Apple Rips While Grokster Burns: How MGM v. Grokster Benefits Information Technology Companies

By ANUPAM CHANDER AND MADHAVI SUNDER
Wednesday, Jun. 29, 2005

Leave it to Justice Souter, whom Justice Kennedy has described as a "member of the lead pencil club," to come to the rescue of digital technology.

This week's Supreme Court decision in MGM v. Grokster, penned (or penciled?) by Justice Souter, substantially reduces the risks faced by information technology companies as they innovate. Steve Jobs must be breathing a sigh of relief.

The Lawsuit: Hollywood Goes After Peer-to-Peer File-Sharing

In 2001, Hollywood studios, music publishers, and songwriters sued Grokster and some other file-sharing companies for copyright infringement. (Grokster offers software that ordinary people can use to share files--including copyrighted music or movies.)

The studios did not accuse Grokster of infringing copyrights directly--after all, Grokster did not copy any work itself. Rather, they accused Grokster of secondary copyright infringement, which can arise either because of "contributory copyright infringement" or "vicarious copyright infringement."

The Key Precedent: Sony and Its "Substantial Non-Infringing Uses" Language

Standing in the studios' way, however, was a hoary precedent--Sony v. Universal Studios. In that 1984 decision, Hollywood had badly failed in a previous attempt to accuse the maker of a new technology of secondary copyright infringement.

There, the new technology was the VCR. And in Sony, the Supreme Court gave the VCR its blessing. It said the maker of a device that, like the VCR, had "substantial non-infringing uses," could not be held liable even if it knew of widespread infringing uses of that device.

Peer-to-peer (P2P) file trading software also has substantial non-infringing uses: It can be used, for instance, by solo musicians, garage bands, and others who want to disseminate their work widely.

So did Sony mean that P2P software, too, was legal?

In Grokster, the studios urged the Court to say no. They argued for Sony to be interpreted narrowly, permitting only technologies whose "principal" use is non-infringing to avoid liability. And they contended the principal use (or, at least, the currently most popular use) of P2P software was copyright infringement.

Fortunately, the Court did not undermine Sony in the face of the studios' entreaties, and adopt the "principal use" test. Instead, it held steadfast to the idea of "substantial non-infringing uses."

The Risk for Apple: Why Even Steve Jobs Must Have Been Nervous

The stakes were high - many others, besides the few upstart peer-to-peer file trading services who were sued, would be affected.

Other digital technology companies, too, felt the pressure of Hollywood's lawsuit. If the Court accepted the studios' argument--or. worse, accepted the argument of some others who suggested that the Court do away with Sony entirely--these companies knew that they could well be next in the studios' line of fire.

Consider the iPod, Apple's much adored digital music player, which has probably singlehandedly revived the music industry. When the iPod was introduced, Apple simultaneously unveiled its iTunes music store, permitting legal downloads for $0.99 a song.

But most users, it turns out, did not fill their iPods with iTunes; they often used peer-to-peer software to fill them with illegal downloads instead. So if "principal" use means "currently most popular use," the principal use of an iPod has arguably been copyright infringement.

Thus, the studios' claim that Grokster abetted copyright infringement -- because it designed a product to permit infringement -- might have swallowed with it the music publishers' new favorite retailer, Apple.

Some Data Suggests iPods May Be Primarily Used to Infringe Copyright

And some of the numbers supported the claim that the iPod's primary use is infringement:

In an amicus brief submitted in the Grokster case, Harvard law professors offered some simple math to demonstrate this. They divided the number of iTunes songs legally downloaded (250 million, at the time they performed the calculation) by the number of iPods sold (10 million). The iPod thus has on average 25 songs purchased online.

Yet iPods famously hold thousands of songs, so the iTunes downloads accounts for a small fraction of their capacity.

What other ways can you load up your iPod with songs? Apple offers two:

First, you can "rip" songs from CDs that you insert into the computer - a legal use, at least if you've bought the CD at issue.

Second, you can copy songs in MP3 form that have been downloaded from peer-to-peer services like Grokster. The music that is distributed on peer-to-peer services often ends up on MP3 players like the iPod - and since much (but not all) of this music is illegally downloaded, it may follow that iPods are, in practice, largely stocked with illegal downloads.

Even worse for Apple was the fact that it might have engineered the iPod not to play MP3s, but it did not. Sony, by contrast, was more conscientious: Its Networked Walkman would not play MP3s when it was rolled out last year; rather the Walkman only permitted you to play songs purchased legally from Sony's website. But Sony hastily reconsidered that decision when it proved unpopular.

The Supreme Court Carefully Considered the Risk of Chilling New Inventions

The iPod, then, could have been at risk. And so were a number of yet-to-be-dreamed of technologies that might not effectively protect against illegal uses.

This risk was likely to chill invention. And the risk was coupled with an uncertainty: Sometimes, when a company is considering rolling out a new technology, only time will tell how that technology will be used in practice. If "principal" use was the test, and if it meant "most popular" use, a company would incur somewhat uncontrollable legal risk: Who knows which uses will prove popular?

No wonder, then, that the risk of chilling invention was very much on the mind of the Supreme Court Justices as they heard oral argument in the MGM v. Grokster case in March. Justice Breyer asked the studios' lawyer: "Are you sure that you could recommend to the iPod inventor that he could go ahead and have an iPod, or, for that matter, Gutenberg, the press?"

Imagine the scene in the Apple boardroom if the iPod were being rolled out today, and the studios had had their way in Grokster:

"Mr. Jobs, are you confident that this device you call an iPod will be used principally for legal songs? I might remind you, Mr. Jobs, that your 60 MB model holds 15,000 songs, costing $14,850 if purchased through iTunes. Do you expect Americans to hold out against the temptation to download illegally to the tune of thousands of dollars?"

The Risk for Information Technology Companies

The risk that was faced by Apple is endemic to information technology. That's because the fundamental characteristics of information technology facilitate copyright infringement.

In the digital world, copyright infringement is made possible by a computer processor, storage devices, and a communications medium. A Sony, Dell, or Toshiba laptop, with their built-in DVD burner, and Ethernet and wireless connections to the world, makes a near-ideal infringement tool.

And couple that with a super-fast (USB 2 or Firewire) connection to an MP3 player like an iPod, and you can copy entire libraries of material in minutes flat.

It is not surprising, then, that Intel, AT&T, BellSouth, MCI, SBC, Sun, and Verizon submitted briefs to the Supreme Court arguing against the rule proposed by the studios.

The Economist reports that more than half of the traffic flowing through broadband systems is peer-to-peer file trading, the bulk of which is illicit. This risk is one reason why telecommunications companies such as Verizon have obtained Congressional protection in the form of Title II of the Digital Millennium Copyright Act (DMCA), which insulates them from secondary copyright infringement liability. But clearly, even with the DMCA's insulations, broadband companies would still not have felt safe had the Court adopted the studios' rule.

What the Court Held

This week's Supreme Court decision in MGM v. Grokster leaves intact technology companies' ability to innovate.

The Court held unanimously that there was evidence that Grokster might have induced users to infringe copyright using its software. After Napster's demise, Grokster had promoted itself to Napster's users, most of whom were trading files illicitly, as an alternative. Grokster apparently even responded to requests by its users for help in locating and playing copyrighted material!

Given this evidence of inducement, the Court ruled that Grokster could not avail itself of the Sony safe harbor for products with substantial non-infringing uses. That exception to liability, it said, only applied in the absence of evidence of inducement.

Here's a simple cheat sheet to the decision, in the form a law student might outline the issue:

The Law of Secondary Liability (assuming direct infringement)

  • Contributory infringement
    • If no evidence of inducement, knowledge + material contribution Liability
      • But if substantial non-infringing use No liability (Sony)
    • If evidence of inducement Liability (Grokster)
  • Vicarious infringement

What the Court Did Not Say - and Why It Is Crucial

As important as what the Court said, is what the Court did not say.

The Court did not reinterpret Sony to apply only where the principal use was legal. This new test was what the studios most dearly wanted.

Also, the Court did not hold that a company could be liable because the product could have been designed differently to bar copyright infringement - as for instance, the iPod could have been, by being designed to bar MP3s.

The Court did note that the design of the software was relevant to a contributory infringement claim, but only when there is evidence of inducement.

What counts as inducement? Recall: Grokster courted Napster's users when that company was in legal trouble. Grokster apparently even helped users find files to illegally download.

If a company avoids Grokster-like inducing behavior, then even if its product is capable of both infringing and noninfringing uses, it will still be fine: According to the Court, it will not need to redesign its product to bar the infringing uses.

More precisely, the Court held that there would be no contributory infringement claim in such a case. One hurdle remains: In Grokster the Supreme Court mentions, but does not discuss, the possibility of vicarious liability, leaving this claim a potentially loose cannon in the music industry's arsenal. Yet, vicarious liability seems not to fit Grokster, which because of its decentralized structure hardly supervises infringement, as vicarious liability would require.

Grokster's Future -- and That of File-Sharing in General

After this, is there any way Grokster can survive in anything like its present form? Unlikely.

Given the Court's strong language describing the allegations of inducement by Grokster, the future does not look bright. The Court said that the record is "replete with evidence" that Grokster induced infringement.

The Court accordingly sent the case back to the lower courts for reconsideration. The upshot? While Grokster might reinvent itself as a service for legal downloads or reach another compromise with the studios, it might equally go down in flames.

But that would not mean the end to file sharing. As long as a company does not induce infringement, it can avoid liability. So an indie band/garage band P2P site can still flourish on the basis of welcoming free, licensed distribution. But it would be well-advised to post policies that are anti-illegal downloads, and to decline to help users who are bent on downloading illegally.

Then, even if the site is used, in practice, for illegal downloads, a contributory infringement claim still would fail, due to the substantial non-infringing uses: the licensed distribution of MP3s some bands want to get into listeners' iPods free of charge.

Information Technology Companies' Future

Some worry that the Court's new inducement standard will stifle innovators because they might not have a clear sense of the standards for inducement. The worry is intensified because the Court's unanimous opinion is clouded by its two concurrences, with three justices arguing for interpreting the Sony exception to liability strictly, and three others arguing for a broader interpretation.

Fortunately, though, Justice Souter's opinion stands on its own as the governing rule. Yes, companies will have to worry that they are inducing infringement, but they should not have to worry too much, for the line Souter draws is more than tolerably clear: Inducement requires a "clear expression or other affirmative steps taken to foster infringement." And it "does not include ordinary acts incident to product distribution," such as product updates or technical support.

After the Grokster decision, information technology companies today are freer to innovate. They no longer face the risk of a substantial reworking of the Sony standard - the one that favored technologies with substantial noninfringing uses, ranging from the VCR to the iPod to P2P software (when not accompanied by inducement).

That means that Steve Jobs, or someone else in a garage or a boardroom, is now freer to invent the next iPod.


Anupam Chander is a Professor of Law specializing in cyberlaw at the University of California, Davis. His blog on law and technology appears at www.Chander.com. Madhavi Sunder is also a Professor of Law, specializing in intellectual property at the University of California, Davis.