Source: http://www.techlawjournal.com/topstories/2004/20040819.asp
Timestamp: 2019-04-20 09:05:14+00:00

Document:
9th Circuit Holds No Vicarious Infringement in Grokster Case, 8/19/2004.
August 19, 2004. The U.S. Court of Appeals (9thCir) issued its opinion [26 pages in PDF] in MGM v. Grokster, affirming the District Court holding that Grokster's and Streamcast's peer to peer (P2P) file copying networks do not contributorily or vicariously infringe the copyrights of the holders of music and movie copyrights.
See, related story titled "Senate Judiciary Committee Holds Hearing on Inducement Bill" in TLJ Daily E-Mail Alert No. 963, August 20, 2004.
The plaintiffs are music and movie industry owners of copyright interests. The defendants are companies that distributed P2P software that enables the individual users to infringe the plaintiffs' copyrights. The individual infringers are not defendants in this suit. This opinion pertains only to the legal theories of contributory and vicarious liability.
District Court. Metro Goldwyn Meyer (MGM), and other movie companies, and various record companies, filed a complaint in the in the U.S. District Court (CDCal) against Grokster, Streamcast and Kazaa alleging copyright infringement, in violation of 17 U.S.C. § 501. They alleged contributory and vicarious infringement.
Court of Appeals. Plaintiffs appealed. See also, story titled "Music Publishers File Appeal Brief in P2P Infringement Case" in TLJ Daily E-Mail Alert No. 724, August 22, 2003.
The Appeals Court first reviewed the nature of P2P technologies, and its variations. The Court wrote that "there are three different methods of indexing: (1) a centralized indexing system, maintaining a list of available files on one or more centralized servers; (2) a completely decentralized indexing system, in which each computer maintains a list of files available on that computer only; and (3) a “supernode” system, in which a select number of computers act as indexing servers."
The Court concluded that Napster used the centralized indexing system, while Streamcast now uses the decentralized index model (by using its own branded Morpheus version of the open source Gnutella code), and Grokster uses the supernode system developed by Kazaa (although Kazaa has sold its FastTrack technology to Sharman Networks).
The Court next reviewed the extent of copyright violation. "Some of the files are copyrighted and shared without authorization, others are not copyrighted (such as public domain works), and still others are copyrighted, but the copyright owners have authorized software users in peer-to-peer file-sharing networks to distribute their work. The Copyright Owners assert, without serious contest by the Software Distributors, that the vast majority of the files are exchanged illegally in violation of copyright law."
The Court then applied the law of vicarious and contributory infringement to the facts of this case. The Court praised, and followed, the analysis of the District Court.
Contributory Infringement. The Court wrote that there are three elements of contributory infringement: "(1) direct infringement by a primary infringer, (2) knowledge of the infringement, and (3) material contribution to the infringement." The Court first briefly noted that "The element of direct infringement is undisputed in this case."
On the element of knowledge, the Court turned to the Supreme Court's opinion in Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), which held that Sony did not contributorily infringe with its Betamax technology, and the 9th Circuit's opinion in A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (2001).
The Appeals Court summarized the Supreme Court's ruling by stating 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.´´ In applying this doctrine, the Court found that because Sony's Betamax video tape recorder was capable of commercially significant noninfringing uses, constructive knowledge of the infringing activity could not be imputed from the fact that Sony knew the recorders, as a general matter, could be used for infringement."
The Appeals Court summarized the key ruling in the Napster case: "if 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."
Thus, this Appeals Court panel concluded that "If the product at issue is not capable of substantial or commercially significant noninfringing uses, then the copyright owner need only show that the defendant had constructive knowledge of the infringement. On the other hand, if the product at issue is capable of substantial or commercially significant noninfringing uses, then the copyright owner must demonstrate that the defendant had reasonable knowledge of specific infringing files and failed to act on that knowledge to prevent infringement."
Then, applying this standard to the facts of this case regarding the P2P systems used by Grokster and Streamcast, the Court concluded that the P2P software is capable of substantial noninfringing uses. For example, these P2P systems copy both public domain literary works and copyrighted works which owners allow to be placed on these P2P systems.
The Court added that it is not pertinent that almost all of the works distributed are unauthorized copies. What matters is merely that the software is "capable of substantial noninfringing uses". The Court emphasized the word "capable". This opinion thus provides a very minimalist interpretation of the Supreme Court's "capable of substantial noninfringing uses" standard.
The Court wrote that "In the context of this case, the software design is of great import. As we have discussed, the software at issue in Napster I and Napster II employed a centralized set of servers that maintained an index of available files. In contrast, under both StreamCast’s decentralized, Gnutella-type network and Grokster’s quasi-decentralized, supernode, KaZaa-type network, no central index is maintained. Indeed, at present, neither StreamCast nor Grokster maintains control over index files. As the district court observed, even if the Software Distributors ``closed their doors and deactivated all computers within their control, users of their products could continue sharing files with little or no interruption.´´" The Court then concluded that the knowledge element is lacking.
On the third element of contributory infringement, material contribution to the infringement, the Court of Appeals held that Grokster and Streamcast did not materially contribute. It elaborated that they do not provide storage of the infringing files, the site or facilities for infringement, or lists of infringing files. It did not expressly state, but the opinion necessarily implies, that providing the software the enables the infringement is not material contribution.
Vicarious Infringement. The Appeals Court wrote that there are three elements of vicarious infringement: "(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". The Court concluded, for its vicarious infringement analysis, as for its contributory infringement analysis, that the first element, direct infringement by others, is present. The Court also concluded briefly that the second element, direct financial benefit to Grokster and Streamcast, is met through advertising revenues.
However, the Court held that the vicarious infringement claim fails because the third element, right and ability to supervise, is absent. The Court noted that neither Grokster nor Streamcast "has the ability to block access to individual users." The Court added that "none of the communication between defendants and users provides a point of access for filtering or searching for infringing files, since infringing material and index information do not pass through defendants’ computers."
The Appeals Court also rejected the copyright owners argument that Grokster and Streamcast turned a blind eye to infringement. The Court wrote that "there is no separate ``blind eye´´ theory or element of vicarious liability that exists independently of the traditional elements of liability. Thus, this theory is subsumed into the Copyright Owners’ claim for vicarious copyright infringement and necessarily fails for the same reasons."
Historical Perspective on Copyright Law. The Appeals Court began and ended its opinion with historical perspectives on developments in entertainment technology and copyright protection. It stated at the outset that "From the advent of the player piano, every new means of reproducing sound has struck a dissonant chord with musical copyright owners, often resulting in federal litigation. This appeal is the latest reprise of that recurring conflict, and one of a continuing series of lawsuits between the recording industry and distributors of file-sharing computer software."
It concluded that "The introduction of new technology is always disruptive to old markets, and particularly to those copyright owners whose works are sold through well-established distribution mechanisms. Yet, history has shown that time and market forces often provide equilibrium in balancing interests, whether the new technology be a player piano, a copier, a tape recorder, a video recorder, a personal computer, a karaoke machine, or an MP3 player. Thus, it is prudent for courts to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent present magnitude."
It added, "Indeed, the Supreme Court has admonished us to leave such matters to Congress. In Sony-Betamax, the Court spoke quite clearly about the role of Congress in applying copyright law to new technologies. As the Supreme Court stated in that case, ``The direction of Art. I is that Congress shall have the power to promote the progress of science and the useful arts. When, as here, the Constitution is permissive, the sign of how far Congress has chosen to go can come only from Congress.´´"
Related Cases. See also, A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001), in which the Appeals Court found vicarious infringement.
See also, the opinion of the U.S. Court of Appeals (7thCir) in In Re Aimster Copyright Litigation, 334 F.3d 643. On June 30, 2003, the 7th Circuit issued its opinion [23 pages in PDF] affirming the District Court's preliminary injunction affecting the Aimster (aka Madster) file copying system. See, story titled "7th Circuit Affirms Preliminary Injunction in Aimster Case" in TLJ Daily E-Mail Alert No. 691, July 1, 2003.
The present case is Metro-Goldwyn-Meyer Studios, et al. v. Grokster, Ltd., et al., U.S. Court of Appeals for the 9th Circuit, appeals from the U.S. District Court for the Central District of California, Judge Stephen Wilson presiding. Judge Sidney Thomas wrote the opinion of the Court, in which Judges Robert Boochever and John Noonan joined.

References: v. 
 § 501
 v. 
 v. 
 v. 
 v.