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WASHINGTON — The most important copyright challenge in decades will unfold in the U.S. Supreme Court next week with potentially enormous damages and the future of Internet innovation at stake. Twenty-one years ago, the high court, in a closely decided ruling, held that the maker, distributor and sellers of the Betamax videocassette recorder were not liable if users infringed copyrights on television broadcasts. Sony Corp. of America v. Universal City Studios, 464 U.S. 417 (1984). The justices next week face a similar question, but the technology involved is light years ahead of the videotape recorder. In MGM Studios v. Grokster, 04-480, the entertainment industry is asking the justices to find Grokster and StreamCast — makers and distributors of so-called peer-to-peer (P2P) software often used by computer users to search and share files — liable for “mind-boggling” infringement by their users. Grokster and StreamCast contend that the liability sought by the entertainment industry runs counter to the 1984 Sony decision. They also argue liability is inappropriate and would deter future product innovation, not just in the P2P context, but in many other related industries and stand-alone products, such as the iPod. Signaling the high stakes involved, more than 50 friend-of-the-court briefs have been filed in the case, representing a cross-section of the entertainment industry, the technology industry, consumer groups, property rights organizations, the Bush administration, states, and law professors and academics from the fields of intellectual property, media, Internet and economics. The entertainment industry lost in the Ninth Circuit U.S. Court of Appeals. Kazaa, another P2P service network, is also a defendant in the underlying lawsuit but is not a party to this particular appeal. “What’s notable to many of us about the Grokster case is the Ninth Circuit just interprets and applies the Sony standard in such a fashion as to virtually immunize massive day-in and day-out regular infringement from any meaningful limitation, particularly the companies and persons who are essentially responsible for it,” said Jon Baumgarten of Proskauer Rose, who filed an amicus curiae brief supporting MGM Studios on behalf of the National Academy of Recording Arts & Sciences and others. The Ninth Circuit interpreted Sony correctly, countered Cindy Cohn of the Electronic Frontier Foundation, counsel of record to Grokster and StreamCast in the high court. “As I look at history, [the entertainment industry] has always wanted to control distribution of their work,” she said. “They’ve sued every new technology that’s come along. They sued Sony over the VCR. They want a paradigm shift where copyright law suddenly means all those technologists have to come to Hollywood first and get some kind of dispensation before they create new products. That would be a bad result for consumers, for sure, and for the economy as well.” HI-TECH LIABILITY At the core of the MGM case is the concept of secondary liability in copyright law. When the justices took up the Sony case in 1984, copyright law lacked a statutory provision imposing secondary liability on technology developers for the infringing acts of their users. Secondary liability is liability on those who create, cause or induce conditions supporting infringements. Secondary liability can be contributory liability, which requires knowledge of the infringing act and inducing, causing or materially contributing to the infringement. Or it can be vicarious liability, where the right and ability to supervise coincide with a direct financial benefit in the infringement. In Sony, Justice John Paul Stevens looked to patent law for guidance and crafted a copyright standard: If the technology — here the VCR — is “capable of substantial non-infringing uses” that are commercially significant, there is no liability for contributory infringement. Stevens found two substantial noninfringing uses of the VCR, and a 5-4 court subsequently held that Sony was not secondarily liable. The parties in the MGM challenge have drawn battle lines over whether the Sony standard creates a safe harbor or a bright-line rule immunizing technology developers from secondary liability if any substantial noninfringing use is found, or whether the standard is more of a balancing test. The software in the high court case is called peer-to-peer because it enables computer users to communicate directly with each other, search files on other personal computers and download files of other users. Most of the major motion picture studios and recording companies and a certified class of more than 27,000 songwriters and music publishers sued Grokster, StreamCast, Kazaa and others, charging that more than 90 percent of the files that are actually shared using the P2P software consist of copyrighted material that the file-sharer — who makes files available for download to the swapper’s computer — has no legal right to distribute. These copyright violations, they charged, have cost the copyright owners millions and millions of dollars. They sought to hold the software distributors both contributorily and vicariously liable for the infringements. Applying Sony, the Ninth Circuit held that the P2P networks were not contributorily liable because they were “capable of substantial non-infringing uses.” Those uses included evidence that new artists had willingly distributed their works on the Internet for free, and that organizations had made available public-domain literary works and historic films. Even if only 10 percent of the uses were legitimate, the court said, that was enough to defeat liability. On vicarious liability, the appellate court held that Grokster and StreamCast did not have the practical ability to cut off infringing users, and that they had no affirmative duty to alter their software to prevent copyright infringement. In the high court, Donald Verrilli of Jenner & Block, counsel to MGM, argues that the Ninth Circuit “broke faith” with Sony. The Sony ruling requires “balance” between copyright protection and innovation protection, he told the justices in his brief, and is “not a free pass for ‘market abuses.’” Grokster and StreamCast are liable as contributory infringers, he argues, because they “know full well that their services are rife with infringing activity.” And they materially contributed to that infringement, he said, “by creating, maintaining, and expanding their services, which make possible the infringement that could not otherwise occur.” They are also vicariously liable, he contends, because they benefit from the exploitation of copyrighted materials. “It is equally clear that Grokster and StreamCast have the right and ability to supervise or control infringement on their services, but have deliberately tried to shed all legal and practical means of doing so,” he said. REPLACING A ‘CLEAR RULE’? But Richard Taranto of Washington’s Farr & Taranto, who will argue for Grokster and StreamCast, accuses MGM of trying to replace Sony‘s “clear rule” with an “uncertain multifactor standard.” Their software “indisputably has significant noninfringing uses as an article of commerce, and the Sony rule therefore prevents contributory-infringement liability based on respondents’ general provision of their software,” said Taranto. The vicarious liability standard, he added, does not extend to providers of a product that gives the provider no control over its customers’ individual uses of the product. Cohn of the Electronic Frontier Foundation noted that the Bush administration, which has filed an amicus brief supporting MGM, does not agree with MGM on vicarious liability. “The entertainment industry says technology companies should have liability if they could have developed the technology differently in order to prevent infringements. The government says that would be disastrous, and I think that’s right,” she said. “It would threaten innovation.” But Proskauer’s Baumgarten said if MGM wins, “Lower courts will be able to fashion relief that doesn’t inhibit the use of P2P technology where substantial infringement is not the hallmark of the activity. It will hopefully have an impact on those users where substantial infringement is the hallmark.” Technology companies call the Sony decision the “Magna Carta” of the technology industry, said Cohn. “It’s a pretty big shelter,” she said. “Many of the industry amicus briefs that support us point out how important that rule has been and how the kinds of changes in the rule that the entertainment industry is calling for are really just a recipe for endless litigation. Their approach has no clear edges and raises so many questions right out the gate.” ‘LINES WE CAN DRAW’ The Sony decision has done well over time, said copyright scholar James Gibson of the University of Richmond School of Law, who filed an amicus brief supporting MGM on behalf of a number of law professors. “I certainly don’t think Sony was wrong, but it operated under the assumption that the technology itself was relatively unsophisticated so the court had to come up with a bright-line rule — prohibit the technology or allow it,” said Gibson. “We have now technology capable of being smarter. So I think the lines we can draw are more fine than we could 20 years ago.” It is not inconceivable, he said, that companies could design a software program and build in some copyright protection. While still developing, that factor is something courts need to take into account, he added. “The high court should ensure when there is a relatively simple way to curtail the infringement through technological design, the technologist at least has incentive to explore that alternative,” he said. “By allowing them to get off the hook if they can simply point out a few legitimate uses of their product, the law sets up the wrong incentive. It allows them to purposely ignore copyright interest.” Sony has kept courts out of the kind of second-guessing of the technology industry sought by MGM, said Dierdre Mulligan of Boalt Hall School of Law. And Sony itself, she added, rejected many of the tests proposed by MGM and its amici. “I do think at this point the Sony doctrine has provided a lot of stability,” said Mulligan. “It has allowed the technology industry and the content-owning industry to really flourish. It’s not like we have had a dry spell in either.” There are many ideas being floated today on how to ensure that copyright owners get paid for use of their works on the Internet, said Cohn. “There’s a fundamental problem that simply attacking P2P networks isn’t going to fix,” she said. “The technology to make copies of digital works is here to stay, easy to use and everybody is going to have it,” she added. “We need to find a different way to ensure artists get paid instead of trying to control copies.” Marcia Coyle is a reporter with The National Law Journal, a Recorder affiliate based in New York City.

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