The lessons of MGM v. Grokster

Last summer's anticipation of the U.S. Supreme Court's decision in Metro-Goldwyn-Mayer Studios Inc. et al. v. Grokster Ltd., et al. (MGM v. Grokster) resembled the climax to the original Star Wars movie as the minutes ticked down to when the Death Star could destroy the rebel base. Metro-Goldwyn-Mayer Studios Inc., a movie studio, and 27 other entertainment companies had filed a copyright-infringement suit in 2001 against Grokster Ltd. and Streamcast Networks Inc., makers of peer-to-peer file-sharing services. The entertainment firms alleged that the services not only facilitated but actively encouraged widespread downloading of copyright-protected material over the Internet.

Grokster and Streamcast lost. But while most of the attention focused on the immediate impact on Grokster and similar file-sharing services, a deeper issue was at stake: the balance between the rights of technological innovators and of those who own artistic works.

The disputing parties, in a variety of ways, asked the Supreme Court to answer two persistent questions:

If a company creates an innovative technology clearly designed to help customers make copies of artistic works (songs, films, TV shows) and many customers use it to infringe on copyright, under what circumstances will the company be held liable for such uses?

If a company is at risk of being liable, how can it avert liability?

Much of the anticipation of the Grokster decision resulted from the fact that it had been decades since the Supreme Court had fully addressed such questions in its landmark 1984 decision in Sony Corp. v. Universal City Studios. In that case, movie studios sued Sony, accusing it of copyright infringement for selling videocassette recorders that could be used to record movies shown on television. Sony won.

The doctrine the courts used to decide the Sony case was borrowed from patent law, where it is known as the "staple article of commerce" defense. Transplanted into copyright law, it became known as the Sony doctrine. Under the doctrine, the maker or distributor of an innovative copying technology may, in certain circumstances, qualify for a "safe harbor" from liability when its customers use the technology in ways that infringe on copyrights. If the technology has or could have substantial noninfringing uses, the manufacturer/seller has a substantially higher probability of not being held liable even if some or even many buyers misuse its technology to infringe on copyrights. However, the courts have declined to declare a magic number of substantial noninfringing uses that guarantee immunity from copyright infringement liability.

By not issuing definitive guidelines, the courts leave the creators of technologies with limited guidance on how to avoid liability for contributing to copyright infringement. The courts thereby make it more risky to attempt to circumvent the copyright laws and warn creators of copying technologies to proceed responsibly and with caution.

In the digital era, the contours of the Sony doctrine pose serious challenges to innovators wanting to market their wares without being held liable for infringement, even though they are also motivated by the knowledge that sales may be enhanced by the very opportunity to infringe that their products provide. Thus, what increased the anticipation of a decision in the Grokster case was the expectation that the Supreme Court would offer a clarification of the Sony doctrine.

Something more complicated happened instead. When the Supreme Court released its Grokster decision, it probably disappointed both sides, because it did not agree with either one's interpretation of the Sony doctrine. Moreover, after declaring erroneous the earlier interpretation provided by the Ninth Court of Appeals--that is, provided that a product is capable of substantial lawful use, the producer will never be held contributorily liable for third parties' infringing use of it--the Supreme Court decided to leave "further consideration of the Sony rule for a day when that may be required."

The line drawn in the Sony case that opened the vast possibility of safe harbors for any product "capable of substantial non-infringing uses" had been erased and redrawn, as one discovers by looking closely at the Grokster practices that the Supreme Court condemned.

So, where is that line now? For creators of innovative technologies, the line between liability and being at rest in a safe harbor was moved and remains imprecise. However, the Supreme Court opinion contains substantial guidance, although not expressed as such. The court emphasized that the "record is replete with evidence that from the moment Grokster...began to distribute" its software, it "clearly voiced the objective that recipients use it to download copyrighted works, and...took active steps to encourage infringement."

The court quoted an internal e-mail from a company executive stating: "We have put this network in place so that when Napster pulls the plug on their free service...or if the court orders them shut down prior to that...we will be positioned to capture the flood of their 32 million users that will be actively looking for an alternative." (Napster was a first-generation peer-to-peer file-sharing service that was shut down in 2001 after being sued by the music industry.)

The Supreme Court highlighted Grokster promotional materials that urged customers to consider the company's product as something to help them "get around" the closure of Napster and emphasized that the business models of the defendant companies "confirm that their principal object was use of their software to download copyrighted works." The Grokster defendants thus seemed to be aware that their actions took them perilously close to the line of unlawful conduct, and perhaps thought they could use the Sony doctrine's imprecision as an excuse or to make it seem that any violation was inadvertent. The court's recitation of evidence dispels that, and should be a warning to any creator of an innovative copy-making technology.

The court thereby provided a crisp checklist of dubious practices to avoid. It allows us to recommend that innovators give serious consideration to the following (offered not as legal advice but as prudent precautions):

Recognize that business models and plans (and any other internal correspondence) have the high potential to be read by unintended audiences--including trial judges and juries--who will hold the authors and their companies accountable for the intentions preserved in such records.

Review with counsel the kinds of expressions that can disqualify a company from the protections of the "staple article of commerce" defense and start training officers, directors, and engineers to give clear guidance on the kinds of expressions to avoid in business plans, advertising materials, and internal correspondence.

Recognize that the more senior the position held by a person in a company, the more accountable the company may be for what that person writes concerning its intentions, plans, and policies. As a result, there is a continuous need to remind senior officers and directors to view all internal correspondence as if it might be blown up as a large exhibit in a courtroom, where thoughtless expressions will appear as deliberate compositions and seemingly small ideas will be magnified.

Recognize that the courts are increasingly articulating what might be viewed as a duty to be wary of the misuse of one's inventions--which includes responding diligently when a company becomes aware of such misuse. This duty is perhaps best expressed by Judge Richard A. Posner of the U.S. Court of Appeals for the Seventh Circuit, in his opinion in a case holding Aimster, another file-sharing service, liable for infringing uses of its service: if the infringing uses of an innovative technology "are substantial, then to avoid liability as a contributory infringer the provider of [that technology] must show that it would have been disproportionately costly for him to eliminate or at least reduce substantially the infringing uses." [Emphasis added.]

To avoid such liability, include in the company's formal policies and procedures, and in training sessions, a firm and clear instruction that whenever the company becomes aware that its inventions or technologies are being used by customers to infringe on copyright-protected works, the company will quickly take measures to halt, limit, or otherwise mitigate the infringing activity and the damage done to copyright owners.

To place those factors in context, one need only highlight the Supreme Court's summary of its decision in the Grokster case: "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." [Emphases added.]

The Grokster court decision did not unleash on the engineering community any destructive beam from a Death Star, although many predicted that would be the result and some may claim it was the result. Instead, the court, as courts often do, proclaimed that it was not changing the law and then proceeded to change the law by moving the line established by the Sony doctrine. It drew a line that responsible companies may not always find easy to accept, because respecting it conflicts with pursuit of revenues.

It may also be necessary to reduce the chance of inadvertently creating evidence in the daily exchanges of e-mail, instant messages, and so on that people send and forget.

Rereading e-mail before sending it and reviewing business plans with your counsel before adopting them are not costly measures, but they can save a good company from the perils and exorbitant costs of litigation and the damage to reputations that litigation brings, even to those who prevail.

Companies have a duty to be wary when they develop technologies that could be used to infringe on copyrights. It is not a new duty, but it is an enhanced one under the Supreme Court's refinement of the Sony doctrine.