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High Court: P2P Services May Be Sued for Infringement

Record sales and the box office might be down, but Hollywood's hope to stem wholesale theft of its products got a big boost June 27 as the U.S. Supreme Court ruled that file-sharing companies are responsible if they aid and abet copyright theft. The 9–0 decision in MGM v. Grokster sets up a new court battle between the studios and the file-sharing services, as the justices ruled that there is enough evidence for a trial to determine whether Grokster Ltd. and StreamCast Networks Inc. induced people to steal songs and movies.

"We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by the clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties," Justice David Souter wrote for the court.

Executives and attorneys with the studios and record companies said the unanimous opinion gives them plenty of ammunition to win when the case is heard in the district court. "The most striking feature is that it was 9–0," Record Industry Association of America president and CEO Mitch Bainwol said. "This is a court that can't agree on what to have for lunch, but they agreed that copyrighted works are worthy of protection."

Don Verrilli, the attorney who argued the case before the court, pointed to the last paragraphs of the court's opinion as evidence that the copyright industry is likely to prevail. "There is substantial evidence in MGM's favor on all elements of inducement, and summary judgment in favor of Grokster and StreamCast was [in] error," Souter wrote. "On remand, reconsideration of MGM's motion for summary judgment will be in order."

Two lower courts had ruled in Grokster's favor without holding a trial, each basing the decisions on the 1984 Supreme Court ruling that Sony Corp. could not be sued over consumers who used its VCRs to copy movies.

The lower courts said P2P services were just the latest technological incantation of the VCR and are legal because of such "substantial noninfringing uses" as giving away free songs, free software, or government documents. They also said the file-sharing services were not legally responsible because they don't have central servers pointing users to copyrighted material.

But in the June 27 ruling, Souter said lower courts could find the file-sharing services responsible by examining such factors as how companies marketed the product or whether they took easily available steps to reduce infringing uses. He dismissed the idea that such legal uses as downloading the Bible or Shakespeare's plays were important enough to override copyright concerns.

"While there is doubtless some demand for free Shakespeare, the evidence shows that substantive volume is a function of free access to copyrighted work," Souter wrote. "Users seeking Top 40 songs, for example…are certain to be far more numerous than those seeking a free Decameron, and Grokster and StreamCast translated that demand into dollars."

The court's ruling was not a total loss for P2P companies, as their executives, attorneys, and officials with fair-use groups contend they can muster the evidence to win at trial.

"On first reading we think that we will have the evidence to dispel the inference that the entertainment companies have a right to prove that the Supreme Court said there was sufficient liability," said Richard Taranto, who argued the case for Grokster and StreamCast before the court.

Instead of clearing up the liability issue, the court just muddied the water, Taranto said.

"The court has now given as precedent to the whole world of digital technologies a very difficult road map to follow," he said. "It has said to the Intels and others of the world, 'We have a multifactor standard that you can't, in advance, be terribly sure how it will apply to you.' While the immediate impact of the decision for the future of our case is not clear, I think the immediate impact for the technology industry as a whole will immediately be seen as a chilling one."

StreamCast CEO Mike Weiss said the court's opinion would have little impact on what he was doing. "We'll have another day in court—make that several other days in court," he said. "The David versus Goliath battle will continue, and we're staying in this for the fight."

P2P advocates contend that the decision mistakenly puts the entertainment industry in the position of technology overseer. "The decision seems somewhat Orwellian," said Matthew Neco, general counsel for StreamCast. "The copyright and entertainment industries now become the thought police. The guy in the garage, the gal in the executive suite had better be very sophisticated about what they think—let alone what they communicate to each other or what they communicate to their customers. Their every thought, their every action will now be subject to discovery and expensive litigation."

But entertainment industry executives disputed that notion, saying that instead of strangling innovation, the ruling will breathe new air into entertainment-delivery technology.

"I think it'll have the reverse effect," Motion Picture Association of America President and CEO Dan Glickman said. "I think it will inspire technology because it will establish clarity on what is right and what is wrong. It will certainly be a foundation for new technology on the creative side of the picture because artists will know they can begin the process of writing music or writing screenplays without fear their product will be stolen off the Internet."

The decision was applauded by entertainment industry executives and artists nationwide. "We will no longer have to compete with thieves in the night whose businesses are built on larceny," said Sony BMG CEO Andrew Lack. "Today's unanimous decision is a resounding victory for both creative content industries and technologists who together are trying to develop legitimate businesses on the Internet."

That sentiment was echoed by Doug Morris, chairman and CEO of Universal Music Group. "It should now be clear to everyone that the rights of creators and copyright holders deserve meaningful—and not merely symbolic—protection under the law," he said. "Piracy does not become acceptable merely because it is cloaked within innovative technology. Cooperation between the creative and technology interests is crucial to unlocking the vast cultural and economic promises of the digital revolution, and we look forward to continuing those efforts."

Several entertainment industry unions—Screen Actors Guild, the American Federation of Television and Radio Artists, the Directors Guild of America, the Writers Guild of America (West), and the American Federation of Musicians—released a joint statement praising the decision. "Today a clear and unmistakable message has been sent—that work created by our members deserves the same basic financial protections as every other product in the marketplace," the statement read. "Unauthorized file-swapping of copyrighted material is property theft, plain and simple, and this theft destroys the very protections that allow our members to sustain a career and provide for their families…. Today's decision marks an economic and creative victory for every creator whose livelihood has been threatened by the blatant copyright infringement running rampant on peer-to-peer sites across the Internet. What is most important about it is the determination that just because something can be distributed freely does not mean that it is free, and that the financial rights of creators and copyright holders can no longer be ignored."

The decision also pleased lawmakers from both sides of the aisle and both coasts.

"There can be a future for peer-to-peer networks as long as they uphold copyright protections," Reps. Steny Hoyer, D-Md., and Mary Bono, R-Calif., said in a statement. "However, while we have a healthy debate on how to reconcile intellectual property laws in the face of new technologies, our government first must protect intellectual property rights."

Artists from rappers to Christian rockers described the decision as a win for them.

"This is a great victory for artists, songwriters, and all of those who make their living through the creative process," rapper Jay-Z said in a news release supplied by the RIAA.

Said Christian musician Nichole Nordeman, "The Supreme Court has given a voice to countless individuals like me who make their living in the creative arts and are constantly jeopardized by the epidemic of illegal downloading. Their decision is an important victory for us...and a clear warning for many others."

Although the case goes back to the district court, Washington isn't quite ready to give it up. Sens. Ted Stevens, R-Alaska, and Daniel Inouye, D-Hawaii, the chairman and senior Democrat on the Senate Commerce Committee, said they plan to review the decision, as did Sen. Arlen Specter, R-Pa., chairman of the Senate Judiciary Committee.

RIAA's Bainwol said the entertainment industry is unlikely to seek new laws on the matter, but Consumer Electronics Assn. vp Michael Petricone said they are weighing their options.

While the court case pitted technological innovators against the entertainment industry, the decision could push the opponents to find common ground. Most entertainment industry executives held out an olive branch to P2P companies.

"As a music company, we fully understand that our ultimate success lies not in preventing people from getting what they want but in providing it to them in new and exciting ways," said Edgar Bronfman Jr., chairman and CEO of Warner Music Group. "We must strike a balance, one that nurtures technological innovation while at the same time protecting the very content that inspires innovation in the first place. This important decision will allow artists and the creative community to prosper side by side with the technology industry."

A similar statement was issued by Hewlett-Packard. "The entertainment and technology industries must work together to apply content protection through interoperable technologies and fair business models that respect copyright laws, reward content owners, and deliver new entertainment experiences consumers want and are willing to pay for," the company said. "Technological innovation is key to enabling these new business models. Consumers will ultimately be the benefactors of a successful marriage of entertainment and technology; consumers have proved they are willing to pay for content when it's provided in the form and format they want."

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