Alert: Supreme Court Scales Back Safe Harbor For Copyright Inducement In Grokster Case

July 01, 2005

In a decision of particular interest to both technology companies and the entertainment industry, the United States Supreme Court this week reversed the Ninth Circuit and found that the companies responsible for distributing the well-known Grokster and Morpheus file-swapping software can be held liable for the actions of those using the software to exchange copyrighted materials.  The Court’s decision in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., __ S.Ct. __, 2005 WL 1499402 (U.S. June 27, 2005) looks to be a watershed decision regarding the scope of secondary copyright liability that companies may face when their products are used by others to infringe copyrights.  Technology companies and other clients that market goods or services that could be used by third parties to infringe copyright will want to reassess their potential risks under this week’s decision.

Court Adopts A Narrow View Of Long-Standing “Betamax” Precedent

The respondents in the case – distributors of the popular peer-to-peer software programs Grokster and Morpheus – had obtained summary judgment in the lower courts after being sued by a group of copyright holders.  The copyright holders alleged that the respondents knowingly and intentionally distributed peer-to-peer software to enable users to reproduce and distribute copyrighted songs.  The respondents defended against these allegations by seeking safe harbor in the celebrated “Betamax” decision, Sony Corp. v. Universal City Studios, 464 U.S. 417 (1984), in which the Supreme Court had rejected secondary copyright liability for distributors of Betamax VCRs because such products were "capable of commercially significant noninfringing uses” and there was no evidence of intent to promote infringing uses of the VCRs.  The Betamax precedent has, for the last two decades, been the primary guidepost used by lower courts when trying to ascertain the appropriate scope of secondary copyright liability.  While this week’s decision left the Betamax decision intact as a legal precedent, the Court has now articulated a narrower view of the safe harbor it provides than some lower courts and legal commentators had expected.

In its unanimous decision, the Supreme Court rejected the notion that the distributors of Grokster and Morpheus could find safe harbor in the Betamax precedent.  The Court criticized the Ninth Circuit, which had affirmed the finding of no liability, for interpreting the Sony safe harbor too broadly.  As the Court explained, the Betamax precedent only “barred secondary liability based on presuming or imputing intent to cause infringement solely from the design or distribution of a product capable of substantial lawful use, which the distributor knows is in fact used for infringement.”  The safe harbor created by the Betamax decision does not, however, require courts to ignore independent evidence of an improper objective to cause or promote infringing use. 

No Safe Harbor Where There Is Independent Evidence Of Intent To Promote Infringement Of Copyright

Pointing to various examples of "statements or actions directed to promoting infringement" taken by the distributors of Grokster and Morpheus, the Court found sufficient independent evidence that the respondents had acted with the improper objective of promoting the infringement of copyright.  The Court apparently relied heavily on the existence of advertisements promoting the software’s ability to access popular copyrighted music, which internal documents showed were intended “to satisfy a known source of demand for copyright infringement, the market comprising former Napster users.”  The Court cited, as further evidence of unlawful objective, the fact that neither respondent had attempted to develop filtering tools to diminish infringing activity.  Also deemed relevant by the Court was the fact that the respondents’ business models were designed to generate advertising revenue from the high volume of infringing use.  The Court therefore ruled that liability could attach, vacated the summary judgment order, and remanded.  As the Court explained, “[h]ere, evidence of the distributors’ words and deeds going beyond distribution as such shows a purpose to cause and profit from third-party acts of copyright infringement.  If liability for inducing infringement is ultimately found, it will not be on the basis of presuming or imputing fault, but from inferring a patently illegal objective from statements and actions showing what that objective was.”    On remand, the district court will now conduct further proceedings to resolve plaintiff’s inducement claim, as well as other theories of secondary copyright liability not addressed by the Supreme Court’s ruling. 

Key Questions Remain In Wake Of Decision

There are several key questions in the wake of this week’s decision.  Because the Court’s resolution of the issues was fairly fact-specific, the decision does not leave technology companies or future innovators with many bright-line rules.  When promoting a product capable of infringing use, where does a company cross the line such that it becomes liable for the conduct of its customers?  Given the Court’s reliance on the respondents’ internal documents, business models, and failure to take technological steps to counter infringement as proof of unlawful objective, what best practices will help companies remain within the Sony safe harbor?  Technology companies and the entertainment industry will continue to struggle with these questions in the months to come. 

For more information about this or other intellectual property-related matters, please contact Jeff Fisher of the Farella Braun + Martel Intellectual Property and Technology Group.