The Informationist

Some Initial Thoughts about MGM v. Grokster

Court Sides With the Entertainment Industry! Court Rules Against File-Sharing Networks! Or so the headlines scream. But is it true? As is so often the case with Supreme Court rulings, the answer is “yes and no.” It’s certainly true that the Court ruled against Grokster and Streamcast, the two file-sharing network companies involved in today’s lawsuit. And it’s equally true that the Court supported the entertainment industry’s attempts to put these networks out of business. At a deeper level, though, the Court did what it does best: it punted. It decided the case on the narrowest grounds possible and let all of the interesting issues linger—likely until Congress decides to enter the fray.

I predicted both this sort of dispute and this sort of outcome in my recent book, Digital Phoenix: Why the Information Economy Collapsed and How it Will Rise Again (MIT Press, 2005)—but more on that later. First, a bit of background necessary to understand today’s ruling.

A historical detour is in order. Several years ago, Napster pioneered the idea of Peer-to-Peer (or P2P) downloads. In most parts of the Internet—say, the Web—individual desktop and laptop computers communicate with larger, high-powered servers. These interconnected web servers form the broader network of the World Wide Web. Users go through their own servers to access other web servers; for the most part, they can’t go through the foreign web servers to access individual user computers connected directly to them. Napster’s P2P software let users designate their individual computers as “Napster machines” capable of communicating directly with all other self-designated Napster machines. But though the technology was clever and general, Napster arose for a specific purpose: college students wanted to swap their digital music files. Because much of that music was copyrighted and few of those students had the necessary authorization, most of those early file-sharers were copyright infringers.

The copyright owners—mainly the record labels—chose not to sue the infringers. Instead, they sued Napster under a number of theories of indirect copyright infringement. Indirect infringement, however, is tough to prove. The critical Sony case that determined the law involved a copying technology once considered radical but today deemed passé, namely the VCR. Back in the 1980s when Sony first launched the VCR, the movie studios claimed that people were using it to infringe their copyrights, and that Sony was indirectly liable because it provided them with the technology to infringe. The Supreme Court disagreed. The Court explained that though copyrights are important and infringement is wrong, no one should ever use the copyright system to impede productive technological growth. As long as the machine in question was capable of “significant non-infringing uses,” as the VCR was, the simple acts of manufacturing or distributing machines capable of infringement could not constitute indirect infringement.

Napster claimed that the Sony standard immunized it from indirect infringement claims. A trial court in San Francisco and the Ninth Circuit Court of Appeals disagreed. Those courts found a significant difference between Sony’s VCR and Napster’s P2P network. Napster, it seems, did more than just write and distribute software. Napster also maintained a centralized directory of every shareable file on every peer computer attached to its network. Napster users seeking a file went first to Napster’s centralized directory to locate a suitable peer—and then to that peer to download the file. The courts ruled that Napster’s critical role at the center of the infringement exposed it to indirect infringement claims. The Supreme Court chose not to get involved.

That’s when Grokster entered the picture. Napster had been a hugely successful product. Its demise left many music lovers seeking an alternative. Grokster used some clever coding to build second-generation P2P networks that avoided the Napster problem. Grokster dispensed with the centralized directory altogether in favor of a distributed index that moved among user machines. Grokster and its fellow post-Napster P2P systems incorporated some technologically important advances in distributed directory design, but remained less efficient than Napster’s more straightforward design. It started to look as if the law didn’t really ban P2P file sharing—it only banned efficient P2P file sharing. Such an outcome should disturb people on a number of grounds, not the least of which is that Grokster’s advances in distributed computing were mostly coincidental; their primary purpose was to allow music lovers to continue sharing files while avoiding the fatal legal flaw in Napster’s design. Though numerous advocates for the technology found many non-infringing uses, Grokster never tried to hide its primary business: enabling music downloads.

Once again, the entertainment industry sued, this time with MGM and its fellow movie studios in the lead. Once again, the dispute hinged on the Sony standard. Grokster claimed that it was immune from suit because their systems enabled many meaningful and important non-infringing file downloads, and unlike Napster, they lacked direct involvement in any specific infringement. MGM disagreed. The studios asked the court to rule that these non-infringing downloads—which they contended accounted for less than ten percent of Grokster’s traffic—were “not significant enough” to qualify as “significant non-infringing uses.” The trial court and the Ninth Circuit agreed with Grokster. And that’s where things stood when the Supreme Court agreed to get involved.

In today’s ruling, a unanimous Supreme Court disagreed with both Grokster and MGM—not to mention with the lower courts. Justice Souter, on behalf of the court, held that “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.” In other words, Grokster lost not because it enabled its customers’ infringement, but because it encouraged infringement. Its entire business model and marketing campaign centered on encouraging infringement. Not surprisingly, the Court couldn’t simply look the other way. As long as Congress chooses to grant certain rights to copyright holders, the law can’t exempt companies encouraging rampant infringement; if it did, the rights that Congress granted wouldn’t be worth much.

That’s where the headlines got it right. The Court did side with the entertainment industry—by agreeing that companies that encourage infringement are liable as indirect infringers. And the Court certainly ruled against the file-sharing networks—by announcing that their business models were illegal. But the Court refused to answer the burning underlying question: Is P2P technology legal? What if the next P2P file-sharing company simply sells its software under a vanilla name with a vanilla marketing campaign? In fact, what if that company tailors its entire advertising campaign to scholars seeking to share their working papers, and mimics the beer industry by warning its customers to behave responsibly and to avoid infringement. Could such a company still be liable for indirect infringement?

That question divided the court in three. Justice Ginsburg assumed her customary position as the content owners’ best friend. She, along with Justice Kennedy and Chief Justice Rehnquist, expressed her belief that Grokster had violated the Sony standard. She wanted the Court to give the movie studios what they had sought—a narrow interpretation of Sony and an explanation of why the P2P networks fell outside its scope. Justice Breyer, along with Justices Stevens and O’Connor, took the opposite view. In his opinion, P2P technology was no different than VCR technology. He wanted the Court to rule that the technology was fine, and that the only problem here was the networks’ explicit encouragement of infringement.

But it takes five votes for the court to rule, and the center held. Granted, this may be the only time in recent memory in which that center consisted of Justices Souter, Thomas, and Scalia, but apparently neither Ginsburg nor Breyer could win their backing. And so, the Court emerged with a very narrow ruling and the underlying question still lingering: What is the legal status of P2P technology? Stay tuned. We’re going to need more legal maneuvers before we can answer the question.

So where does that leave us? In the short run, the answer is easy. Grokster is likely to go out of business, and somebody somewhere is about to launch a vanilla P2P system just to attract the next test case. Inquiries into and rollouts of technologies related to P2P will proceed more slowly and at higher cost than they would have had Breyer’s view prevailed, but more quickly and at lower cost than had Ginsburg’s view prevailed. Technologists and copyright owners may not agree on much, but they do both want to see the legal status of P2P networks clarified. It’s hard to imagine that either side will give up before the matter is resolved. The Supreme Court has probably not seen the last of this issue.

And that in and of itself is unfortunate, because the courts are the wrong place to fight this battle. The right place is on Capitol Hill. As I explained in Digital Phoenix, the information age will force us to rethink the ways that we promote invention and creativity. The P2P saga highlights a pattern that we’re going to see over and over again as information technology improves. First, technology reduces transaction costs; in the realm of music, information technology made the once-expensive tasks of copying and distribution almost costless. Second, clever businesses discover ways to leverage the new technology into a profit; Napster, Grokster, and Streamcast all tried to generate advertising revenues. Third, the existing businesses accustomed to making money from the newly eliminated transaction costs fight back; with technology and economics working against them, their only recourse will be to law and regulation.

That’s exactly what happened here. Under our current copyright system, we motivate creativity by granting most creators exclusive rights over copying and distribution. When we started granting those rights, however, their primary protection was technological. Our grandparents didn’t copy records because they couldn’t—and even if they could, they couldn’t access much of a distribution network. Granting exclusive copying and distribution rights made sense because it motivated necessary investment in distribution, and added fairly little in legal costs. Today’s world is very different. We no longer need to motivate investment in digital-product distribution, and the legal costs are becoming prohibitive—just ask the record companies and movie studios how much they’ve spent chasing indirectly infringing networks and directly infringing kids (not to mention the costs to the networks and kids). So why are we still granting those rights? Wouldn’t we be better off with some form of a compulsory license—a concept that already exists in some parts of the music world—a license that allows anyone willing to pay to copy and distribute digital products?

I certainly think so. Others disagree. But what should be clear is that it’s time to ask the question. Why do we continue to lock in a system that works against technology rather than with it? That debate can’t happen in the courts. It can only happen in Congress. By ruling against Grokster in the narrowest possible way, the Supreme Court tried to remove itself from the equation. That decision was likely wise. Our current copyright system has left P2P systems in legal limbo and likely deterred other areas of fruitful technological inquiry. As I show in Digital Phoenix, this deterrence is spreading throughout the economy in ways both obvious and subtle.

In the final analysis, disputes like this one are inevitable when a regulatory system works against both technology and economics. The regime that we use to regulate creativity—the copyright system—runs smack into both. The time has come to deregulate—or more likely to re-regulate.

Those are my initial thoughts upon reading the opinion. As I see what others have to say and internalize the ruling, I expect to have further (and more formal) thoughts. Who knows—I may even change my mind about something. It’s been known to happen. Once again, stay tuned.

Posted by Bruce Abramson from on 06/27 at 08:11 PM in The Not-Quite-Yet Information Economy