File-Sharing Firms Can Be Held Liable

For these reasons, the U.S. Court of Appeals for the 9th Circuit in August threw out the MGM suit against Grokster and StreamCast Networks Inc., which operates Morpheus.

But the Supreme Court said yesterday that the 9th Circuit mistakenly applied the Betamax precedent. In this case, it said, strong evidence exists showing that Grokster and StreamCast were created to exploit, and then encouraged, illegal trading.

"The record is 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 David H. Souter wrote in the unanimous opinion.

The court sent the case back for trial, ruling that the Betamax decision did not provide cover for firms if they induce piracy or build their businesses around it.

But the court stopped short of granting the entertainment industry's push to refine the Betamax standard. The industry had argued that liability should be determined based in part on how much a product was being used for illegal purposes.

"We do not revisit Sony further, as MGM requests, to add a more quantified description of the point of balance" in determining when product makers should be held responsible, the court said.

Nonetheless, the entertainment industry declared the ruling a major victory.

Invoking another court ruling yesterday involving display of the Ten Commandments, Mitch Bainwol, head of the Recording Industry Association of America, said the court affirmed the notion that "thou shalt not steal."

Bainwol said parents should tell their children that "there's a right way, and a wrong way" to get music online and that the right way is using for-pay or subscription services such as Apple Computer Inc.'s iTunes or RealNetwork Inc.'s Rhapsody.

File-sharing executives, consumer electronics makers and some digital-rights advocacy groups condemned the decision.

"Today the Supreme Court has unleashed a new era of legal uncertainty on America's innovators," said a statement by Fred von Lohmann, a senior attorney with the Electronic Frontier Foundation, which represented the file-sharing firms. "The newly announced inducement theory of copyright liability will fuel a new generation of entertainment industry lawsuits against technology companies. Perhaps more important, the threat of legal costs may lead technology companies to modify their products to please Hollywood instead of consumers."

Many new products allow consumers to copy music and videos in new ways and move them to different locations and devices, often prompting objections from the entertainment industry.

Michael Weiss, chief executive of StreamCast Networks, said his company also would prove in trial that the allegations of inducing illegal behavior are groundless.

But associations representing many large technology firms, which had urged the court not to weaken Betamax protections, said the court struck the right balance.

Companies such as Microsoft Corp., Intel Corp., America Online Inc. and others had recommended that the court send the case back for trial on the narrow issue of whether Grokster and StreamCast encouraged piracy.

Attorneys specializing in intellectual property said they would advise clients with new products to consider how their technology might be used, even if they were not openly encouraging piracy.

"The court is sending a message that you can't just do nothing," said Georges Nahitchevansky, a New York attorney.