Business 8th Edition by Marianne Jennings

Exercise 22

Facts
Grokster, Ltd., and StreamCast Networks, Inc. (Respondents\defendants) distribute free software products that allow computer users to share electronic files through peer-to-peer networks. With no central computer server required in these networks, the high-bandwidth capacity server storage space issues disappear. Since copies of a file (particularly a popular one) are available on many users' computers, file requests and retrievals move faster than on other types of networks, and can take place between any computers that remain connected to the network without risk of a server glitch. Peer-to-peer networks are used by universities, government agencies, corporations, and libraries to store and distribute electronic files.
Grokster and StreamCast software users have generally used the software networks for sharing copyrighted music and video files without authorization. A group of copyright holders (MGM for short, but including motion picture studios, recording companies, songwriters, and music publishers) (Petitioners) sued Grokster and StreamCast for their users' copyright infringements through the distribution of their software that allows users to reproduce and distribute copyrighted works in violation of the Copyright Act.
Grokster and StreamCast do not know when files are copied, but MGM commissioned a statistician to conduct a systematic search, and his study showed that nearly 90% of the files available for download were copyrighted works.... [t]he probable scope of copyright infringement is staggering. Grokster and StreamCast dispute this figure and argue that free copying even of copyrighted works may be authorized by the rightholders. They also argue that potential noninfringing uses of their software are significant, although infrequent in use. Some musical performers have gained new audiences by distributing their copyrighted works for free across peer-to-peer networks, and some distributors of unprotected content have used peer-to-peer networks to disseminate files, Shakespeare being an example. StreamCast has given Morpheus users the opportunity to download the briefs in this very case, though their popularity has not been quantified.
StreamCast gave away a software program of a kind known as OpenNap, designed as compatible with the Napster program. The OpenNap program was engineered "to leverage Napster's 50 million user base"
One StreamCast proposed ad read: "Napster Inc. has announced that it will soon begin charging you a fee. That's if the courts don't order it shut down first. What will you do to get around it?" Another proposed ad touted StreamCast's software as the "# 1 alternative to Napster" and asked "[w]hen the lights went off at Napster... where did the users go?" StreamCast even planned to flaunt the illegal uses of its software; when it launched the OpenNap network, the chief technology officer of the company averred that "[t]he goal is to get in trouble with the law and get sued. It's the best way to get in the new[s]\ J Grokster launched its own OpenNap system called Swaptor and inserted digital codes into its Web site so that computer users using Web search engines to look for 'Napster" or [f]ree filesharing" would be directed to the Grokster Web site, where they could download the Grokster software.
Grokster and StreamCast receive no revenue from users, who obtain the software itself for nothing. Instead, both companies generate income by selling advertising space, and they stream the advertising to Grokster and Morpheus users while they are employing the programs. As the number of users of each program increases, advertising opportunities become worth more. While there is doubtless some demand for free Shakespeare, the evidence shows that free access to copyrighted work is most important to users. Users seeking Top 40 songs or the latest release by Modest Mouse, are far more numerous than those seeking a free Decameron. Grokster and StreamCast translated that demand into dollars.
The District Court held that those who used the Grokster and Morpheus software to download copyrighted media files directly infringed MGM's copyrights, but granted summary judgment in favor of Grokster and StreamCast as to any liability arising from distribution of the then current versions of their software. The Court of Appeals affirmed. MGM appealed.
Judicial Opinion
SOUTER, Justice
The question is under what circumstances the distributor of a product capable of both lawful and unlawful use is liable for acts of copyright infringement by third parties using the product....
Digital distribution of copyrighted material threatens copyright holders as never before, because every copy is identical to the original, copying is easy, and many people (especially the young) use file-sharing software to download copyrighted works. As the case has been presented to us, these fears are said to be offset by the different concern that imposing liability, not only on infringers but on distributors of software based on its potential for unlawful use, could limit further development of beneficial technologies.
The argument for imposing indirect liability in this case is, however, a powerful one, given the number of infringing downloads that occur every day using StreamCast's and Grokster's software. When a widely shared service or product is used to commit infringement, it may be impossible to enforce rights in the protected work effectively against all direct infringers, the only practical alternative being to go against the distributor of the copying device for secondary liability on a theory of contributory or vicarious infringement.
In Sony Corp. v Universal City Studios , 464 U. S., at 434 , this Court addressed a claim that secondary liability for infringement can arise from the very distribution of a commercial product.... Because the VCR was ''capable of commercially significant noninfringing uses" we held the manufacturer could not be faulted solely on the basis of its distribution.
In sum, where an article is "good for nothing else" but infringement, there is no legitimate public interest in its unlicensed availability, and there is no injustice in presuming or imputing an intent to infringe.... Conversely, the doctrine absolves the equivocal conduct of selling an item with substantial lawful as well as unlawful uses, and limits liability to instances of more acute fault than the mere understanding that some of one's products will be misused. It leaves breathing room for innovation and a vigorous commerce.
Grokster and StreamCast reply by citing evidence that their software can be used to reproduce public domain works, and they point to copyright holders who actually encourage copying. Even if infringement is the principal practice with their software today, they argue, the noninfringing uses are significant and will grow.
Because the Circuit found the StreamCast and Grokster software capable of substantial lawful use, it concluded on the basis of its reading of Sony that neither company could be held liable, since there was no showing that their software, being without any central server, afforded them knowledge of specific unlawful uses.
This view of Sony , however, was in error, converting the case from one about liability resting on imputed intent to one about liability on any theory.
... 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.
The classic case of direct evidence of unlawful purpose occurs when one induces commission of infringement by another, or "entic[es] or persuad[es] another" to infringe, Black's Law Dictionary 790 (8th ed. 2004), as by advertising. Thus at common law a copyright or patent defendant who "not only expected but invoked [infringing use] by advertisement" was liable for infringement "on principles recognized in every part of the law."
For the same reasons that Sony took the staple-article doctrine of patent law as a model for its copyright safe-harbor rule, the inducement rule, too, is a sensible one for copyright. We adopt it here, holding 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. 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. 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.
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. StreamCast's internal documents made constant reference to Napster, it initially distributed its Morpheus software through an OpenNap program compatible with Napster, it advertised its OpenNap program to Napster users, and its Morpheus software functions as Napster did except that it could be used to distribute more kinds of files, including copyrighted movies and software programs. Grokster's name is apparently derived from Napster, it too initially offered an OpenNap program, its software's function is likewise comparable to Napster's, and it attempted to divert queries for Napster onto its own Web site. Grokster and StreamCast's efforts to supply services to former Napster users, deprived of a mechanism to copy and distribute what were overwhelmingly infringing files, indicate a principal, if not exclusive, intent on the part of each to bring about infringement.
Second, neither company attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software. While the Ninth Circuit treated the defendants' failure to develop such tools as irrelevant because they lacked an independent duty to monitor their users' activity, we think this evidence underscores Grokster's and StreamCast's intentional facilitation of their users' infringement. Third,... [i]t 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.
We hold 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. The judgment of the Court of Appeals is vacated, and the case is remanded for further proceedings consistent with this opinion.
Case Questions
What additional grounds for imposing vicarious liability for copyright infringement can be used beyond "other lawful means of use"?