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Gordon Zhu
Fall 2007

Technology and Law in the Music Recording Industry

I. Introduction

In 1999, Shawn Fanning, a student at Northeastern University, single-handedly

started the file-sharing craze. Though he was eventually put out of business by the Ninth
Circuit Court of Appeals in a suit brought forth by the recording industry, his creation has
had lasting effects on technology and the music industry. In 2005, the United States
Supreme Court heard an offshoot of the Napster case, Metro-Goldwyn-Meyer Studios
Inc. v. Grokster, Ltd. [1]. When the Supreme Court ruled in favor of the recording
industry, critics split into two opposing camps. Some described the decision as a critical
blow to technological innovation while others described it as a landslide victory for the
music industry. This article will argue that the Supreme Court’s ruling in the Grokster
case achieved a fair balance between the competing interests of copyright protection and
technological innovation. The first part of this article will address the general criticisms
put forth by technology supporters and suggest that far from being a fatal blow to
technological progress, the Supreme court’s decision may even have some positive
effects. The second part will assess the weight of the recording industry’s apparent
victory.

II. Why the decision is not as damaging as it seems for technology

Upon a quick search of internet news and blog sites, results such as “Grokster is
Dead, Long Live Grokster” [2], and “Grokster Loss Sucks for Tech” stick out [3]. Even
Stanford Law professor Lawrence Lessig chimed in with his article “A Rotten Ruling”
[4]. However, the likelihood that the Supreme Court’s ruling will stifle innovation as
much as these technology companies, consumer groups, and academics imply is difficult
to believe. The basic argument supposed by these pro-technology groups is that through
the Supreme Court’s ruling, technology companies will have to cautiously tread upon
new and uncharted territory. To protect from liability, many firms will be overly cautious
and small firms may not want to take the risk of liability at all and cease innovation. For
example, a piece in the Northwestern Journal of Technology and Intellectual Property
argues that the Supreme Court’s decision in Grokster was “fraught with potential
negative effects on technological development and difficulties that may arise within
intellectual property legal practice” [5].

In evaluating such analyses, it is worthwhile to examine the precursor to this case,

Napster. This case is similar to Napster in many ways. Grokster and StreamCast
Networks both distributed file-sharing programs very much like Napster, and the basic
premise of these file-sharing programs is the same. Users download software that puts
them in a network where files are shared. While connected to this network of users,
customers are free to share copyrighted and uncopyrighted files (Justice Bryer, in his
concurring opinion, cites the user who is looking for classical music, Shakespeare,
Project Gutenberg electronic books, or various public domain works). There is however,
a distinct difference between Napster and the case at hand. This difference lies in the
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software’s system design: whereas in Napster, all users transmitted their files through a
centralized network maintained by Napster, this new generation of file-sharing programs
is decentralized. For this reason, there is no way that Grokster can regulate or know of
specific acts of infringement. There is no main server through which all shared files are
transmitted. Rather, each individual user acts as both the server and the client (the server
is the host that is being searched and the client is the computer that is searching for a
particular file). Following a search, if the requested file is available on another computer
in the network, the user is directly connected “peer-to-peer” with the other user who has
the desired file [1]. This technical nuance was enough to impress the Ninth Circuit Court
of Appeals [6].

This very slight technical difference, the lack of a central server, ingeniously
overstepped the ruling in the Napster case. In making this ruling, the lower court and the
Ninth Circuit relied on Sony Corp. of America v. Universal City Studios, Inc, one of the
only precedents in the matter of secondary copyright infringement. Whether or not it was
intentionally devised, this difference became the crucial piece upon which the lower court
and Ninth Circuit Court of Appeals relied in holding that Grokster was not liable under
the Sony “safe harbor” rule [6]. The Sony case dealt with the introduction of Sony’s
Betamax, better known as the VCR. Universal City Studios alleged that Sony’s
distribution of the Betamax constituted contributory infringement. To be liable for
contributory infringement, Sony had to have knowledge of direct infringement and
contribute to it materially. There was no doubt that Sony knew that some people used the
VCR to copyright infringe. However, the allegation that they contributed to this was less
clear. The court went on to say that one cannot be liable for distributing a product that
has the capability to infringe if the product has the potential for non-infringing uses.
Thus, the same court that had condemned Napster a few years earlier similarly held that
“distribution of a commercial product capable of substantial non-infringing uses could
not give rise to contributory liability for infringement unless the distributor had actual
knowledge of specific instances of infringement and failed to act on that knowledge” [1].
The plaintiffs appealed the decision and it was later granted certiorari by the United
States Supreme Court.

Though the Ninth Circuit was impressed with Grokster’s technical argument, the
public is not concerned with slight nuances in technology. For the United States
Supreme Court, siding with Grokster would give the green light to users who want to
download copyrighted files. On the other hand, siding with MGM could have a
detrimental effect on the legitimate exchange of information via such file-sharing
programs as Grokster. In a 9-0 majority opinion, the United States Supreme Court struck
down the summary judgment granted to Grokster by the Ninth Circuit of Appeals.

In light of the Betamax decision, why was there so much controversy once the
Grokster case came to the Supreme Court? At first, the Ninth Circuit’s summary
judgment in favor of Grokster looked like a no-brainer. Grokster and StreamCast
Networks’ Morpheus have legitimate non-infringing uses, and even if they are not
substantial, they surely satisfy the requirement of having the “potential for non-infringing
use.” This part is undisputed. Why then did the Supreme Court find that the Ninth
Circuit’s decision was in error? First of all, the Betamax case was decided almost 20
years ago when the technological arena was very different than it is today. Universal
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City Studios was worried that Betamax users would tape television programs or copy
videotapes that they would then sell and distribute. But another potential use was simply
to have them to watch at a later time. This latter use (so called “time-shifting”) was
declared fair use by the deciding court. In contrast, Grokster and Morpheus were being
used to transfer files over the internet on a massive scale. While the primary use of the
Betamax was found to be time shifting, it was apparent to the Court and even conceded
by Grokster that the primary use of this new generation of file-sharing programs was
copyright infringement.

In the Supreme Court’s examination, Justice Souter explains why the Ninth
Circuit’s decision was made in error. The Supreme Court found no issues with the
Betamax ruling itself, but it held that the Ninth Circuit applied the Betamax decision in
error. The Ninth Circuit Court of Appeals read the Betamax case as limiting any liability
whatsoever for a distributor whose product has substantial non-infringing uses. The
Supreme Court found that the Ninth Circuit did not account for whether Grokster and
StreamCast had “an actual purpose to cause infringing use” and ignored any evidence of
intent to infringe or profit from it [1].

This idea was justified by the Court’s theory of inducement. The Court defines
inducement of infringement as “active steps . . . taken to encourage direct infringement”
[1]. Behind evidence of inducement of actual infringement must lie the specific intent to
infringe. Both were present in the case of Grokster. Grokster’s distribution of the
software was not contentious. It was their activities independent from distribution that
caused trouble. The classic case of inducement is advertising that encourages someone to
infringe a copyright. It is well documented that Grokster and StreamCast both marketed
their products as the next Napster and went so far as to advertise the number of Top 40
songs that were available through their software [1]. Furthermore, they gained from the
infringement of their users by “profiting from direct infringement while declining to
exercise to stop or limit it” [1]. This inducement rule seems perfectly fitting for another
reason. Many technologists praise the Sony substantial non-infringing use clause for its
protection of future innovations. They should be mindful of the fact that this logic was
borrowed from patent law which says, “Distribution of a component of a patented device
will not violate the patent if it is suitable for use in other ways” [1]. Similarly, the
inducement rule was also borrowed from patent law. For that reason, technologists
should not be surprised by its use here. The use of an inducement rule creates a natural
extension of the substantial non-infringing use rule.

Upon first examination of this legal situation, the average person is prone to
appeal to gut instinct. For some time, there was a substantial number of people who were
so taken aback by file-sharing technology that they became addicted to the idea of getting
music for free. Many young adults today grew up with Napster and saw nothing wrong
with downloading copyrighted works. In its public awareness campaign, the RIAA has
sought to combat this mentality and has attempted to spread the word that downloading
copyrighted files is akin to stealing. As the world of file-sharing is a very new
phenomenon, even this mindset took time to evolve. Now, however, there is little dispute
among the public. The fact that downloading copyrighted files for free is illegal is well
ingrained in the public psyche. Those who disagree with the Supreme Court’s ruling
must look to the Napster rule for guidance. When there is no material difference, save for
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a subtle system change, one cannot expect Grokster to escape liability. One could even
surmise that Grokster and StreamCast attempted to sidestep Napster’s ruling by
decentralizing their software. Furthermore, one must consider the possibility that if the
case were instead decided in Grokster’s favor, the music industry would undoubtedly
seek legislative changes; these would have the potential to be much stricter than the
Supreme Court’s ruling here.

One law review article theorizes that this decision may soon fade as the Napster
case did before into a “toothless tiger” and have few positive or negative implications for
peer-to-peer technologists [8]. This “toothless tiger” scenario proposes that this case will
simply be a new “teaching manual for future iterations of Napster/Grokster on how to
avoid liability” [8]. In addition, since the holding essentially addresses only the
marketing behavior of the company, Justice Scalia commented, “If the next generation of
peer-to-peer developers and distributors simply sell or give away their software, without
saying or doing anything publicly or behind the scenes about their hopes that illicit file-
sharers will be attracted to their wares, liability for inducement will evaporate, but the
problems for the content industry will persist” [8]. Taken this way, the Supreme Court’s
ruling can even be considered lenient.

Just as the Supreme Court made important concessions for future technological
growth in the Sony case, it again made special conditions that sought to protect
innovators in Grokster. For example, though the Court considered the “defendants’
internal and external communications, Grokster’s choice of name, advertisements—even
if the ads were never shared with the public,” the Court stipulated that such evidence is
not a crime itself, but only when taken together as a whole with other factors of the case
(Hancock 204). In the Berkeley Technology Law Journal, Galen Hancock points out the
significance of footnote 12 in the Grokster opinion. Here the Court explicitly controls
how future courts may interpret malicious intent, holding that “a product distributor need
not include content filtering features to avoid liability, at least as long there is no other
evidence of an unlawful objective of causing infringement” [9]. By saying that the
failure to filter out copyrighted materials is not enough by itself to hold a company liable
under the inducement rule, the court is telling potential litigators that it is unlikely that
they will find liability unless they have generous supporting evidence. Though they did
not explicitly outline the requirements for this new inducement rule, if patent law is any
predictor, the charge will be difficult to prove and would likely require proof of direct
infringement by a third party, active inducement of third parties to infringe, and
knowledge that such actions would induce infringement as stipulated by patent law [10].

Even as the Supreme Court sided with the record industry in this case, they had
technological growth in mind. This is evidenced by their preservation of the Betamax
rule. In essence, they simply gave Grokster a slap on the wrist for bad behavior.
Legitimate devices cannot be marketed for their illegal uses. By concentrating only on
the infringing intent of Grokster and not on their technology, the Supreme Court
successfully solved the problem of infringement on a massive scale and at the same time
preserved the technology protections inherent in the Sony safe harbor rule. Staunch
technologists need not be alarmed at this ruling. Far from the extreme accusations
brought on by some regarding the potentially inhibiting effects on technological growth,
the Supreme Court did not cede to the record labels. With slight modification to the
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Betamax rule, technology companies who responsibly market products with substantial
non-infringing uses should not be worried about potential litigation.

III. Why the decision is not as good as it seems for record labels

In many ways, MGM’s celebration upon hearing the court’s ruling was
premature. The media furthered the victorious sentiment with headlines such as
“Hollywood triumphs in piracy fight” in what Berkeley law professor Pamela Samuelson
called “MGM’s media blitz” [7]. This is understandable. Who can blame the recording
industry for spinning the story into a black and white victory? Unfortunately for them,
the evidence says they are bluffing. Upon further evaluation, the decision does not seem
to be such a great success for the plaintiffs. Going into the case, MGM wanted the
Supreme Court to reevaluate the Sony Betamax ruling. The plaintiffs were counting on
the Court to make a decision under the substantial non-infringing use clause of the Sony
case. Their hope was that in light of the fact that the primary use of Grokster’s and
StreamCast’s products was overwhelmingly to copyright infringe (estimates reach to
about 90%), the Court would reconsider whether Grokster could find refuge under the
defense of substantial non-infringing use [6]. Their ultimate goal was to have the Court
substitute the substantial non-infringing use rule with a stricter rule [7]. For example,
adoption of a rule requiring that products with both non-infringing and infringing uses
have a majority share of legitimate use would take the guesswork out of secondary
liability. Since estimates of the non-infringing use of the products in question were about
10% [6], the defendants would be held liable under this requirement. Such a bright line
rule would make contributory infringement easier to prove for MGM not only in this case
but also in future cases. Never eager to diverge from precedent, however, the Court kept
the Sony ruling intact and completely avoided the issue by applying its new inducement
rule.

Not only did the Court leave the Sony substantial non-infringing use rule
untouched, but its new creation, the inducement rule, does not give future litigants a
strong basis for proving liability for secondary copyright infringement. In the first place,
proving a case of inducement to infringe copyright seems to pose a range of problems.
Unless there is gross evidence of malicious intent, such as advertisements and memos
explicitly impelling customers to illegal activities, the charge will be hard to prove [7].
Furthermore, since the Court in its decision basically laid out a strategy guide to avoid
infringement by inducement, companies will be quick to adopt these new procedures to
protect themselves against liability in the goal of avoiding the fate of Napster and
StreamCast Networks. In a comprehensive outline, Hancock advises software
companies to shield themselves from liability by being careful not to target and advertise
to known infringers, having awareness of internal communications, public statements,
and business decisions that may show intent to infringe, and not creating features that
make infringing activity especially easy [9].

In the ideal instance for the entertainment industry, the Court would replace the
substantial non-infringing use rule with a rule that requires a primary non-infringing use
[7]. With such a rule, the plaintiffs could unequivocally hold Grokster liable based on
statistical data. Instead, now companies can continue to distribute peer-to-peer software
identical to Grokster and Morpheus and be free from liability as long as they are careful
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in their marketing practices. This is far from the ideal situation for MGM or any other
parties who seek to strengthen copyright protection. Just as “Sony’s rule is strongly
technology protecting” [1] by shielding products with legitimate uses and making it
difficult for them to be found secondarily liable, the inducement rule created here
likewise does not make it easy for litigants to hold technologists liable for secondary
copyright infringement. In this continuing conflict between the music and technology
industries, MGM has merely won a battle against a singular enemy behind which stand
many others who are willing to take its place.

IV. Future Implications

What remains to be seen is the case in which copyright infringement occurs on a

similarly large scale, but there is no evidence of inducement. In such a case, the Court
would have similarly strong interests in ceasing the distribution of such a product but
would also be controlled by the substantial non-infringing use rule derived from the Sony
case. In that instance, based on the cases discussed here, the Court would have to finally
examine Sony and define requirements for substantial non-infringing uses or simply hold
the defendant not liable and wait for legislators to solve the problem. This may be the
best solution available since the legislature is better suited to deal with the issue of
secondary liability. Furthermore, courts are ill-suited to deal with facts of a technical
nature. For example, expecting the Justices to discern what fraction of a device’s use
must be non-infringing, or requiring certain technological safeguards or filters are out of
the purview and expertise of the court. The Ninth Circuit expressed this concern when it
stated, “We live in a quicksilver technological environment with courts ill-suited to fix
the flow of internet innovation” [6].

In the interim, as the issue of secondary copyright evolves in the court system,
recording companies should continue to use alternative remedies such as suing
individuals for direct infringement. In suing individuals, there are none of the difficulties
that come with proving contributory copyright infringement as there were in Grokster.
Moreover, this tactic has done a great deal to create a new public understanding that such
infringing activity is a serious offense. Record companies can even use technology to
their advantage by creating new “devices that will help curb unlawful infringement” [1].
With the major file-sharing companies out of business, existing strategies such as
flooding file-sharing networks with bogus files should prove even more effective as the
number of real users declines. The inconvenience and inconsistent quality of the files on
these networks may steer users to other sources. Together with the legitimization of file-
sharing via new services such as iTunes, Realnetworks’ Rhapsody, and even the new and
legal Napster, the public will seek out illegal services less and less as they are presented
with better legal alternatives.

V. Conclusion

Instead of ceding to record companies or giving a free pass for file-sharing

companies, the Supreme Court created a fair balance by both extending copyright
protection and preserving the technology-friendly Betamax rule. By focusing on the
marketing behavior of Grokster and StreamCast rather than the software, the Court was
able to achieve these ends. For these reasons, criticisms that deem the ruling a blow to
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technology or a victory for the recording industry are off the mark. Upon closer
examination, the evidence does not suggest that the ruling will pose a hindrance to
technologists. Many, such as Justice Scalia, have pointed out the flexibility and leniency
of the ruling. Grokster lost the case, but peer-to-peer technology as a whole lost little.
From MGM’s perspective, the seeming victory is largely immaterial and short-lived.
MGM’s request for stricter interpretation of the Sony substantial non-infringing use
requirement was ignored. Furthermore, the difficulty inherent in proving inducement
liability limits the usefulness of the rule in future cases. MGM should use this case to
further public awareness of the problem of copyright infringement and steer music
listeners to legitimate new and existing music downloading services.
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References

[1] METRO-GOLDWYN-MAYER-STUDIOS-INC., ET AL., PETITIONERS V.

GROKSTER, LTD., ET AL. No. 04-480. Supreme Court of the United States. 27 June
2005.
[2] Krupp, Alex. "Grokster is Dead, Long Live Grokster!" Kuro5hin. 28 June 2005. 24
Oct. 2007 <http://www.kuro5hin.org/story/2005/6/27/16033/6308>.
[3] Dean, Katie. "Grokster Loss Sucks for Tech." WIRED. 27 June 2005. 5 Nov. 2007
<http://www.wired.com/print/entertainment/music/news/2005/06/68018>.
[4] Lessig, Lawrence. "A Rotten Ruling." WIRED. Sept. 2005. 2 Nov. 2007
<http://www.wired.com/wired/archive/13.09/posts.html?pg=7>.
[5] Wooten, Julie A. "Times May Have Changed, But the Song is Still the Same Why
the Supreme Court Was Incorrect to Stray From Sony's Reasoning in Metro-Goldwyn
Mayer Studios, Inc. V. Grokster, Ltd." Northwestern Journal of Technology and
Intellectual Property 5 (2007): 351-364.
[6] METRO-GOLDWYN-MAYER V. GROKSTER. No. 03-55894. United States Court
of Appeals for the Ninth Circuit. 3 February 2004.
[7] Samuelson, Pamela. "Three Reactions to MGM V. Grokster." Michigan
Telecommunications and Technology Law Review 13 (2006): 1-20. 15 Nov. 2007
<http://www.mttlr.org/volthirteen/samuelson.pdf>.
[8] Zimmerman, Diane L. "Symposium: the Unintended Consequences of Legislating
Technology: the Digital Millenium Copyright Act: Recent Development: Daddy, are
We There Yet? Lost in Grokster-Land." New York University Journal of Legislation and
Public Policy (2006): 1-24.
[9] Hancock, Galen. "Metro-Goldwyn-Mayer Studios Inc. V. Grokster, Ltd.: Inducing
Infringement and Secondary Copyright Liability." Berkeley Technology Law Journal 21
(2006): 189-212.
[ 10] Robert Gajarsa & Benjamin Dryden, "Induced and Contributory Infringement
Claims
Before the International Trade Commission," 337 Reporter (forthcoming 2008)