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When can you be held liable for what your customers are up to? At least where copyright infringements are concerned, this question has come to haunt a wide variety of technology companies and providers of Internet services. After all, personal computers, audio jukebox software, blogs, email and instant messaging services can be and are used to commit copyright infringement every day. When should the technology vendors be held responsible? If you get the answer wrong, innovators spend all their time meeting with lawyers instead of innovating. In its Aug. 19 ruling in MGM v. Grokster, the 9th U.S. Circuit Court of Appeals got the answer right. The case began in October 2001, when the music and movie industries sued several distributors of peer-to-peer file sharing software (I represent one of the defendants in the suit). In April of 2003, the district court in Los Angeles granted partial summary judgment in favor of two of the defendants, StreamCast (maker of the popular Morpheus software) and Grokster. The 9th Circuit affirmed that lower court ruling, declaring that these companies are not liable for the copyright infringements committed by their end-users. The 9th Circuit ruling clarified the scope of copyright’s two secondary liability doctrines in the digital age: vicarious and contributory infringement. But tucked amid the 15 pages of legal reasoning is a clear message: today, technology developers dodged a bullet. Three bullets, in fact. First, the court rejected the entertainment industry’s startling view of vicarious liability, a view that would have essentially required the installation of Hollywood lawyers in every technology company’s engineering meetings. Vicarious infringement is an outgrowth of respondeat superior: If you control the infringer and make money from her infringements, you can be held responsible in her stead. The entertainment industry in MGM v. Grokster argued that the defendants had control over their end-users because “the software itself could be altered to prevent users from sharing copyrighted files.” In other words, the plaintiffs argued that the software companies should be liable simply because they could have designed their software differently (read: more to the liking of the entertainment industry). In particular, the plaintiffs argued that complex acoustic fingerprinting technologies could have been used to filter out infringing files from file sharing networks. The 9th Circuit rejected this expansive view of vicarious infringement, holding specifically that evidence about the possibility of “upgrading” the software with filtering mechanisms was irrelevant to the question of vicarious liability. Had the court ruled in favor of the entertainment industry on this point, technology companies would have faced a flood of litigation (and threats of same) over whether they had “done enough” to prevent infringements. The second bullet dodged was intended for the heart of the “Betamax doctrine.” Simply stated, that rule establishes that so long as a technology is “merely capable of substantial noninfringing uses,” contributory liability for the technology vendor is foreclosed. The doctrine takes its name from the Supreme Court’s 1984 ruling in Sony v. Universal City Studios, a copyright challenge to the “Betamax” VCR. In MGM v. Grokster, no one seriously contested that peer-to-peer technologies were capable of noninfringing uses. The technologies are used today to distribute software, movie trailers, video games and music tracks, all with the authorization of forward-thinking copyright owners. Public domain materials also circulate widely on the networks. The entertainment industry, however, urged the 9th Circuit to look at the proportion of infringing to noninfringing uses. The 9th Circuit disagreed, emphasizing that it is the capability for noninfringing uses that is critical. The contrary “proportionality” rule would almost certainly have killed off a host of new technologies prematurely, as infringing uses tend to be common until incumbent industries adjust their business models to take advantage of the new opportunities created by the new technology. So, for example, when there were no pre-recorded videocassettes, the VCR was doubtless used for more infringement than it was after there were Blockbusters on every corner. In addition, making liability a question of proportion would invariably involve a battle of experts, exposing technology companies to expensive litigation that could never be resolved at summary judgment. The third bullet dodged by technology vendors had its origins in the 9th Circuit’s own Napster rulings. In that case, the court held that the “Betamax doctrine” can be trumped in some cases. The open question was how big is the hole in the Betamax armor? In MGM v. Grokster, the court clarified that the Betamax doctrine will yield where “the defendant had reasonable knowledge of specific infringing files and failed to act on that knowledge.” In short, liability will attach only where you have knowledge of specific infringements, coupled with the capacity to act on such knowledge. This holding delivers clear rules that should reassure many technology vendors. You will not liable for infringing activity until you have been notified of specific instances of infringement, and unless you had the ability to do something about them. So if a teenager today walks out of a store with a new Hewlett-Packard PC equipped with a CD burner, HP need not worry about being held responsible for what the teenager may be up to next week. And delivering a flurry of “infringement notices” about that teenager to HP’s general counsel will not change that. Of course, the disappointed entertainment industry plaintiffs may appeal MGM v. Grokster to the Supreme Court. Moreover, Senator Hatch is pushing for the creation of a new category of secondary liability: inducement of infringement. Technology developers should be working to ensure that the 9th Circuit’s ruling, drawing a clear line between copyright and innovation, wins out. Fred von Lohmann is a senior staff attorney with the Electronic Frontier Foundation, a San Francisco-based nonprofit devoted to protecting civil liberties and free expression in the digital world.

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