In a landmark copyright decision, the U.S. Supreme Court, in reversing the Ninth Circuit ruling that distribution of software capable of substantial non-infringing uses did not result in contributory infringement, unanimously held that companies that develop and distribute file-sharing software may be held responsible for infringement committed by the software’s users if the companies intended the software to be used to commit infringement. Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., Case No. 04-480 (June 27, 2005) (Souter, J.). The decision reversed and remanded a Ninth Circuit ruling.

The defendant in the case is a developer and distributor of computer software programs that enable users to trade files with one another over the internet. While a small minority of users employ the software to trade material in the public domain, or otherwise not subject to copyright protection, the vast bulk of traded files consist of copyrighted music and motion picture files. The plaintiff filed suit for contributory copyright infringement alleging illegal file sharing on a massive scale using the defendant’s software programs; infringement that resulted in billions of dollars in lost revenue and ongoing, rampant theft.

The specific issue addressed by the Court was "under what circumstances the distributor of a product capable of both lawful and unlawful use is liable for acts of copyright infringement by third parties using the product." The Ninth Circuit had affirmed summary judgment for the defendant, basing its decision on the Supreme Court’s opinion in Sony Corp. of America v. Universal City Studios, Inc. In that case, the Ninth Circuit held Sony could not be held liable by copyright owners for the conduct of consumers who used Sony’s Betamax VCRs to make copies of movies, even though some of those copies were infringing, since the VCR was also capable of commercially significant (or substantial) non-infringing uses; namely, authorized uses and fair use. The defendant in Grokster argued, and the lower courts agreed, that their file-sharing software was protected under the Sony doctrine because the software, like a VCR, could be used for substantial non-infringing uses, such as the distribution and trading of un-copyrighted and authorized material. Additionally, the defendant argued they could not stop the infringement committed by users of their software because neither company maintained or controlled a central server through which users accessed or located copyrighted material.

The Supreme Court disagreed, holding the Sony test applied only where the plaintiff tried to impute intent to infringe based on the characteristics of a product. However, the Court held that nothing in Sony required a court to ignore actual evidence of intent if such evidence exists. Because the evidence in this case raised a genuine issue of material fact regarding whether the defendant expressed an intent for its software to be employed by users to infringe the plaintiff’s copyrights, the Court remanded with the instruction 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."

The Court cited facts that established the defendant’s intent to stimulate users to engage in copyright infringement, such as advertisements promoting the software programs as an alternative to or compatible with Napster; affirmatively assisting users in locating and illicitly downloading copyrighted materials; failing to develop a filtering tool or other mechanism to reduce infringing activity; and following a business model whereby the software was distributed free to users and revenue was generated through advertising, whose value turned on high-volume use. Further, the record demonstrated the actual use of the program was overwhelmingly infringing.

In a concurring opinion, Justice Ginsburg and three justices noted the defendant failed to establish that their software products fell within the Sony safe harbor for products "capable of commercially significant non-infringing uses" because the file-sharing programs were "overwhelmingly used to infringe." In another concurring opinion, Justice Breyer and three other justices disagreed and suggested the scope and amount of user infringement was comparable to that in Sony; the Ninth Circuit’s conclusion that the software fell within the safe harbor was correct. However, because three other justices offered no opinion on this issue, the Court left for lower courts the circumstances under which file-sharing software and other controversial products could be distributed without running afoul of copyright laws. Also left unanswered was whether a plaintiff can establish liability when the evidence of purposeful intent to infringe is less obvious than it is in this case.

In apparent response to the many amici briefs voicing concern that imposing indirect liability here could chill technological innovation by introducing legal uncertainty into the product development and marketing process, the Court acknowledged the issue of contributory copyright liability for software and technology companies required balancing the copyright interests of content owners with the free development of new technologies and consumer products. The Court found, however, the argument for imposition of indirect liability in this case overwhelmed the risk posed to development of future technology because the defendant here clearly intended and promoted its product to be used in an infringing manner.

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