCast and Grokster business models – (1) the advertising designed to attract customers intent on exploiting the unlawful aspects of the program, and publicize the illegality of the system, (2) the flagrant failure to limit copyright infringement across the networks in any way, and (3) the revenue model based almost entirely on advertising and dependent on a high number of users who, more often than not, are committing acts of infringement. Id. at 939-940. These practices, coupled with evidence of actual infringement as required, displayed a clear intent on the part of Grokster and StreamCast to induce infringement among their users. The Supreme Court vacated the decision of the Ninth Circuit and remanded. Id. at 941.
 The group of other copyright owners includes film studios, record companies, songwriters and music publishers, and the District Court consolidated the separate suits. MGM Studios v. Grokster, 545 U.S. 913, 921 (2005).
 In Sony Corp. v. Universal City Studios, copyright owners sued the electronics manufacturer for copyright infringement committed by users of Sony’s VCR. The Supreme Court held that Sony was not legally responsible, under theories of secondary liability, for these acts, as it had not specifically encouraged such infringement and the VCR was “capable of commercially significant noninfringing uses.” Id. at 922 citing 480 F. Supp. 429, 439-442.
 In concurring opinions, Justice Ginsburg, joined by Chief Justice Rehnquist and Justice Kennedy, and Justice Breyer, joined by Justices Stevens and O’Connor, evaluated the merits of Sony, as read by the Court of Appeals and as applied to the case at bar. Justice Ginsburg found that the record lacked evidence of Grokster’s and StreamCast’s networks being employed for lawful purposes, and therefore, the Ninth Circuit should have granted summary judgment in favor of MGM based explicitly on the Sony standard. Id. at 948. Justice Breyer envisioned possible legitimate uses of this software in the future, and supported the Ninth Circuit’s interpretation of Sony. Id. at 965.
 Grokster used website tags to direct those who searched for “Napster” or “[f]ree filesharing” to the Grokster web site. StreamCast developed advertisements that read, “Napster Inc. has announced that it will soon begin charging you a fee. That’s if the court’s don’t order it shut down first. What will you do to get around it?” and “[w]hen the lights went off at Napster…where did the users go?” Although these advertisements were never publicly run, the court adopted each as evidence of purpose and intent. Id. at 925
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