In a surprising victory for the entertainment industry, the Supreme Court on Monday ruled unanimously that one who distributes a device with the object of promoting its use to infringe copyrights, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting consumer’s infringement.

Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd. raised the question of whether companies that make file-sharing technology, widely used by some consumers to illegally download music and other copyrighted material, should be held liable for copyright infringement.

The Ninth Circuit Court of Appeals in California had held that the file-sharing networks were not liable because their services were “capable of substantial” or “commercially significant noninfringing uses” based on the Supreme Court’s 1984 decision in the “Betamax” case (Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417 (1984)).

Led by MGM, the entertainment industry argued that liability should be imposed when the primary use of the product or service is illegal, or when the provider induces or refuses to take steps to try to stem potential piracy. The entertainment industry focused on the business aspect of the file-sharing technology, arguing that the file-sharing companies profit from the high volume of infringing activity.

The file-sharing companies argued that the Court should uphold the lower courts’ application of the “capable of substantial noninfringing uses” test, arguing that the technology is used extensively for legal swapping of files and that companies have no way of knowing when their users use the software illegally. Respondents asked the Court to respect stare decisis and not overturn or modify the Sony rule.

The case generated a great deal of interest, reflecting the high stakes involved. The entertainment industry believes it will suffer irreparable injury if the unlawful distribution of copyrighted material is not stopped. The technology industry, on the other hand, feels that additional restrictions on technology will impede innovation and development.

The members of the Court acknowledged several of these issues during oral argument, questioning whether holding the software developers liable would chill inventors developing new technology, while also expressing reservations about the inequity of imposing no liability on the file-sharing companies.

On Monday, the Court released its decision, ruling to vacate the Ninth Circuit and remand for reconsideration of MGM’s claim of active inducement. The Court adopted the active inducement test, ruling that the Sony “capable of substantial or commercially significant noninfringing uses” test did not preclude liability where evidence goes beyond a product’s characteristics or the mere knowledge that it may be put to infringing uses, and shows statements or actions directed to promoting infringement.

The Court declined to elaborate on the quantifiable limits of the Sony test after finding the lower courts’ decision on MGM’s active inducement claim to be incorrect. The Court did note, however, that the Ninth’s Circuit’s understanding of Sony - that whenever a product is capable of substantial lawful use, the producer can never be held contributorily liable for third parties’ infringing uses of it - was erroneous.

The Court relied on three factors in finding unlawful intent on the part of the file-sharing companies. First, the Court pointed to the file-sharing companies’ initial advertising and marketing efforts aimed at securing customers who had previously used the Napster product to illegally download copyrighted materials. Second, the Court found it significant, though not determinative on its own, that neither file-sharing company attempted to develop filtering tools to diminish infringing activity.

Finally, the Court found that the business model used by Respondents, when viewed in the context of the entire record, also pointed to their unlawful intent. The Court found that all of this amounted to substantial evidence that the file-sharing companies had a purpose to cause and profit from third-party acts of copyright infringement.

The decision addresses the Court’s earlier expressed concern that imposing liability on developers of technology would stifle invention. The Court struck a balance between promoting innovation and protecting copyright holders’ rights, by retaining the Sony test, but allowing for the imposition of liability if the developer actively induced and encouraged infringing uses of its products, even if the product is capable of substantial or commercially significant noninfringing uses.

The Court cautioned that mere knowledge of potential or actual infringing uses would not be enough to subject a distributor to liability, but rather premised liability on common law principles of purposeful, culpable expression and conduct. According to the Court, the active inducement test will protect rights’ holders without compromising legitimate commerce or discouraging innovation.

The decision will continue to leave inventors the opportunity to develop new technology that may have infringing uses, but not protect those developers with bad faith intent to profit from copyright infringement.

Elizabeth Cohen
202.857.6166
cohen.elizabeth@arentfox.com