At the end of June, the US entertainment industry won a long fought victory to help bring file swappers to heel. Since the US Supreme Court case that shut down Napster in 2001, some of the biggest companies in the film and music entertainment industry have battled to stop Napster's peer-to-peer progeny, companies such as Grokster and Streamcast, setting up systems that allow users to continue to obtain unauthorised copies of music files with no payment to the artists or the copyright owners of the music. Napster was found liable as all file swapping occurred through its central servers thus giving Napster the ability to prevent illegal activity and by not doing so, it was found to have abetted copyright infringement. This led to the development of systems like Grokster and Kazaa which use "don't ask" decentralised systems in which a peer was able to swap files with another peer but not through any centralised server thus removing the possibility of the software system supplier being found liable for illegal activity under the same principles that decided the Napster case.

Sony Betamax decision

Under copyright law (both in the UK and the US), a person commits an offence if they make an article which is designed or adapted for making copies of a particular copyright work thus enabling copyright infringement. In 1984, the US Supreme Court in a landmark ruling decided that Sony had adequately demonstrated that its Betamax video cassette recorders and video tapes were capable of non-infringing uses sufficient to protect it from the claims of enabling copyright infringement. The entertainment industry had claimed that in making the Betamax, Sony was responsible for facilitating the illegal acts of its customers some of whom used the Betamax to make illegal copies of movies. This Sony Betamax decision is still the benchmark for these facilitation-type decisions and was discussed in detail in the current US litigation.

MGM v Grokster

The 28 companies that represented the entertainment industry in the current action against Grokster and Streamcast lost the two previous rounds of their cases in the US District Court and the Ninth Circuit Court of Appeals. On the basis of the precedent set by the Sony Betamax decision, the US courts in those two cases dismissed each case summarily as the peer-to-peer networks could be used for legitimate lawful uses as well as to facilitate copyright infringement. In addition, the courts held the distribution of software alone did not provide the distributors with actual knowledge of specific acts of infringement. Therefore, distributing a product capable of substantial non-infringing uses could not give rise to contributory liability on the part of Grokster or Streamcast despite the illegal acts of some of its users. The parties representing the entertainment industry were then granted leave to ask the US Supreme Court to examine and interpret the scope of the Sony Betamax decision in light of the claims brought by the entertainment industry.

In examining the relevant law, the US Supreme Court handed down a decision stating:

  • a party contributes to infringement by intentionally inducing or encouraging direct infringement and infringes vicariously by profiting from direct infringement while declining to limit or stop it (although the court was not unanimous in how far actions need be taken to constitute inducement or encouragement);
  • the lower courts had misread the Sony Betamax decision to mean that where the device was capable of substantial non-infringing use, the maker could not be liable for unlawful uses unless they had specific knowledge of the unlawful acts and failed to prevent them. The Sony decision did not remove all possibility of secondary liability; and
  • on the facts presented, there is sufficient evidence that Grokster and Streamcast may have acted unlawfully by inducing users to infringe copyright by looking at how the companies marketed the product, derived profits from the product and the (lack of) steps taken to prevent infringement.

Next steps

The case has been sent back to the lower court for a full hearing on its facts to decide whether Grokster and Streamcast are guilty of contributing to copyright infringement by inducing users of their networks to do so. This hearing will rely on the US Supreme Court's decision to help it interpret the facts and the legal consequences of those facts. The decision of this next case will be extremely important in setting out examples of what actions can be defined as overt acts of inducement necessary to satisfy the requirements for contributing to copyright infringement under the newly-tightened Sony Betamax decision principles. It may be that software distributors may merely need to find a way to bypass the new legal framework by extending the "don't ask" policy to one of "don't sell".

Impact of finding

Since the finding, the US records industry through the Recording Industry Association of America ("RIAA") has continued to file complaints against end users of peer-to-peer software by filing some 784 complaints in the same week the finding was handed down. The British Phonographic Industry ("BPI"), a similar industry body that represents the music industry and protects copyright owners against music piracy in the UK, has reportedly recovered nearly £70,000 from illegal file-sharers as part of its recent strategy to target the 90 worst known file-sharers. One of its latest targets was a computer-illiterate mother whose 14-year-old daughter illegally downloaded music from the internet. So far, each file-sharer has paid an average £2,600 fine to the BPI.

In addition, shortly after the finding was handed down, Sony BMG entered into a licensing arrangement with file-swapping service iMesh (one of the most popular file swapping services post Napster) and iMesh is currently negotiating with other record companies such as Universal Music Group. Negotiating with the record companies is not new. Sean Fanning, founder of the original Napster was one of the first to do so in the wake of Napster being forced to shut down by the US Supreme Court in 2001. Fanning went on to found Snocap, a company aimed at providing infrastructure to turn unauthorised downloads on peer-to-peer networks into legitimate, non-copyright infringing sales. Napster itself was bought out to be a pay for legitimate downloads service which relaunched in a worldwide marketing blitz this year. Another example is Mashboxx, a peer-to-peer company which is expected to go live shortly. Mashboxx was created in partnership by Sony BMG and Wayne Rosso who used to run Grokster (but left before the current court actions). Of course, the most high profile legitimate music distributor of all at the moment is Apple's iTunes. After the US Supreme Court's recent finding, there continues to be increasing motivation for peer-to-peer network operators to ensure legitimate use of their file networks.

It remains to be seen whether a similar action to that brought in the US will be launched by the UK entertainment industry against UK peer-to-peer system operators although such an action appears to be likely given the recent success of the entertainment industry in the US. In which case, it is highly possible the US finding may influence legal thinking in the UK and therefore, UK peer-to-peer operators and users should be re-examining their current business and marketing plans and practices and perhaps instituting their own business policies of "don't ask" and "don't sell".

Anna Feros is a solicitor with commercial law firm Shepherd and Wedderburn. 020 7429 4948.

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