Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.

No. 04-480 (U.S. June 27, 2005)

The U.S. Supreme Court has ruled that anyone who distributes a device — including software — is liable for copyright infringement committed by others if the device is distributed “with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement.” In so doing, the Court vacated a lower court’s judgment in favor of defendants and remanded the case for further proceedings.

Metro-Goldwyn-Mayer v. Grokster began in the U.S. District Court for the Central District of California, when the motion picture studio MGM and other copyright holders — including other studios, recording companies, songwriters, and music publishers — filed a number of copyright-infringement lawsuits (later consolidated into a single case) against software distributors Grokster and StreamCast. Both defendants distributed — free of charge — software that allows users to share (by copying) electronic files through “peer-to-peer networks.” Such networks effectively allow one user’s computer to exchange information with another user’s computer without an intermediary central computer server. The specific allegation by MGM and the other copyright holders (MGM, collectively) was that Grokster and StreamCast intentionally distributed their software products to enable end-users to copy works protected by copyright, including MGM’s copyrighted works. Thus, Grokster and StreamCast were not alleged to have themselves infringed copyrights, but were allegedly liable for so-called secondary infringement: i.e., contributory infringement or inducing infringement.

Notably, Grokster’s and StreamCast’s distributing free software was done not for altruistic reasons, but as part of for-profit, advertising-based business models. Both companies generated income by selling advertising space; the advertising was streamed to users while they were employing the Grokster and StreamCast software. Moreover, both companies sought to increase their user populations — and thus their advertising revenues — by enabling reproduction of popular copyrighted material. Perhaps more significant, Grokster and StreamCast both aimed to build their businesses by attracting customers from another distributor of file-sharing software, Napster. As Grokster and StreamCast were getting off the ground, Napster was being sued — and eventually found liable — for copyright infringement. See A & M Records, Inc. v. Napster, Inc., 239 F. 3d 1004 (9th Cir. 2001). Grokster and StreamCast were happy to portray their software to potential users as an alternative if (as did happen) Napster’s free service was effectively put out of business.

In Metro-Goldwyn-Mayer v. Grokster, both sides sought summary judgment in the district court, which denied MGM’s request and granted that of Grokster and StreamCast. The Court of Appeals for the Ninth Circuit affirmed that decision. The lower courts’ consideration was done largely in light of two previous decisions: the Napster case and a case concerning Sony’s Betamax videocassette recorder, Sony Corp. of America v. Universal City Studios, Inc., 464 U. S. 417 (1984). In Napster, a group of copyright holders successfully argued that distributing Napster’s file-sharing software — which used central server computers to facilitate reproducing copyrighted works — constituted secondary copyright infringement. But Napster did not control the current case, the lower courts reasoned, because Grokster’s and StreamCast’s software worked without servers. As for the Supreme Court’s 1984 decision in Sony, the appeals court interpreted that case as holding that distributing a product capable of substantial noninfringing uses could not constitute contributory infringement unless the distributor had actual knowledge of specific instances of infringement and failed to act on that knowledge. The appeals court agreed with the district court’s view that the allegedly infringing software was capable of substantial noninfringing uses, and thus agreed that Grokster and StreamCast bore no liability for infringement of MGM’s copyrights.

But the Supreme Court ruled that its precedent was misconstrued by the Ninth Circuit:

[T]he Court of Appeals misapplied Sony, which it read as limiting secondary liability quite beyond the circumstances to which the case applied. Sony barred secondary liability based on presuming or imputing intent to cause infringement solely from the design or distribution of a product capable of substantial lawful use, which the distributor knows is in fact used for infringement. The Ninth Circuit has read Sony’s limitation to mean that whenever a product is capable of substantial lawful use, the producer can never be held contributorily liable for third parties’ infringing use of it; it read the rule as being this broad, even when an actual purpose to cause infringing use is shown by evidence independent of design and distribution of the product, unless the distributors had “specific knowledge of infringement at a time at which they contributed to the infringement, and failed to act upon that information.” 380 F. 3d, at 1162 (internal quotation marks and alterations omitted)...

This view of Sony, however, was error, converting the case from one about liability resting on imputed intent to one about liability on any theory.

[Slip op. at 16 (p. 21 of PDF file).]

Continuing, the Supreme Court corrected the Ninth Circuit’s misunderstanding, explaining that “Sony’s rule limits imputing culpable intent as a matter of law from the characteristics or uses of a distributed product. But nothing in Sony requires courts to ignore evidence of intent if there is such evidence, and the case was never meant to foreclose rules of fault-based liability derived from the common law.” [Slip op. at 17 (p. 22 of PDF file).]

In order to determine whether evidence of culpable intent suffices to prove secondary copyright infringement, the Court adopted the following “inducement rule”: “one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.” [Slip op. at 19 (p. 24 of PDF file).] The Court went on to provide some additional guidance on the meaning of this new rule:

We are, of course, mindful of the need to keep from trenching on regular commerce or discouraging the development of technologies with lawful and unlawful potential. Accordingly, just as Sony did not find intentional inducement despite the knowledge of the VCR manufacturer that its device could be used to infringe, mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor to liability. Nor would ordinary acts incident to product distribution, such as offering customers technical support or product updates, support liability in themselves. The inducement rule, instead, premises liability on purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate commerce or discourage innovation having a lawful promise.

[Slip op. at 19-20 (pp. 24-25 of PDF file) (citation omitted).]

Of course, whether the new inducement rule for copyright infringement will in fact harm neither commerce nor innovation will likely depend upon how the courts in future interpret such phrases as “clear expression or other affirmative steps taken to foster infringement” and “purposeful, culpable expression and conduct.” For the moment, we have the Supreme Court’s descriptions of Grokster’s and StreamCast’s actions, which do not bode well for those alleged infringers:

Here, the summary judgment record is replete with other evidence that Grokster and StreamCast, unlike the manufacturer and distributor in Sony, acted with a purpose to cause copyright violations by use of software suitable for illegal use ...

Three features of this evidence of intent are particularly notable. First, each company showed itself to be aiming to satisfy a known source of demand for copyright infringement, the market comprising former Napster users ...

Second, this evidence of unlawful objective is given added significance by MGM’s showing that neither company attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software ...

Third, there is a further complement to the direct evidence of unlawful objective. It is useful to recall that StreamCast and Grokster make money by selling advertising space, by directing ads to the screens of computers employing their software. As the record shows, the more the software is used, the more ads are sent out and the greater the advertising revenue becomes. Since the extent of the software’s use determines the gain to the distributors, the commercial sense of their enterprise turns on high-volume use, which the record shows is infringing. This evidence alone would not justify an inference of unlawful intent, but viewed in the context of the entire record its import is clear.

The unlawful objective is unmistakable.

[Slip op. at 21-23 (pp. 26-28 of PDF file) (footnote omitted).]

Noting that “there is evidence of infringement [by users of Grokster’s and StreamCast’s software] on a gigantic scale,” the Court concluded that “there is no question that the summary judgment evidence is at least adequate to entitle MGM to go forward with claims for damages and equitable relief.” [Slip op. at 23 (p. 28 of PDF file).] Aside from holding that Grokster and StreamCast should not have been granted summary judgment, the Court went on to advise that “[o]n remand, reconsideration of MGM’s motion for summary judgment will be in order.” [Slip op. at 24 (p. 29 of PDF file).] The Supreme Court thus vacated the judgment of the Court of Appeals for the Ninth Circuit and remanded the case for further proceedings.