United States: Producers of File-Sharing Software may be Liable for Contributory Copyright Infringement

In a landmark copyright decision, the Supreme Court unanimously held that companies which 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., 04-480 (U.S. June 27, 2005). The decision, written for the Court by Justice Souter, reversed and remanded a Ninth Circuit ruling that the distribution of the software did not result in contributory infringement because the software was capable of substantial non-infringing uses.

The defendants in the case, Grokster Ltd. and StreamCast, Inc., are developers and distributors of computer software programs which 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 plaintiffs in the case, including 29 motion picture studios and record labels, sued Grokster and StreamCast in October 2001 for contributory copyright infringement. According to the plaintiffs, illegal file sharing on a massive scale using defendants’ software programs, among others, has resulted in billions of dollars in lost revenue, and the ongoing, rampant theft could ultimately threaten the viability of the music and motion picture industries.

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 defendants, basing its decision on the Supreme Court’s opinion in Sony Corp. of America v. Universal City Studios, Inc. In that case, the Court 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 defendants in Grokster argued, and the lower courts agreed, that their file-sharing software was protected under Sony because the software, like a VCR, could be used for substantial non-infringing uses, such as the distribution and trading of uncopyrighted and authorized material. Additionally, the defendants 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.

In reversing, the Supreme Court held that the Sony test applied only where the plaintiff tried to impute intent to infringe based on the characteristics of a product. However, the Court further held that nothing in Sony required a court to ignore actual evidence of intent if such evidence exists. Such evidence did not exist in Sony. Because the evidence in this case raised a genuine issue of material fact regarding whether defendants expressed an intent that their software be employed by users to infringe the plaintiffs’ copyrights, the courts below erred in granting summary judgment. 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."

In reaching its conclusion, the Court cited facts that clearly established the defendants’ unlawful intent to stimulate users to engage in conduct the defendants described as copyright infringement. First, both StreamCast and Grokster distributed advertisements promoting their respective software programs as an alternative to or compatible with Napster, which was earlier held as infringing for facilitating the theft of huge amounts of copyrighted material. Further, both companies affirmatively assisted users in locating and illicitly downloading copyrighted materials. Second, neither company attempted to develop a filtering tool or other mechanism to reduce infringing activity. Third, both StreamCast and Grokster employed a business model whereby their software was distributed free to users and revenue was generated through advertising, whose value turned on high-volume use. The record demonstrated such use was overwhelmingly infringing. Importantly, the Court stated in footnotes that neither the second nor third factors, standing alone, would give rise to liability for contributory infringement. However, taken together the Court found these facts supported the conclusion that the unlawful objective of the defendants was "unmistakable."

The members of the Court differed in their views of how Sony would have been applied to this case had the issue of intent not been dispositive. In a concurring opinion, Justice Ginsburg and three justices commented Grokster and StreamCast failed to establish before the lower courts 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 with Justice Ginsburg and suggested the scope and amount of user infringement was comparable to that in Sony, and 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 is whether a plaintiff can establish liability when the evidence of purposeful intent to infringe is less obvious than it is in this case.

In its opinion, the Court acknowledged that 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. Many of the amici, including consumer groups and technology companies, argued that imposing indirect liability on Grokster and StreamCast could chill technological innovation by introducing legal uncertainty into the product development and marketing process. According to these parties, the advance of new technologies, such as MP3 players and Apple’s iPod, could be stunted if the Court were to adopt an expansive view of contributory liability. The Court found, however, that the argument for imposition of indirect liability in this case overwhelmed the risk posed to future technology because Grokster and StreamCast clearly intended and promoted their products to be used in an infringing manner.

The Supreme Court’s rebuke of the tactics and business models of Grokster and StreamCast represents a significant success in the entertainment industry’s continuing battle against unauthorized online file-trading services. Moreover, the decision provides a powerful new litigation option to owners of copyrighted motion pictures, musical compositions and sound recordings. Rather than solely focusing on suits against individual infringers, many copyright holders may now consider infringement actions directly against the file-trading services themselves.

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