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For intellectual-property attorneys, the lead-up to the recent U.S. Supreme Court ruling in the MGM vs. Grokster case was like being in a crowded sports bar before the Super Bowl.
Bets were placed on the outcome of the ultimate showdown between two formidable teams. Everyone had an opinion on the players and we all followed every play.
In football, once the fans leave and the stadium is cleared, a new season begins and every team starts from scratch again. But this particular court ruling is just the beginning. Now we have to figure out the implications and advise clients how the ruling affects their business.
The Teams
This titanic struggle pits MGM, the music companies, movie studios and their industry groups on one side against Grokster, StreamCast and other companies that provide peer-to-peer (P2P) file-sharing systems on the other.
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Nobody is accusing the P2P companies of directly violating anyone’s copyright, but the music companies are having a hard time stopping individual direct infringers in a cost-effective manner. Thus, they have to try and pin the liability on a more centralized participant in the infringement process.
The Rules
Copyright holders have the right to exclude others from making copies of their works without their permission. It is undisputed that at least some artists and content companies that hold copyrights to songs and movies have not granted users the right to make copies of their works using P2P systems.
On the other hand, it might be argued that some copying is fair use and that fair use might include using a P2P system to access a recorded song if the user already owns the right to play the song as a result of buying the CD. But that fine point was not the subject of this case and there are large numbers of users downloading songs that are not in their purchased CD library.
Long before digital networks, the law recognized that a rights holder would be without remedy if the only remedy was against the actual individual infringer. For example, employers can be liable for actions of their employees in the course of their employment, allowing for a recovery from a party able to pay a judgment.
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Those who induce or contribute to infringement of intellectual property can be as liable as those who are induced.
The Issue
This case is not about banning illegal file swapping. That already is not allowed. This case is about who can be dragged into court to be held responsible for the infringements of others.
In the 1984 Sony Corp. of America v. Universal City Studios, Inc. (the Sony Betamax case), the court held that there was no liability for contributory infringement merely for selling a device capable of being used for infringing acts, if there were also commercially significant noninfringing uses of that device.
The issue in Grokster was whether the distributors of the P2P software could be held liable for the actions of the infringing users. This time there was more than just selling a device that could be used for infringing and noninfringing uses. The intended use of the software was at issue.
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The New Rules
Neither side got all they wanted. The content owners wanted a ruling that when a device distributor does not provide tools for protecting copyrighted material, the distributor is liable for the acts of the users. The technology developers wanted a ruling that substantial noninfringing use would be a shield for liability.
The court ruled down the middle (perhaps favoring the content owners a bit), which leaves us with a new rule. Anyone with a new business plan that might be implicated should read this case very carefully.
If your company is developing a new product that is just an improvement over previous devices that haven’t been hauled into court, there is probably no need for concern. However, if your company’s business model is new, tread carefully.
For example, if the product is a new DVD player with additional bells and whistles, the rules for existing DVD players still will apply. However, suppose your company developed a rental DVD player and has a business model where subscribers rent these players, watch the movie until the player “expires” and then pass them on to other subscribers or return them to be reloaded with new movies. Do you need the movie copyright holder’s permission? That is worth checking.
Standard legal advice would tell you to compare your offering to case law before investing large sums in development. However, the MGM v. Grokster case brings up an interesting development that adds a new layer of complexity to that analysis.
Intent and History Matter
The court held that one who distributes a device with the intention of encouraging infringement of copyrights is liable for third-party infringement, regardless of any noninfringing uses the device has and maybe even if the distributor stopped the bad encouragement.
In the opinion, the court highlighted the actions of Grokster in getting former
Napster
users to switch to Grokster after Napster was shut down with a ruling that it was liable for third-party infringement. In various arguments along the way, Grokster attempted to limit the review of its liability to its current embodiment, but the court opined that prior history cannot be ignored entirely.
Thus, if a file-sharing company was promoting its product for infringing purposes, but is no longer doing so, it might still be liable. Grokster cannot escape its past advertisements and promotional activities.
This might create interesting business opportunities wherein the second to market has an advantage. Suppose the first to market with a new device or business model promotes its product in a way that is found to be inducing infringement, but later backs away from that position. That company would still be in trouble, while those coming later and duplicating the current product would be free from liability.
Of course, there are those that like to play on the edge. They’ll find ways to move their product to an entity not tainted by the old intent and history. However, for those who like to play it safe, one lesson to take away from this case is to have a clean marketing act from day one.
Evolution Is Inevitable
Software developers that don’t think this case is important to them need to keep a close eye on their products and their users. No one can control completely how a product is used, and it might evolve into something used primarily for infringing.
For example, pseudoephedrine is a common component of a cold remedy, but an unintended market developed is its use as a base for producing the illegal drug methamphetamine. While drugs and software are quite different, it is instructive to note that manufacturers of cold remedies, with their undisputed legitimate uses, nonetheless took steps to block that unintended use, even before anyone mentioned possible liability.
Like football, product development requires periodic review. After the season is over, it is worth looking back at how your team did to determine what to stick with next season. Champions know the importance of always being prepared, even when your players do something unexpected.
Philip H. Albert is a patent attorney and partner with the San Francisco office of the intellectual property law firm Townsend and Townsend and Crew LLP.
