The MGM v. Grokster case has generated some interesting press coverage since the U.S. Supreme Court weighed in on the latest issue of peer-to-peer file sharing.  While the Supreme Court's decision in Grokster does not spell the death of peer-to-peer file transfers, it could have a significant impact on other commercial peer-to-peer services while providing a boost to licensed services.

In the Grokster case, a group of record and motion picture companies, lead by MGM, sued the peer-to-peer facilitators Grokster and StreamCast (the providers of the Morpheus file sharing software) for facilitating violations of the Copyright Act perpetuated by Grokster's and StreamCast's users.  For purposes of this article, Grokster and StreamCast will just be referred to as "Grokster."  Grokster created software that allowed the easy and fast transfer of almost any type of digital file, although most users used it to illegally download copyrighted music and movies.  Unlike Napster, Grokster did not maintain any central registry of files.  The music industry (through the Recording Industry Association of America) and the movie industry (through the Motion Picture Association of America) has been pursuing large-scale illegal downloaders directly for some time now.  By contrast, in this case, MGM and the other plaintiffs did not accuse Grokster of infringing copyrights directly, but instead accused Grokster of contributory and vicarious infringement; that is, MGM attempted to hold Grokster responsible for the copyright infringements of its users.

Grokster believed that it had a solid defense to the claim–namely, the U.S. Supreme Court's 20 year old decision in the Sony v. Universal Studios case, wherein similar claims were made by the movie industry, claiming that the manufacturer of the VCR should be held liable for the copyright infringements of users of the VCR.  In that landmark case, The Supreme Court held that Sony could continue to manufacture and sell the VCR because the VCR had "substantial non-infringing uses."  The court reasoned that Sony could not be held liable for the actions of its customers, even if it knew of widespread infringing uses of that device, because the device itself has substantial non-infringing uses.

Grokster claimed its software also has substantial non-infringing uses; namely, to transfer non-copyrighted files or to transfer the music and movies of new bands and filmmakers, eager to get their products in the hands of consumers, who had authorized such file transfers.  In fact, when end-users downloaded the Grokster software, they were required to agree to the terms of Grokster's End User License Agreement.  That EULA contained the following language:

"1. Violation of Copyright and Other Laws When Using Grokster

PLEASE NOTE THAT GROKSTER RESPECTS THE RIGHT OF COPYRIGHT OWNERS AND IS FULLY COMMITTED TO PROTECT THEIR RIGHTS. GROKSTER EXPECTS ALL GROKSTER DESKTOP USERS AND GROKSTER WEB SITE USERS TO DO THE SAME. WE, THEREFORE, ASK YOU TO PAY SPECIAL ATTENTION TO AVOID VIOLATING COPYRIGHT LAWS AND REGULATIONS. AS A CONDITION TO USE THE GROKSTER PRODUCTS AND SERVICES, YOU MUST AGREE THAT YOU WILL NOT USE GROKSTER TO INFRINGE THE INTELLECTUAL PROPERTY OR OTHER RIGHTS OF OTHERS IN ANY WAY. UNAUTHORISED COPYING, DISTRIBUTION, MODIFICATION, PUBLIC DISPLAY, OR PUBLIC PERFORMANCE OF COPYRIGHTED WORKS IS AN INFRINGEMENT OF THE COPYRIGHT HOLDERS' RIGHTS….YOU ARE HEREBY PUT ON NOTICE THAT YOU ARE ENTIRELY RESPONSIBLE FOR YOUR CONTENT AND FOR ENSURING THAT IT COMPORTS WITH ALL APPLICABLE LAWS, INCLUDING ALL COPYRIGHT AND DATA-PROTECTION LAWS. IN CASE YOU FAIL TO COMPLY WITH LAWS REGARDING COPYRIGHTS OR OTHER INTELLECTUAL PROPERTY RIGHTS AND DATA-PROTECTION, YOU MAY, BY THE RELEVANT AUTHORITIES, BE EXPOSED TO CIVIL AND CRIMINAL LIABILITY, INCLUDING FINES AND JAIL TIME."

Accordingly, Grokster argued, the Sony case protected them from vicarious or contributory infringement liability, even if it knew of widespread infringing uses of the software.  On the other hand, MGM wanted the Supreme Court to interpret Sony in a more restrictive manner, asking that only devices whose "principal" use is non-infringing to avoid liability.

The Supreme Court disagreed with both of the parties and crafted a different exception to the "substantial non-infringing uses" doctrine first enunciated in the Sony case.  The Supreme Court was not persuaded by the self-serving language in the Grokster EULA and stated that the evidence supported the fact that Grokster had induced its users to infringe the copyrights by targeting the audience of former Napster (a peer-to-peer provider that used different technology) customers after Napster was shut down following the holding that it had infringed by not only providing peer-to-peer software but by maintaining a central server with the infringing materials (Napster has since been "reborn" as a legitimate pay music service and is now owned by BMG, one of the major record companies).  The Supreme Court also discussed Grokster's name (derived from Napster) and the fact that Grokster customer support helped its customers find copyrighted material.  In other words, notwithstanding the language contained in the EULA, the Court held that the record contained ample evidence that Grokster had induced the infringement and felt that Grokster actions spoke louder than the words contained in the EULA.

The Supreme Court determined that because Grokster induced its customers to violate other's copyrighted material, the Sony protection for devices that have substantial non-infringing uses did not offer protection.  Stated simply, if a company makes a device that is capable of widespread copyright violations, and then induces its customers to use it to commit copyright violations, the company can't look to Sony for protection.

So what does this mean for the future peer-to-peer networks?  File sharing over peer-to-peer networks is still alive, but will take a different shape in the future.  Grokster will most likely go down in flames because of the fallout of this case, but other peer-to-peer networks that do not induce their users to commit violations may very well be protected by Sony.  In a sense, the Grokster case developed a legal road map for the next generation of peer-to-peer networks to follow.  However, it appears to us that it will be difficult for any commercial peer-to-peer service (i.e., one that relies on advertising revenue as opposed to revenues from legal downloads) will be able to thrive without running afoul of the new "inducement" standard announced by the Court in Grokster.  Without attracting sufficient traffic to the peer-to-peer site by offering a means of downloaded copyrighted works for free, the site itself may not be profitable enough to sustain itself because it will not be able to generate large advertising revenues.  Thus, those interested primarily in enabling large scale file sharing without a profit motive may continue to operate.

Contrary to some of the statements reported in the press immediately following the decision, we believe that the decision will not have a negative impact on hardware technology providers (such as Sony), but will, in fact, have a positive impact on current legitimate pay services such Sony's Sony Connect and the now legal Napster.  Further, it may serve to increase competition between these and other legitimate services and drive prices downward for consumers while providing for a greater variety and availability of music and movies.  As broadband connectivity becomes more widespread, legal downloading will likely become a very common means by which consumers purchase music, movies, books, video games and other entertainment.