File-Sharing Firms Can Be Held Liable
Ruling Aids Entertainment Industry

By Jonathan Krim
Washington Post Staff Writer
Tuesday, June 28, 2005

The nation's largest media, entertainment and communications companies, often under siege by Internet-based upstarts, won a measure of relief yesterday in two Supreme Court rulings that will help define how people can go online and what they can do once they get there.

In a unanimous ruling, the court found that distributors of popular software for sharing of music and videos online can be held responsible for theft if they encourage or induce their users to illegally swap copyrighted works.

The decision hands movie and recording studios a sharper legal weapon in their campaign to try to shut down file-sharing systems that enable hundreds of millions of consumers around the world to bypass retail outlets by electronically swapping music, videos and software programs.

In a separate decision yesterday, the court ruled 6 to 3 that cable-television operators do not have to open their high-speed Internet lines to rival providers of online access. The decision affirms the Federal Communications Commission's largely hands-off strategy for managing the growth of the Internet as it becomes the backbone of the U.S. economy.

In both cases, the court effectively reinforced private or corporate ownership in the face of technologies that relentlessly challenge those boundaries. To the digital age's often-heard cry that information wants to be free -- or at least more democratically provided -- the court offered a resolute no.

"At some level, the court in these cases came down on the side of property over others who wanted to use it," said Paul Gallant, a policy analyst with investment broker Stanford Washington Research Group who served as a legal adviser to then-FCC Chairman Michael K. Powell.

In the cable-access case, the court affirmed FCC policy that companies that own the pipes that feed high-speed Internet access into homes should not be forced to share them with rivals. The FCC is examining similar rules for telephone companies for their high-speed digital subscriber line, or DSL, service, sparking fear among consumer groups and small Internet providers that online access will soon be limited to a duopoly of cable and telephone providers in most communities.

But no technology has been as potent in threatening established interests as peer-to-peer software. Nor has an Internet case attracted as much attention from across the corporate world as the case decided yesterday, MGM Studios Inc. v. Grokster Ltd.

In recent years, the major movie studios, music labels and software companies say they have lost billions of dollars in sales to illegal swappers using software distributed by Grokster, Kazaa, Morpheus, LimeWire and others.

While the entertainment industry successfully sued thousands of individual file-traders, it largely failed in efforts to punish file-sharing providers for the actions of their users.

Lower courts had ruled that under a landmark Supreme Court decision in 1984, distributors of technologies could not be held liable for illegal acts by customers if the technology has "substantial" legal uses. That case involved Sony Corp.'s Betamax video recording machine.

Moreover, the file-sharing providers argued they could not exercise control over their users, since the software connects them directly to one another.

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.

© 2005 The Washington Post Company