Grokster to stop distributing file-sharing service

WASHINGTON (Hollywood Reporter) - Hollywood and Grokster ended their legal war Monday as the recording and movie industries and the peer-to-peer service agreed to settle a lawsuit that went all the way to the U.S. Supreme Court.

According to the settlement agreement, Grokster will shut down its infringing service, is permanently banned from participating directly or indirectly in the theft of copyrighted files and requires the company to stop giving away its software. It also includes a payment of $50 million.

While lawsuits against other P2P services like Kazaa continue, the injunction against the lead party is a significant move.

"This settlement brings to a close an incredibly important chapter in the history of digital music," Recording Industry Assn. of America chairman Mitch Bainwol said. "This is a chapter that ends on a high note for the recording industry, the tech community and music fans and consumers everywhere. At the end of the day, this is about our ability to invest in new music. An online marketplace populated by legitimate services allows us to do just that."

The settlement includes a permanent injunction prohibiting infringement, directly or indirectly, of any of the plaintiffs' copyrighted works. This includes the immediate cessation of the distribution of the Grokster client application and the cessation of operation of the Grokster system and software, according to a music industry release.

After the settlement was announced, the Grokster.com site carried a warning that the Supreme Court "unanimously confirmed that using this service to trade copyrighted material is illegal." The site includes links to http://www.Respectcopyrights.com and http://www.Musicunited.org, entertainment-industry supported sites that support intellectual property rights. The Web page also said: "There are legal services for downloading music and movies. This service is not one of them."

Motion Picture Assn. of America president and CEO Dan Glickman said the court made clear what the boundaries are.

"The Supreme Court in its ruling sent a strong and clear message that businesses based on theft should not and will not be allowed to flourish," Glickman said. "The clarity of the court's decision combined with this settlement provides the content and technology sectors a window of opportunity which I think ultimately will greatly benefit consumers."

David Israelite, chairman and CEO of the National Music Publishers Assn., said the settlement helps clear the way for more legitimate services to flourish.

"The Grokster verdict has spurred growth and innovation for legal music services, including a legitimate peer-to-peer market," he said. "Now that a legal online entertainment environment has been established, the ultimate winners in the Grokster case are the music fans, who now have more options than ever before to hear the music they love."

The case put an indelible stamp on the rules that control the distribution of copyrighted works on the Internet. It was the biggest copyright case decided by the court since its 1984 decision that Sony Corp. could not be sued if consumers used VCRs to make illegal copies of movies.

Writing for the court, Justice David 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 Grokster's argument that legal uses of the service were important enough to override copyright concerns because very few people use the services for benign uses.

"While there is doubtless some demand for free Shakespeare, the evidence shows that substantive volume is a function of free access to copyrighted work," he wrote. "Users seeking top 40 songs, for example, or the latest release by Modest Mouse are certain to be far more numerous than those seeking a free 'Decameron,' and Grokster and StreamCast translated that demand into dollars."

The Supreme Court's June ruling in MGM v. Grokster sent the case back to the district court for trial, but apparently Grokster didn't have the stomach for the fight as Monday's action ends the case.

The court said Grokster and another firm, StreamCast Networks Inc., can be sued because they deliberately encouraged customers to download copyrighted files illegally so they could build a larger audience and sell more advertising. Souter said the companies' "unlawful objective is unmistakable."

"Grokster's out of business," said Charles Baker, a lawyer for StreamCast. "It's over for them. There was a lack of desire to continue to fight this thing going forward." Baker said the settlement does not affect StreamCast, the co-defendant in the entertainment industry's lawsuit.

The Supreme Court noted as evidence of bad conduct that Grokster and StreamCast made no effort to block illegal downloads, which the companies maintained wasn't possible.

The Grokster name will continue as a new fee-based version of its software, which will permit only legal downloads and will be available soon from a new parent organization.

"It is time for a new beginning," Grokster Ltd. said in a statement from the company's Nevis, West Indies, headquarters. "While today marks the end of the Grokster of old, we hope to have a new, next-generation Grokster -- a lawful service that respects copyright -- available soon."

Grokster's decision was not expected to affect Internet users who already run the company's file-sharing software to download music and movies online, nor was it expected to affect users of rival downloading services, such as eDonkey, Kazaa, BitTorrent and others.

Wayne Rosso, the former Grokster president who headed the company when its legal battles with Hollywood first began, said he predicted that the legal fight would take its toll on Grokster, but he also noted that the genie is out of the bottle, so to speak, as far as the distribution services that P2P offers consumers.

"In the second generation of P2P it's all decentralized, so there's no way you can cut off the millions of users who are already out there," said Rosso, now chairman of legitimate P2P distribution service Mashboxx. "Grokster has agreed to stop distribution of its software client, so it won't make anything new available until it complies with the demands of the industry."

Reuters/Hollywood Reporter