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Morpheus Falling?

Decentralized second-generation file-sharing services raise issues that only the U.S. Supreme Court or Congress can resolve

4 min read

December will mark the fourth anniversary of the recording industry's suit against the first peer-to-peer file-sharing service, Napster. In that case, the federal courts shut Napster down on the grounds it was helping its users to obtain copyrighted works without compensating their creators. Now the battle between purveyors of file-sharing technology and makers of digital content has entered a major new phase, as courts address second-generation systems that provide the means of distributing copyrighted material without central servers.

Though the ultimate resolution of this epic contest cannot be predicted, where we are headed in the short term seems clear enough: a reexamination of ”the Magna Carta of the technology age,” the U.S. Supreme Court's landmark 1984 ruling in the Sony Betamax case.

The Supreme Court found in Sony Corp. of America v. Universal City Studios that manufacturers of VCRs could not be held liable for copyright infringement even though it was foreseeable that some consumers would use those devices for infringing purposes. The ruling had the beneficial effect of freeing manufacturers to innovate without fear of legal challenges, but the Supreme Court may soon have no choice but to reappraise Betamax in light of conflicting lower court rulings.

This past June, in a case approving the shutdown of Aimster--a Napster-like service that also offered chat capabilities--Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit in Chicago interpreted Betamax very differently from the way it was traditionally understood. Posner, an eminent judicial scholar, wrote: ”When a supplier is offering a product or service that has non-infringing as well as infringing uses, some estimate of the respective magnitudes of these uses is necessary for a finding of contributory infringement.” In effect, he was calling on judges to weigh the value to society of a product's noninfringing uses against the perils posed by its infringing uses.

Two months earlier, however, U.S. District Judge Stephen Wilson in Los Angeles rendered a seemingly more traditional interpretation of Betamax, in finding that the second-generation file-sharing services Grokster and Morpheus couldn't be held liable for any copyright violations committed by their subscribers. Judge Wilson's ruling was a crushing setback for the plaintiffs--an alliance of the seven major Hollywood studios and the five top record labels. Yet Wilson expressed distaste for his own conclusions, and invited the U.S. Congress to change the law to better protect content creators.

Morphing to Morpheus

The recording industry has appealed Judge Wilson's ruling to the U.S. Court of Appeals for the Ninth Circuit in San Francisco, which will probably hear the case this winter. If the Ninth Circuit upholds Judge Wilson's order, there would be an apparent conflict among the federal appeals courts--a situation that often prompts the Supreme Court to weigh in.

The Betamax formula has been under mounting pressure for years with the emergence of various digital technologies that facilitate reproduction and distribution of copyrighted works. In the Digital Millennium Copyright Act of 1998, Congress partially nullified Betamax by banning outright the distribution of one important category of technologies--those that are ”primarily designed” to circumvent access protections on copyrighted works.

What remained of Betamax was then first tested in the courts by the Napster litigation. But when the Ninth Circuit court heard the case in February 2001, it sidestepped the main issues, finding that Napster was a service with an ongoing relationship with its users, rather than a provider of a product. The court therefore decided that the Betamax formula simply didn't apply.

Software developers then swiftly engineered around the Napster ruling by devising an array of technologies that look and feel more like products than services. The most popular were those that employ the proprietary FastTrack P2P network co-developed by the Swedes Niklas Zenn-strom and Janus Friis. Unlike Napster, which maintained servers on its premises containing centralized indexes of all the files its users were offering and seeking, the FastTrack system distributed those indexes across the network on the users' own computers. The network was also ”self-organizing”--its software would constantly reassign indexing functions--which enable users to find the files they are seeking--to suitable computers as users signed on and off.

Zennstrom and Friis proceeded to set up KaZaA, distributing free software that consumers used to navigate the FastTrack network. The developers also licensed to others--including iMesh (Israel) Ltd. and Grokster Ltd. (Nevis, West Indies)--the right to distribute their own customized software for navigating FastTrack.

Shortly after being sued by the entertainment industry two years ago, Zenn-strom sold the KaZaA assets to Sharman Networks (set up under the laws of the Pacific island nation of Vanuatu, though it operates out of Australia), retaining only the FastTrack source code, which passed to Zennstrom's new Swedish company, Joltid Ltd. (Stockholm). According to court filings, Sharman pays Joltid 20 percent of its revenues as license fees, and Grokster pays 60 percent.

Accordingly, the licensees can all now cogently argue that they are not services, like Napster, but merely providers of software products that enable users to navigate the pre-existing FastTrack network, over which licensees have no control. The same can be said of the commercial services that provide software that navigates the open-source Gnutella network, including Morpheus, LimeWire, and BearShare.

Hidden hands

In his decision last April, Judge Wilson agreed that the Grokster and Morpheus technologies are, in fact, products and therefore immune from liability under Betamax. Naturally, most manufacturers of technology products have cheered that decision, as they can continue, without fear of liability, to market products like CD burners, CD-ripping software, portable digital music players, digital video recorders, and broadband Internet connections [see ”Protecting Digital Video”]. Yet it's apparent from the facts Wilson considered that the rigid logic of Betamax no longer strikes a fair balance between the interests of creators and file-share purveyors.

To begin with, Wilson heard unrebutted entertainment industry evidence suggesting that about 90 percent of the files traded over the two services are copyrighted and not authorized for distribution.

What's more, the commercial services now earn nontrivial sums from advertising revenue. When users download the free file-sharing software, they get aggressive and sticky adware bundled with it that launches whenever the file-sharing software launches.

There was a time, of course, when file-sharing's champions passionately argued that file-sharing actually promotes CD sales, by allowing consumers to sample songs and then buy the ones they like. But the claim appears to be vanishing from both legal briefs and public discourse as the empirical evidence against it mounts.

Faced with these realities, Judge Posner's cost-benefit analysis may offer the most viable short-term solution. His analysis would appear to immunize Internet service providers and most manufacturers from liability, while banishing commercial file-sharing services to underground status.

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