Earlier this year, MGM et al appealed the ruling of a California District Court in its ruling in favor of peer-to-peer software companies Grokster, Streamcast and Sharman (for simplicity's case, I will simply refer to the defendants in the case as 'Grokster' although the courts finding apply equally to all). The appellants consist largely of MPAA and RIAA members, who clearly have no love for peer-to-peer networks. In the original ruling, the District Court held that Grokster was not liable for contributory or vicarious copyright infringement. As one would expect, the case appealed to the 9th Circuit, who issued a ruling in the case today.

The ruling of the 9th Circuit Court upholds that of the District Court in finding Grokster not liable for the content being shared by its users. The 9th Circuit also laid out the requirements for finding Grokster to be infringing. The test required three things to establish contributory infringement: direct infringement by a user (which went undisputed), knowledge of the infringement and material contribution to the infringement.

As noted, it went undisputed that direct infringement by third parties takes place over the network. With regard to "knowledge of the infringement," the court found that the software is capable of non-infringing uses, and has on record many examples of such. Following the precedent set in the original Napster case, the court held that "if a defendant could show that its product was capable of substantial or commercially significant noninfringing uses, then constructive knowledge of the infringement could not imputed." The court found that the uses presented to them were sufficient to be considered "substantial" and "commercially significant." This finding was over the arguments of the "Copyright Owners," as the court refers to the appellants in the case, that the primary use of the software was copyright infringement. "... the Copyright Owners argue that the evidence establishes that the vast majority of the software use is for copyright infringement. This argument misapprehends the Sony standard as construed in Napster I, which emphasized that in order for limitations imposed by Sony to apply, a product need only be capable of substantial noninfringing uses" (with original emphasis). "Napster I" refers to the first Napster case, where Napster was required to block filenames as provided by Copyright Owners. In a footnote, the court writes that "Indeed, even at a 10% level of legitimate use, as contended by the Copyright Owners, the volume of use would indicate a minimum of hundreds of thousands of legitimate file exchanges."

Without having constructive knowledge, the court looked at the question of whether Grokster had "reasonable knowledge of specific infringement." Here, the 9th Circuit agreed with the District Court in finding that the timing of notification of infringement was a factor. It is required that the alleged infringer had knowledge of the infringement when it occurred, and failed to act to stop it. As the "Copyright Owners" would simply provide Grokster with lists of infringements after the fact, there was nothing that could be done to stop the direct infringement. The court also noted that the "quasi-decentralized, supernode" architecture of the Grokster network meant that infringement would still be able to take place even if Grokster were to "close their doors and [deactivate] all computers within their control."

The court then considered the issue of material contribution. In contrast to the Napster case, where centralized index servers were operated by Napster, Grokster has no such servers, and thus no way to accurately view a large portion of the searches and transfers being conducted across its network. Since the network and its indices are created by use of the network and not by Grokster, what happens as a result of accessing such an index is not any fault of Grokster. Furthermore, the court found that the fact that Grokster and Sharman operate root nodes to facilitate supernodes and provide a brief XML file with some parameters, these are "too incidental to any direct copyright infringement to constitute material contribution."

One of the best quotes from the decision is that "the peer-to-peer file-sharing technlogy at issue is not simply a tool engineered to get around the holdings of" the decisions in the Napster cases. With all this established, the court does not "expand contributory copyright liability in the manner that the Copyright Owners request."

The court next looks at the claims of vicarious copyright infringement. As with contributory infringement, the court lists a three-part test for determining vicarious infringement, that there have been direct infringement by a third party, that the alleged vicarious infringer received financial benefit and that the alleged infringer have "the right and ability to supervise the users." The first two parts, direct infringement and financial benefit, are undisputed. The financial benefit comes from the advertising revenue from ads displayed in the software.

This leaves the question of whether Grokster had the "right and ability" to supervise the users of its software and network. Again, the decentralized nature of the network means that Grokster did not have the ability to terminate or supervise accounts, though their software's license agreement retained for them the right to terminate accounts. StreamCast did not even have that right, as there was no license agreement for their software. It is interesting to note that the court finds blocking access by IP address to be ineffective as large numbers of users do not have static IP addresses.

The court also writes that while there are certain measures that could have been taken to control access, they would have resulted in a universal ban on access, not control over specific accounts. From these findings, the court agrees with the District Court that the companies did not the ability to control their users. One of the arguments put forth by the "Copyright Owners" was that the Grokster was turning a "blind eye" to the copyright infringement taking place on its network via its software.

From these findings, the court agrees with the District Court that the companies did not the ability to control their users, and therefore, were not guilty of vicarious copyright infringement.

Many of the findings apply only to more recent versions of the software offered by Grokster. The appellants were also basing their claims on older versions, which operated in different ways than the newer ones. The District Court declined to rule on those versions, and the 9th Circuit likewise "express[ed] no opinion as to those issues."

The circuit court notes that "The Copyright Owners urge a re-examination of the law in the light of what they believe to be proper public policy, expanding exponentially the reach of the doctrines of contributory and vicarious copyright infringement" but believes that "such a renovation [would] conflict with binding precedent ... it would be unwise."

"Doubtless, taking that step would satisfy the Copyright Owners' immediate economic aims. However, it would also alter general copyright law in profound ways with unknown ultimate consequences outside the present context."

The circuit court believes that it is not the place of the courts to make decisions for the marketplace. "[H]istory has shown that time and market forces often provide equilibrium in balancing interests ... it is prudent for courts to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses." The Betamax decision is cited, mainly that it is the place of Congress to apply copyright law to new technologies.

While the first 25 pages of the 26-page decision are good news, I find this sentence to be quite disturbing. Given the push by the "Copyright Owners" for laws such as the INDUCE Act, it is conceivable that Congress may find that it is its place to regulate technological innovation in the interest of 'protecting copyright.' While the court is clearly following along with what has come from above it, that it appeared in such a high-profile decision is sure to increase the lobbying efforts of "Copyright Owners" for the INDUCE Act. It is quite possible that this decision will be pointed to and the claim made that if the courts will not solve the "rampant" problem of copyright infringement on the Internet, Congress must step in, and indeed, was told by the courts that they have the right and requirement to do just that. Hopefully, clearer heads will prevail and this decision will be seen as the right one, but I certainly would not bet against the "Copyright Owners" pushing for and receiving legislation along the lines of the INDUCE Act in the not-to-distant future.

So while the decision comes as a victory, I imagine it will only serve to further muddy the waters surrounding the "Copyright Owners" push for protective legislation in Congress.

For more information about the decision, check out some of these links:

• Grokster Wins Big in 9th Circuit from Ernest Miller
• EFF coverage
• Coverage from Donna Wentworth and Jason Schultz at Copyfight
• The decision