9th Circuit

It's been a bumpy ride on the information super-highway for many file-sharers in the past few years. The tug-of-war between individuals who download music, movies and TV shows and those who create the copyright material seemed endless--not only for those involved, but also for the many courts that have struggled to provide a semblance of balance and fairness for each side.

In June the Supreme Court finally had its say--dealing a blow to the makers of file-sharing software by unanimously deciding in MGM v. Grokster that companies that encourage Internet users to illegally download copyright material should be held liable for their actions. It sent the case back to district court for trial.

Justice David H. Souter wrote for the court, "We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by the clear expression or other affirmative steps taken to foster infringement, is liable for resulting acts of infringement by third parties."

This decision, many experts believe, creates a new theory of liability that will significantly increase litigation against technology companies both inside and outside the entertainment industry, as well as stifle technological advancement.

"This is a dangerous precedent for technology companies," says Bill Rosenblatt, president of GiantSteps Media Technology Strategies, a media technology consultancy. "It seems to have more to do with how technologies are marketed than what they actually do."

A New Theory

MGM, the Recording Industry Association of America (RIAA) and several other entertainment companies filed suit in 2002 against two companies that make file-sharing programs--Grokster and StreamCast--claiming their products gave Internet users the ability to illegally download copyright material. A district court in California decided in the defendants' favor in 2003, citing the landmark 1984 Sony Betamax case, which legitimized consumers' rights to make private recordings of copyright material. Through appeals by both sides, Grokster ultimately landed at the Supreme Court.

But when making its decision in the case, the High Court chose not to consider the Betamax, claiming that precedent doesn't require courts to ignore evidence of intent to promote infringement if such evidence exists. Therefore, the court said the case should turn on whether Grokster and StreamCast intentionally encouraged users to illegally download copyright material by the way they marketed their products. They charged the district court with making that determination at trial.

Under this new theory of liability, experts believe companies that develop new technologies of any kind could potentially face lawsuits that would cost millions of dollars to defend.

"America's entire innovation sector is going to now face a serious copyright liability," says Fred von Lohmann, senior staff attorney for the Electronic Frontier Foundation, an organization that promotes freedom of expression in digital media. "By focusing on intent, the Supreme Court has opened the door to lawyers asking to see the notes from engineering meetings, the plans of marketing developments and the e-mails of technology company executives. That is a very expensive threat for technology companies to face."

And it could put small technology companies that don't have the budget to finance such litigation out of business completely.

"This decision is somewhat Orwellian in that it seems the entertainment industries have now become the thought police," says Matthew Neco, general counsel of StreamCast. "The guy in the garage [creating a new technology] and the girl in the executive suite [marketing it for him] better be very sophisticated about what they think, let alone what they communicate to each other and their customers, because their every thought and their every action will now be subject to discovery and expensive litigation."

Additionally, file-sharing proponents are concerned this decision could potentially stifle new technological innovations.

"As a technology industry, we now exist in a highly competitive world," says Michael Pettricone, vice president of technology policy for the Consumer Electronic Association, a trade group of electronics manufacturers. "We are faced with competitors in China and India who do not face the same kind of litigation burden as do companies in the U.S. With this decision, the legal clarity has decreased and the risk of litigation has increased."

Neco agrees.

"With all of this uncertainty, innovation suffers," he says. "And the American public will suffer as well."

Finding The Good

Not everyone, however, buys that argument.

"We already have advances in technology that have made some downloading of music legal with copyrighter permission," says Gregory Aldisert, a partner specializing in entertainment law at Greenberg Glusker in Los Angeles. Apple's iTunes software, for example, allows users to purchase songs and download them to their computers for $.99 each. "It's a lot easier to download music through lawful means, such as using iTunes, than it

is by using the Grokster and StreamCast software programs," Aldisert says.

Aldisert also disagrees with claims that this decision will spawn an increase

in litigation.

"If anything, it will bring more order than chaos," he says. "And there will be less litigation." For example, the RIAA currently pursues hundreds of individuals who illegally download music. "If the distributors such as Grokster and StreamCast can be shut down through this case, the RIAA won't have to go after the individual infringers because those individuals will no longer have the tools they need to infringe."

As for the RIAA, it says its battle against individual infringers will continue.

"We are gratified by the Supreme Court's ruling in this case, but we recognize that this does not mean the end of piracy," says Stan Pierre-Louis, senior vice president for legal affairs with the RIAA. "We will still have to go out and litigate against consumers for infringement. And we will still need to pursue actions against other proprietors of software that facilitate and encourage infringing conduct."

Overall, the entertainment industry lauds the High Court's decision, claiming it not only protects copyrights on music and movies, but also protects IP in general.

"The court found an appropriate balance between the values of protecting creative pursuits through copyright and promoting innovation through technologies," Aldisert says.

While the Supreme Court may have made it more difficult--not to mention costly--for technology companies to create, promote and defend their products against this new theory of liability, Grokster and StreamCast are confident they will prevail at trial.

"This is certainly another hurdle in nature's history for this company," says Michael Weiss, CEO for StreamCast. "Once all the evidence comes forward, we are confident we will prove that [our product] does not promote or encourage copyright infringement. This David versus Goliath battle will continue, and we are staying in it for the fight."

At press time, a trial date had not yet been set.

Staff Writer

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