Just when movie studios had grown comfortable with a technology that they had initially viewed as threatening—video recording and DVDs—something new was invented that posed an even greater threat to their bottom line: the innovative technologies that enabled the sharing of music and videos over the Internet. Using the capabilities of peer-to-peer networks (P2P), those who wanted to watch a movie without going to a theater or renting or buying a DVD were able to simply download the film from the Internet for free and watch it over their computers (or even burn it to a CD or DVD to watch on television).
P2P networks operate by means of computers communicating directly with each other, rather than through a central server. Their advantage over information networks is precisely this absence of a central computer server to manage the exchange of information or files among users. As a result, the high bandwidth communication capacity for a server is not necessary nor is there any need for costly server storage space. Since copies of a file may be available on many users’ computers, file requests and retrievals may occur faster than with networks, and because file exchanges do not have to travel through the intermediary of a server, communication can take place between any computers that are connected, without potential disruptions due to server shutdowns. Because of these potential benefits in security, cost, and efficiency, many universities, government agencies, corporations, and libraries, among others, have recognized the value of P2P systems.
However, the primary use of P2P networks in the late 1990s and early 2000s seemed to be for music and video downloads without authorization. Two companies in particular—Grokster and Streamcast—provoked the wrath of the studios, largely because they had a substantial and growing popularity that over time could seriously harm the studios’ business model. Both Grokster and Streamcast (through its Morpheus program) distributed free software that allowed computer users to share electronic files through P2P networks.
Grokster’s software employed what was known as “Fastrack” technology, while Streamcast distributed the Morpheus software that relied on what was known as Gnutella technology. Users of both Grokster and Morpheus utilized a comparable process: a user would send a file request directly to other computers; search results were sent back to the requesting computers, and the user could then download the desired file from a peer’s computer. Neither Grokster nor Streamcast were involved in this process. Neither had servers that could intercept the content of the search results.
A group of copyright holders consisting of movie studios and others, led by Metro-Goldwyn-Mayer (MGM), filed suit against Grokster and Streamcast in federal court in the Central District of California, requesting that the court order the two companies to stop distributing their free software, and seeking damages for the companies’ users’ copyright infringement, arguing that the two file-sharing businesses knowingly and intentionally distributed their software in order to enable users to infringe copyrighted works in violation of the Copyright Act.
While acknowledging that the users had directly infringed the studios’ copyrights, the district court granted summary judgment in favor of the two software distributors,1 based on the U.S. Supreme Court’s decision in Sony v. Universal City Studios, Inc.2 (the “Betamax decision”). The district court ruling was affirmed by the Ninth Circuit Court of Appeals3 because, under the Betamax decision, P2P software had legitimate and legal uses. Under this ruling, the distribution of a commercial product capable of substantial noninfringing uses could not give rise to contributory liability for infringement unless the distributor actually knew of specific instances of infringement and failed to act to stop the infringing practices. The Ninth Circuit also noted that the software distributors did not materially contribute to their users’ infringement because the users themselves searched for, retrieved, and stored the files of copyrighted materials, without any involvement by the distributors, other than their initial provision of the software. And the Ninth Circuit held that the distributors could not be vicariously liable—another theory put forth by MGM—because they did not monitor or control the software’s use, had no right or ability to supervise the use, and had no duty to police the users’ activities.
MGM appealed to the U.S. Supreme Court. This was a closely watched case, aligning computer and Internet technology companies and trade associations on one side and the recording industry, the Motion Picture Association of America, and movie studios on the other.
Justice Souter wrote the majority opinion. From the first, he acknowledged the overwhelming evidence of copyright infringement presented by MGM—that nearly 90 percent of the files available for download on Grokster’s system were copyrighted works, and that billions of files were shared each month. Given this, “the probable scope of copyright infringement,” he concluded, was “staggering.” Grokster and Streamcast actually did not deny that users of their software employed it mainly to download copyrighted files. MGM had notified the companies that eight million copyrighted files could be obtained using the companies’ software.
Justice Souter also noted that neither Grokster nor Streamcast were “merely passive recipients of information about infringing uses.” He found the record to be “replete with evidence” that, from the moment Grokster and Streamcast began to distribute their free software, each one clearly voiced the objective that recipients use it to download copyrighted works, and each took “active steps to encourage infringement.” Justice Souter noted that after Napster was sued for facilitation of copyright infringement, Streamcast actively pursued Napster users, giving away a software program called “Open Nap” to distribute copies of the Morpheus software and to encourage users to adopt it. Grokster took similar steps. Grokster also sent users a newsletter promoting its ability to provide particular, popular, copyrighted materials.
Finally, Justice Souter observed that neither Grokster nor Streamcast received any revenue from users—they gave their software away free of charge. The source of income for both companies was advertising, and the price to advertisers depended on the number of Grokster or Morpheus users who utilized the program. He pointed out, “while there is doubtless some demand for free Shakespeare, the evidence [showed] that substantive volume is a function of free access to copyrighted work.” He admitted that there had to be a balance between protection for creative pursuits through copyright and promotion of technological innovation, by limiting copyright infringement liability. “The more artistic protection is favored,” he said, “the more technological innovation may be discouraged.” On the one hand, there is the fear “that digital distribution of copyrighted material threatens copyright holders as never before, copying is easy and many people (especially the young) use file-sharing software to download copyrighted works.” He worried that “the ease of copying songs or movies using software like Grokster’s or Napster’s is fostering disdain for copyright protection.” But these fears are “offset by the different concern that imposing liability, not only on infringers but on distributors of software based on its potential for unlawful use, could limit further development of beneficial technologies.”
In this case, the Court saw the balance as needing to provide greater protection for copyright holders. However, while all members of the Court agreed that Grokster could be liable for contributory infringement because it intentionally induced or encouraged the users of its software to infringe on copyrighted works, they disagreed on whether this case was different from the Sony case.
Not that many years before, in Sony, the studios had claimed that Sony was contibutorily liable for infringement that occurred when VCR owners taped copyrighted programs because the company supplied the equipment that was used to infringe and knew that infringement would occur. However, to the studios’ dismay, because a principal use of the VCR was “time-shifting”—taping a program for later viewing at a more convenient time—and because this was considered to be a noninfringing use, Sony was not held liable for the infringement that could take place by users of its equipment. In the Betamax decision, the Court held that because the VCR was “capable of commercially significant non-infringing uses,” the manufacturer could not be faulted simply because the machine could also be used to infringe.
MGM hoped that, in Grokster, the Court would overturn or at least substantially limit Sony, by eliminating the “safe harbor” for technologies capable of substantial noninfringing uses.4 But the majority of Justices did not see the need to go so far in Grokster. Because Grokster’s and Streamcast’s behaviors actively induced the infringement by the users of their software, they could be found to be liable without revisiting the holding of Sony. Justice Souter pointed out, for example, that Streamcast’s advertising was aimed at Napster users while the Napster case was in the courts. He also noted that neither company attempted to develop filtering tools or other mechanisms that would diminish the users’ infringing activities. He believed that “this evidence underscored Grokster’s and Streamcast’s intentional facilitation of their users’ infringement.” And finally, the companies’ advertising pricing model—where the more the software was used, the more ads went out and the greater the advertising revenue—buttressed the evidence that the companies were actively encouraging the infringing activities. Although, as the Court noted, “this evidence alone would not justify an inference of unlawful intent, when viewed in the context of the entire record, its import is clear.”
Based on this theory of active inducement, the case was sent back to the district court for a trial based on the principles set out in the decision. On November 7, 2005, as part of a settlement with MGM, Grokster announced that it would no longer offer its P2P file-sharing service.5 Settlement talks with Streamcast broke down and in further court proceedings, the district court ruled against Streamcast, granting MGM’s motion for summary judgment on September 27, 2006, finding instances of “massive” copyright infringement on its P2P network and “overwhelming evidence of unlawful intent.”6 On October 16, 2007, the court issued a permanent injunction, requiring Streamcast to use filtering technologies while “preserving its noninfringing uses as feasible.”7
Even though MGM won this case, in many respects, the studios lost the larger battle. Even the decision was not what they had sought. They believed that the Supreme Court would be so shocked by the extent of the unauthorized file-sharing activity that the Justices would revisit Sony and perhaps even strike down the protection that this decision afforded to technologies with substantial noninfringing uses.8 But this was not to be. In fact, the studios were left in pretty much the same position after Grokster in their ability to challenge innovative technologies as they had been before.
In a sense, in this area, the studios seem to be playing a game of “whack-a-mole.” They were able to shut down Grokster and Streamcast, but other technologies have since replaced the software of these two companies—technologies that have proved to be more useful and less capable of detection than the earlier forms of P2P sharing. The most recent of these is “bittorrent” sharing, which debuted in 2001, but whose popularity took off in 2005, after the Grokster decision. Bittorrent sharing is a form of P2P sharing technology that is even more hated by the studios than Grokster and Morpheus were. “Bittorrents” (also known as “torrents”) work by downloading small bits of files from many different Web sources at the same time, so that no single file can be traced to a single computer. Bittorrent networking may be one of the most popular activities on the Internet at the present time, that is, until it is replaced, as it is sure to be, by a new and even more disruptive technology. It is fairly safe to state that the motion picture industry will have its hands full for years to come as studios confront the new technologies that will be developed and that will most certainly disrupt their economic model.
The structure of the movie business is changing and, much as movie studios might try to fight these developments, it will continue to do so. The studios can become participants in innovation trends—as they have done when they have licensed films to services such as Netflix to stream into homes—even though this has alienated theater owners,9 or they can be left behind.
Reprinted with permission from The Little Book of Movie Law, by Carol Robertson. Copyright 2014 by the American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
1. 259 F. Supp. 2d 1029 (C.D. Cal. 2003).
2. 464 U.S. 417 (1984); See Reel 25, The Transformers (Little Book of Holiday Law, by Carol Robertson, published 2012 by the American Bar Association).
3. 380 F. 3d 1154 (9th Cir. 2004).
4. See Samuelson, Pamela, “Three Reactions to MGM v. Grokster,” 13 MICH. TELECOMM. TECH. L. REV. ___ (2006).
5. Raysman, Richard and Brown, Peter, “File Sharing in the Post-Grokster World,” THE NEW YORK LAW JOURNAL, Vol. 236, No. 70, Wednesday, October 11, 2006, found at http://www.thelenried.com/resources/documents/10/106-File-Sharing.pdf.
6. Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., 454 F. Supp. 2d 966, 971 (C.D. Cal 2006).
7. Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., 518 F. Supp. 2d 1197, 971 (C.D. Cal 2007).
8. See Reply Brief for Motion Picture and Recording Company Petitioners, Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., No. 04-480 available at http://www.eff.org/IP/P2P/MGM_v_Grokster.
9. Cieply, Michael, “Scuffle Over On-Demand Movies Portends Battles to Come,” The New York Times, April 24, 2011, found at http://www.nytimes.com/2011/04/25/business/media/25vod.html?_r=1&ref=motionpictureassociationofamerica, last accessed July 9, 2011.