How Marketing Strategies and Business Models Sunk Peer-to-Peer Technologies in Grokster

Reggae singer Shaggy hit it big in 2001 with "It Wasn't Me," a song about a philandering boyfriend who tries to excuse his obvious misdeeds by simply claiming, "It wasn't me." While that same excuse worked in the lower courts for peer-to-peer technology companies Grokster and StreamCast Networks, MGM v. Grokster proved "it wasn't me" didn't hold any water with the Supreme Court Justices.

In the continuing copyright battle over illegal downloading, the Court overturned earlier decisions, instead ruling that peer-to-peer technology companies can be held secondarily liable for infringement by users. Before deciding to slap down peer-to-peer technology networks, the Court studied these companies' marketing strategies and business models, uncovering efforts to promote direct infringement amongst users.

Who should take the blame

Copyright law places primary liability for infringement on those who directly violate a copyright owner's rights; hence, computer users who illegally download music or videos are primarily liable. The courts have created secondary liability for those who facilitate infringement. Here is how it works: parties who know or should know of infringement and who cause or materially contribute to infringement are held secondarily liable.

Secondary liability comes in two forms: contributory liability and vicarious liability. If a bulletin board service allows participants to post copyrighted materials and doesn't remove the materials upon request of the copyright holder, the service is guilty of contributory infringement. When a party benefits financially from infringing acts that it can supervise or control, the party has committed vicarious infringement. For example, if an online marketplace allows participants to sell bootleg copies of movies on its site and receives a commission on all sales, the online service is vicariously liable.

The Court, in MGM v. Grokster, determined that peer-to-peer companies can be contributorily and vicariously liable. Under their specific business models, peer-to-peer companies stand to benefit financially by marketing their free software with the express goal of encouraging and supporting copyright infringement.

The VCR's day in court

Back in 1984, the "it wasn't me" excuse shielded a young Sony Corporation and its new VCR technology from the wrath of Universal Studios. At the time, VCRs were a new device that allowed their owners, for the first time, to record television broadcasts. The Supreme Court decided that VCRs simply enabled users to "time-shift" free TV programs by recording the program so that they can watch at a more convenient time. "Time-shifting," according to the court, was not objectionable to most broadcasters and had minimal impact on the market for these copyrighted shows. The Court also determined that despite the potential for infringement, VCR makers had no control over customer use of their product.

The Ninth Circuit Court relied on the Sony decision to relieve peer-to-peer companies from secondary liability for user infringement. The appellate court found no contributory liability because of the decentralized nature of the software architecture and the fact that Internet users searched for, retrieved, and stored the infringing files without the involvement of the peer-to-peer companies. The Ninth Circuit also shot down vicarious liability because the companies could neither monitor nor control the customers' use of their software and had no legal obligation to police their customers' infringing acts.

Without overruling Sony, the Supreme Court contended that the appeals court had misapplied the case. The Court argued that, unlike VCR makers, peer-to-peer technology firms could be secondarily liable if they distributed a product "with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement." The Court found that the companies did intend to induce direct infringement by examining internal company records, promotional materials, and e-mails - especially those of StreamCast Networks.

Both Grokster and StreamCast Networks, the Court indicated, wanted to satisfy the demand for copyright infringement by targeting former Napster users.

Reviving Napster

StreamCast Networks created a software program, OpenNap, which was compatible with Napster's previous software and aimed at promoting its Morpheus interface. In its press kits and promotional materials, StreamCast announced efforts to be the new Napster with provocative ads that, in the opinion of the Court, "flaunted the illegal uses of its software." In addition, the Court stated that StreamCast tracked songs available on its network, seeking to compile the largest number of copyrighted songs available to its software users for illegal downloading.

As for Grokster, the Court added that the company's name was an intentional derivative of the Napster name. Grokster also had inserted metatags in its website to redirect web surfers who typed in the search terms "Napster" and "free file-sharing" to their site.

The Court stated that neither company made any effort to develop software filters to screen out the illegal downloading and, at times, responded to user e-mails requesting help with downloading copyrighted music and videos. With about 100 million copies of the companies' software downloaded, the Court warned that billions of files were exchanged each month, illustrating the staggering scope of potential copyright infringement.

The Court also contended that Grokster and StreamCast had developed business models based on the infringing uses of their software programs. While both companies offered their software for free and made no profit from their customers, they generated revenues through ad sales. By expanding their user base, advertising prospects became more valuable. Therefore, the demand for illegal downloads fueled advertising revenues.

Considering both express actions and underlying business models, the Court determined that civil actions could be brought against both firms under the concepts of secondary liability.

What's next?

Does this decision spell the death knell for a broad range of downloading technologies? Will companies that produce CD burners or Internet service providers offering high speed Internet connections which facilitate faster downloads, be next? In an effort to balance copyright protection with technological innovation, the Court indicated that merely distributing a product or service that has both lawful and unlawful uses does not imply automatic secondary liability. To do that, a company has to encourage clearly infringing activities or to develop a business model that depends financially on users infringing on copyrights.

It is important to recognize that company documents, marketing materials, advertising schemes, and e-mail exchanges are fair game in assessing the intent to induce direct infringement under secondary liability. If your company records reveal that promoting illegal downloading is your true objective, declaring "it wasn't me" won't get you off the hook.