Jonathan M. Eisenberg          Craig S. Rutenberg          Manatt, Phelps & Phillips, LLP
 September 2005    Volume 2, Issue 3   


Grokster Commentary
By Prof. Eric Goldman
Marquette Law School
Milwaukee, WI

Mr. Goldman is an assistant professor at Marquette Law School in Milwaukee, WI.

What Happened

On June 27, 2005, in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. ___ (2005), the U.S. Supreme Court unanimously reversed the U.S. Court of Appeals for the Ninth Circuit’s upholding of summary judgment for the defendants, sending the case back to the lower courts either to consider MGM’s motions for summary judgment (which the Court signals should be granted) or to conduct a trial.

There are three opinions: (1) the majority opinion, joined by all justices (9-0), finding that summary judgment for the defendants was inappropriate because MGM showed enough facts of "inducement" to defeat summary judgment, (2) a Ginsburg concurrence (representing the opinion of three justices), where she says that the defendants should lose under Sony Corp. of Amer. v. Universal City Studios, Inc., 464 U.S. 417 (1984), and (3) a Breyer concurrence (representing the opinion of three justices), saying that the defendants should have qualified for protection under Sony.

Why It Happened

I think the Supreme Court reached the only logical result. It had to find for the plaintiffs. I say this because there was simply no way for the Court to ignore that Grokster and StreamCast were facilitating massive copyright infringement. As the Court says, "the probable scope of copyright infringement is staggering" and "there is evidence of infringement on a gigantic scale." If it ignored these facts, it was simply going to force the U.S. Congress to act.

On the other hand, the Supreme Court had to acknowledge that the rights of copyright owners can go too far in limiting technological innovation. The majority touches on this briefly in the beginning of its opinion, but more telling is the relatively narrow ruling – and careful drafting – of its basis for reversing the Ninth Circuit. The Court really tried to make sure that it found a way to get Grokster and StreamCast without opening up too much new liability.

In particular, the fact that the Court simply sidestepped any broad pronouncements about Sony is telling. Although the opinion was unanimous that the Ninth Circuit should be reversed, the Court appeared badly fractured on the meaning and application of the Sony rule. Thus, it simply tried to leave Sony for another day. One can almost imagine the discussion in chambers: there must have been clear agreement that the defendants should lose, but no agreement on how or why. As a result, the Court seized on an "inducement" theory as a way to avoid clarifying Sony.

The Inducement Theory

Is "inducement" a new basis of liability? I don’t think it’s a radical new doctrine. Under standard articulations of the contributory copyright infringement doctrine, a defendant is contributorily liable when it, "with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another." Gershwin Publ’g Corp. v. Columbia Artists Management, 443 F.2d 1159, 1162 (2d Cir. 1971) (emphasis added).

So "inducement" was already part of contributory copyright infringement. One way to read the Grokster opinion is that the Court merely amplified a new definition of what the word "induces" meant from Gershwin. The Court’s definition: "[O]ne 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."

However, this definition does a couple of things to extend contributory infringement. Most specifically, the Court is a little cagey about the knowledge requirement from Gershwin. As we saw in the lower court opinions in Grokster, there were plenty of questions about knowledge of what and when.

The Court sidesteps all of those questions, but, in doing so, I’m not sure it really overstates the rule. I think the Court clearly interpolates some intent of infringement – a higher level of scienter than knowledge.

This is where the Sony rule should kick in – knowledge or intent should be irrelevant if the device maker is protected by the staple article of commerce doctrine. The Court handles the Sony rule bizarrely and in a way that is sure to spawn hundreds of law review articles. It recharacterizes Sony as merely offering/removing presumptions. The Court says, "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."

I think the Court is trying to say that Sony permitted defendants to argue against any presumption of "knowledge" under Gershwin – and without knowledge, defendants are not contributorily liable. With this recasting, now, the Court is suggesting that we don’t need to worry about the knowledge prong (or, alternatively, we can infer that knowledge exists) when the defendants induce infringement.

While we might obsess about the nuances of each word, conceptually I’m not sure the Court’s semantic jujitsu really changes much of anything. I still think contributory copyright infringement requires scienter + actus reus. The scienter is still knowledge (or intent) of the infringements, and the actus reus is still some type of contribution/facilitation. Under inducement, the actus reus is the building and marketing of the device as a way to infringe.

Did the Defendants Induce?

While I think the legal standard of inducement is not a radical restatement of the law, it could have a significant impact depending on how courts apply the doctrine to the facts. This is where I think the Court went out of its way to make sure that Grokster and StreamCast lost. The evidence that supports that Grokster and StreamCast induced infringement was questionable. Abstracting from the facts, the Court’s basic thread seems to be:

  • Napster was a bad actor
  • Grokster and StreamCast tried to capitalize on Napster’s customer base after Napster’s demise
  • It was wrong of Grokster and StreamCast to try to woo Napster’s customers knowing that Napster was a bad actor

In the end, the defendants appear to suffer a "taint by association" – by having been associated with the Napster collapse, they get tarred by the same brush.

Some of the specific facts that the Court references:

  • The defendants picked names that implicitly invoked Napster in customers’ heads
  • The defendants offered the same basic services to customers that Napster had offered
  • Internal StreamCast correspondence indicates that the company was targeting former Napster users (which proves intent regardless of whether the messages ever reached consumers)

These facts are all ridiculously laughable. These are so defendant-specific and lightweight that it’s hard to take them seriously. Instead, the fact that the Court showcased these facts reinforces that the Court wanted to make sure that Grokster and StreamCast lost in a narrow opinion.

The Court also notes other facts that are more problematic from a precedent standpoint:

(1) The defendants aimed "to satisfy a known source of demand for copyright infringement" (i.e., former Napster customers). This factor again is Grokster/StreamCast-specific, although in theory this could be true of any technology provider whose products can be used to infringe. However, I’m not sure we’ll find situations again where a company aggregates a group of infringing-hungry users, goes out of business due to copyright concerns, and then is supplanted by companies targeting those users. As a result, so long as the courts don’t overinterpret this fact, I'm not sure we’ll see the fact pattern very often.

(2) Neither company tried to deploy filtering tools. The Court says that this failure evidences that the defendants had no desire to reduce users’ infringement because filters would have reduced the software’s attractiveness to its users. However, in footnote 12, the Court says, "[I]n the absence of other evidence of intent, a court would be unable to find contributory infringement liability merely based on a failure to take affirmative steps to prevent infringement, if the device otherwise was capable of substantial noninfringing uses." So the Court goes out of its way to say that merely failing to filter does not equal liability. However, it is possible that lower courts will misinterpret the Court’s words here and construe a defendant’s failure to filter proactively, by itself, against the defendant.

(3) The defendants continued to make money based on infringing activity by serving banner ads to software users. Normally, "direct financial interest" is a factor under vicarious copyright infringement; here the Court points to it as evidence of contributory infringement. I have always been troubled by the defendants’ business model (banner ads over infringing P2P activity), so I’m not surprised that the Court picked up on it. Further, as evidence that the defendants promoted the software as a way to infringe, this factor does provide some insight into the business model. However, merely making money off infringing activity is not per se infringement, so again it’s possible that lower courts will misinterpret this fact.

One obvious question that the Court does not address: When does someone who at one point induced infringement stop being an inducer? In other words, what could Grokster and StreamCast change in their business practices or marketing today that would cut off any future liability? I don’t have an answer to this question. Maybe there is no way to stop being an inducer. At least in this case, the "taint by association" with Napster pervades the defendants, so I think there’s no way these particular defendants could change their behavior to satisfy the Supreme Court. However, in future cases, I think it would be helpful to know how a defendant becomes a former inducer, and I cannot tell from this opinion what that would entail.

Predictions, Consequences and Open Questions

While the case is interesting and will spawn plenty of discussion (some intelligent, some insipid), I think the Supreme Court took care of Grokster/StreamCast without going too far. As a result, I think the practical consequences of this case are not that great. With the exception of Grokster and StreamCast as corporate entities (and their employees), I think this case will affect almost no one’s behavior.

Prediction: On remand, Grokster/StreamCast will lose in the courts. In all likelihood, the lower court will grant the plaintiffs’ motion for summary judgment (as the Supreme Court practically instructs them to do so). I further think that Grokster and StreamCast will be hit with enormous damages that will overwhelm their financial resources. As a result, I don’t see a bright future for these companies.

However, users will keep using their software, so the practical effect of this ruling on their users will be minimal. I also think that users generally will not change their file-sharing ways due to this opinion, so file-sharing will continue as if nothing happened.

Prediction: Other P2P file-sharing services will not change their behavior based on the ruling. The reasons why Grokster and StreamCast induce are so company-specific that very few other P2P file-sharing services will feel like it affects them. Further, new file-sharing technologies will emerge that will not promote themselves as tools for infringement, thus carefully avoiding the same "taint by association" that snared Grokster and StreamCast.

Open Question: This case offers us little insight into how these other P2P file-sharing services will fare in the courts so long as they don’t promote themselves as tools for infringement.

Prediction: I think the Supreme Court practically guaranteed that copyright owners and technology producers will square off in another major litigation over P2P file-sharing services. Indeed, I think it’s practically inevitable that the Supreme Court will revisit copyright liability for file-sharing services in ten years or less.

Prediction: The U.S. Congress will not attempt to disturb this ruling. I think the Supreme Court successfully struck a middle ground that will keep Congress from getting involved. The copyright owners won the case, so Congress won’t be that sympathetic to their requests. Further, the copyright owners got a Supreme Court pronouncement on "inducement," so that will substantially relax any pressure they could put on Congress to give them an inducement doctrine.

At the same time, the opinion is relatively narrow and does not put technology providers automatically on the hook for how their technology is used. I don’t think Congress would be all that excited about giving technology providers a safe harbor under any circumstance, but I certainly think this case is narrow enough that it does not put pressure on Congress to create a new safe harbor for technology. Perhaps if lower courts repeatedly misconstrue this case, technology providers will have more ammunition to get congressional protection. For now, I don’t think this opinion is extreme enough to make Congress want to get involved.

How Did I Do With My Preopinion Prediction?

I don’t consider myself an especially good prognosticator, but I think I did OK here. On June 16, 2005, I made the following (nervous) predictions:

"Supreme Court reverses the Ninth Circuit, but writes a narrow opinion that effectively limits itself to the Grokster facts – thus avoiding broad pronouncements on contributory liability generally or a major recasting of the Sony doctrine. Whatever the Supreme Court rules, I further predict that Grokster – and all of us – lose eventually. Either the Supreme Court reverses the Ninth Circuit or I predict that Congress will reverse the Supreme Court statutorily. Personally, I’d favor a narrow Supreme Court reversal over seeing Congress screw up any effort to draw lines between legitimate and illegitimate contributions to infringing activity."

I feel pretty good about this prediction. The Court did tinker with the Sony doctrine by characterizing how it affects presumptions, but the Court avoided broad pronouncements about Sony – specifically, what the words "capable of substantial noninfringing uses" mean. I feel very good about the prediction that the defendants lose this case. I also think I got what I wanted – a narrow Supreme Court opinion and little likelihood of congressional action to screw it up.

I should stop making predictions. I’m sure I’ve used up my prediction karma.

(Originally published at Technology & Marketing Law Blog ( Reprinted with permission.)

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MGM Studios, Inc. v. Grokster:
An Analysis for Litigators and Business Lawyers

By Ian C. Ballon
Manatt, Phelps & Phillips, LLP

Mr. Ballon co-chairs ManattÂ's Internet & Intellectual Property Practice Group in Los Angeles and Palo Alto, CA. He is the author of E-Commerce and Internet Law: Forms-Text-Cases published by Glasser Legal Works. The views expressed in this article are those of the author.

  1. Introduction
  2. In MGM Studios, Inc. v. Grokster, Ltd., the U.S. Supreme Court, borrowing from patent law, recognized a new cause of action for secondary copyright liability based on inducement, and clarified that secondary liability for distribution of a product under the Supreme Court’s 1984 holding in Sony Corp. v. Universal City Studios, Inc. may be imposed only where there is evidence more substantial than mere knowledge that a product may be used for infringing purposes, in addition to having substantial noninfringing uses.

  3. The Supreme Court’s Unanimous Opinion
  4. In Grokster, the Court considered the liability of operators of peer-to-peer networks, whose services had been used overwhelmingly for copyright infringement. The U.S. Court of Appeals for the Ninth Circuit had previously affirmed the entry of summary judgment for the defendants – Grokster and StreamCast – finding that they could not be held contribu­torily liable for copyright infringement, because their products were capable of commer­cially significant noninfringing uses, and, therefore, the plaintiffs were required to show that defendants failed to take action in response to actual knowledge of specific acts of infringement. The Ninth Circuit concluded that defendants did not have actual knowledge because of the decentralized nature of their services. The Ninth Circuit likewise had granted summary judgment for defendants on plaintiffs’ claim for vicarious infringement based on the conclusion that they lacked the ability to control user conduct – also because of the decentralized nature of the networks that the defendants had constructed.

    In a unanimous ruling written by Justice David H. Souter, the Supreme Court reversed the Ninth Circuit and 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. The Court clarified that liability for inducement is premised on "purposeful, culpable expression and conduct," not mere knowledge by a distributor of potential or actual infringing uses. The Court also clarified that "ordinary acts incident to product distribu­tion, such as offering customers technical support or product updates," would not support liability for inducement in and of themselves, absent other evidence of purposeful, culpable expression or conduct. Further, the Court explained that it is not merely the encouragement of infringement, but also the distribution of the tool intended for infring­ing use, that will give rise to a claim for inducing copyright infringement. While encouraging a particular consumer to infringe a copyright can give rise to secondary liability (presumably for contributory or vicarious infringement) for the infringement that results, "[i]nducement liability goes beyond that, and the distribution of the product can itself give rise to liability where evidence shows that the distributor intended and encouraged the product to be used to infringe."

    In short, a claim for inducement must be based on (1) intent to bring about infringement, (2) distribution of a device suitable for infringing use, and (3) evidence of actual infringement by recipients of the device. The Court made clear that the term "device" in the context of the Grokster case referred to a software application. In proving a claim for inducing copyright infringement, at least in the case before it, the Court explained that liability will not be found "on the basis of presuming or imputing fault, but from inferring a patently illegal objective from statements and actions showing what that objective was."

    Drawing from patent law, the Court explained that "the classic instance of inducement is by advertisement or solicitation that broadcasts a message designed to stimulate others to commit violations." In the context of the Grokster case, the Court identified three aspects of the evidence of the defendants’ intent were significant.

    First, each company marketed its products to users of the former Napster service (which the Court characterized as a known source of demand for copyright infringement) as a substitute for that service. The Court wrote that "[t]he record is replete with evidence that from the moment Grokster and StreamCast began to distribute their free software, each one clearly voiced the objective that recipients use it to download copy­righted works, and each took active steps to encourage infringement." Grokster and StreamCast, in the words of the Court, were not "merely passive recipients of information about infringing use." The Court emphasized that 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. The Court, in footnote 12, emphasized that "in the absence of other evidence of intent, a court would be unable to find contributory infringement liability merely based on a failure to take affirmative steps to prevent infringement, if the device otherwise was capable of substantial noninfringing uses." However, defendants’ failure to use filtering software, in light of evidence of what the Court characterized as defendants’ "unlawful objective," under­scored their "intentional facilitation of their users’ infringement."

    Third, the defendants’ business model – which depended on a high volume of use, which the record showed was overwhelmingly infringing – while not itself deter­minative, provided further evidence of the defendants’ unlawful objective. Notably, StreamCast and Grokster make money by selling advertising space, by directing ads to the screens of computers employing their software. The more the software is used, the more ads are sent out and the greater the advertising revenue.

    It is noteworthy that the Court went out of its way to explain that two of the three factors supporting liability for inducement in Grokster – the defendants’ failure to filter or otherwise deter infringement and the nature of their business model – were not in and of themselves determinative. On the other hand, these factors, in combination with the defendants’ positioning of their products as substitutes for the Napster service, were sufficient to establish inducement. Thus, how a company positions a product – and what it advertises or otherwise says about it – ultimately is likely to be the most important factor in litigating future inducement cases.

  5. The Supreme Court Distinguished Sony Corp. v. Universal Studios, Inc.
  6. In reversing the trial court’s entry of summary judgment for the defendants and remanding the case for reconsideration of plaintiffs’ motion for summary judgment in light of what it alternatively characterized as a "rule" or "theory" of liability based on inducement, the Court explained that the "Sony Betamax" case – Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417 (1984) – was not applicable to the facts of Grokster. In that case, the Court held that Sony, as distributor of the Betamax videocassette recorder, could not be held secondarily liable for copyright infringement because the product it was distributing was capable of substantial noninfringing uses, and, in fact, was used by consumers for both infringing and noninfringing purposes – including the practice of "time shifting" (recording television shows for viewing at a time later than when originally broadcast), which the Court deemed to be a fair use.

    The Ninth Circuit in Grokster had found that Grokster and StreamCast’s software applications had or were capable of "substantial noninfringing uses," even in the face of evidence presented by the plaintiffs that a minimum of 90 percent of the files on defendants’ networks were infringing at the time of the summary judgment motion, because, in the view of the Ninth Circuit, (1) the technology in question had substantial future noninfringing uses, and (2) the volume of files transferred over defendants’ network was so large that even 10 percent represented a substantial, noninfringing use.

    Although the Supreme Court reaffirmed the Sony rule – which it characterized as a safe harbor – it explained that "Sony dealt with a claim of liability based solely on distributing a product with alternative lawful and unlawful uses, with knowledge that some users would follow the unlawful course." The Court in Grokster explained that Sony was a case where there was "no evidence of stated or indicated intent to promote infringing uses." By contrast, in Grokster, "evidence of the distributors’ words and deeds going beyond distribution as such" showed "a purpose to cause and profit from third-party acts of infringement."

    While Grokster presented facts where liability could be imposed based on a defendants’ intent (when coupled with distribution and infringement by users), Sony allows for liability to be imposed "where an article is ‘good for nothing else’ but infringement," but "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."

    All nine justices agreed that the Ninth Circuit had read Sony too broadly 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…even when an actual purpose to cause infringing use is shown by evidence independent of design and distribution of the product" unless the distributor had specific knowledge of infringement at a time when it contributed to the infringement, and failed to act upon that information. In the view of the Supreme Court, Sony merely bars 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. Sony, the Court clarified, dealt only with the issue of imputed intent and did not displace other theories of secondary liability. Where evidence "goes beyond a product’s characteristics or the knowledge that it may be put to infringing uses, and shows statements or actions directed to promoting infringement, Sony’s staple-article rule will not preclude liability." Where applicable, Sony "limits imputing culpable intent as a matter of law from the characteristics or uses of the distributed product." The majority, however, declined to elaborate further to "add a more quantified description of the point of balance between protection and commerce when liability rests solely on distribution with knowledge that unlawful uses will occur." Thus, although not addressed by the Court, legitimate questions also may be raised about Sony’s potential applicability to services, as opposed to products.

  7. Justice Ginsburg’s Concurring Opinion
  8. Justice Ruth B. Ginsburg, joined by Chief Justice William H. Rehnquist and Justice Anthony M. Kennedy, concurred, arguing that there was also a genuine issue of fact precluding summary judgment on the issue of defendants’ liability for contributory infringement. Justice Ginsburg noted that Sony involved a finding of substantial noninfringing use following a full trial on the merits, whereas in Grokster there had been "no finding of any fair use and little beyond anecdotal evidence of noninfringing use…" She noted that most of the defendants’ declarations had been based on self-serving assertions (some of them hearsay) of mostly anecdotal and secondhand evidence, which did not support summary judgment in the face of evidence that the defendants’ software had been used overwhelmingly for infringement. Justice Ginsburg also took issue with the Ninth Circuit’s finding that defendants’ products were immune from liability based on substantial noninfringing use:

    Even if the absolute number of noninfringing files copied using the Grokster and StreamCast software is large, it does not follow that the products are therefore put to substantial noninfringing uses and are thus immune from liability. The number of noninfringing copies may be reflective of, and dwarfed by, the huge total volume of files shared.

    Because the record showed that defendants’ products were, and had been, used to infringe for an extended time, and that this infringement was the overwhelming source of revenue from the products, Justice Ginsburg wrote that the evidence, when fairly appraised, was insufficient to demonstrate, "beyond genuine debate, a reasonable prospect that substantial or commercially significant noninfringing uses were likely to develop over time."

  9. Justice Breyer’s Concurring Opinion
  10. Justice Stephen G. Breyer, joined by Justices John Paul Stevens and Sandra Day O’Connor, concurred, writing however that the Ninth Circuit had adequate legal support for affirming the entry of summary judgment for defendants on plaintiffs’ claim for contributory infringement. Justice Breyer, emphasizing that in Sony itself there was only evidence that around 9 percent of the copying undertaken by Sony users was plainly authorized, wrote that Sony created a clear rule permitting contributory liability to be imposed based on distribution of a product only when the product will be used "almost exclusively" to infringe copyrights. Justice Breyer wrote that by using the word "substantial" to refer to this authorized use, the Court indicated "that these circumstances alone constituted a sufficient basis for rejecting the imposition of secondary liability" even though the Court "buttressed its conclusion by finding separately that, in any event, unauthorized time-shifting often constituted not infringement, but ‘fair use.’" On this basis, he concluded "Grokster passes Sony’s test – that is, whether the company’s product is capable of substantial or commercially significant noninfringing uses." Justice Breyer argued that the Sony rule was clear, forward-looking and mindful of the limitations facing judges where matters of technology are concerned, and concluded that modifying the rule would chill techno­logical development.

    In her concurring opinion, Justice Ginsburg criticized this conclusion, noting that in Sony plaintiffs had owned less than 10 percent of copyrighted television programs poten­tially copied by users, and trial testimony had established that authorization to copy at least an equal percentage of television programming had been given by sports leagues and other copyright owners. By contrast, in Grokster, the plaintiffs controlled between 70 percent and 75 percent of the content exchanged by users of defendants’ software, and evidence of authorized use was anecdotal and based on a "motley collection of declarations" and survey evidence presented by plaintiffs. Justice Ginsburg strongly disputed Justice Breyer’s assertion that Sony had created a "clear" rule permitting contributory liability for distribution to be imposed only where a product will be used almost exclusively for infringement, both based on the text of that opinion and subsequent appellate court decisions which had "not unanimously recognized" Justice Breyer’s clear rule.

  11. The Future of Secondary Liability for Copyright Infringement
  12. While the justices plainly could not agree on the level of noninfringing use required for the Sony safe harbor rule to apply (or whether that level should be based on an absolute or relative number, or possibly even whether it should be based on only current or potential future uses), the Court, in issuing a 9-0 ruling, nonetheless provided substantial guidance to copyright owners, technologists, and the courts regarding when secondary liability should be imposed for distribution of a product that may be used for both infringing and noninfringing purposes.

    The Court adopted a pragmatic approach, based largely on a party’s intent, recognizing that "[w]hen 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…"

    Prior to Grokster, a plaintiff was not required to prove the element of intent in order to establish liability for copyright infringement except in limited circumstances, such as where a plaintiff seeks statutory damages based on willful infringement. The Copyright Act is a strict liability statute. Direct liability is premised on volitional conduct by a defendant, while secondary liability otherwise depends on a showing of knowledge (for contributory infringement) or the right and ability to control the conduct of the direct infringement (for vicarious liability).

    Inducement claims are likely to require extensive discovery of R&D, marketing and other internal documents (including email communications) from which evidence of intent may be inferred. Indeed, in footnote 7, the Court even suggested that promotional materials prepared, but not actually released to the public, while not evidence of encouragement to infringe, could illuminate a party’s intent.

    Inducement claims may need to be proven at trial since the issue of intent may be difficult to resolve on motion for summary judgment. As a practical matter, however, many inducement cases may settle after a ruling on a motion for preliminary injunction.

    The Court’s characterization of Sony as a "safe harbor" underscores that it affords a defense which – in addition to the safe harbor liability limitations of the Digital Millennium Copyright Act codified at 17 U.S.C. § 512 – potentially insulates legitimate technology developers and service providers from contributory or vicarious liability for third-party acts of infringe­ment. The uncertain contours of the Sony safe harbor, however, could make it more difficult for defendants to avail themselves of this defense prior to development of a complete evidentiary record at trial.

    The Court’s failure to address the theory of vicarious liability – beyond stating in dicta that a defendant "infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it" – also may create uncertainty in future litigation. In footnote 9, the Court reiterated its observation from Sony that the lines between direct, contributory and vicarious infringement "are not clearly drawn."

    In approving a cause of action based on inducement, however, the Court found a way to punish bad actors, such as the defendants, that openly sought to encourage and monetize third-party acts of infringement, while insulating from liability legitimate technology developers and service providers. The Court emphasized that substantial evidence must be presented to impose liability, making it clear that purposeful, culpable expression and conduct, not mere knowledge, was required, as shown by clear expression or other affirmative steps taken to foster infringement. As underscored in Justice Ginsburg’s concurrence, the Grokster case was about particular defendants, not peer-to-peer technology per se.

    The Court’s discussion of the grounds on which liability could be imposed – advertising, or in Grokster itself, three specific clusters of evidence (marketing a product as a substitute for Napster to be used to meet a demand for infringing files; failing to filter or otherwise prevent infringement; and adopting a business model built on infringement) – while merely a nonexclusive list, nonetheless provides useful guidance to technology developers and product distributors on what to do to avoid liability for inducement.

  13. Conclusion
  14. Companies plainly must avoid advertising or promoting potentially infringing uses of their products. While not required, or even determinative, developers of new technologies would be well advised to do whatever they can to thwart potentially infringing uses of their products. Where feasible, products should be designed or modified to prevent or deter, rather than facilitate, infringement.

    Technology firms should involve copyright lawyers in the development process to ensure that engineers are educated about a company’s potential exposure for inducement and the benefits of implementing engineering solutions to limit, rather than encourage, infringement.

    The Court’s recognition of a claim for inducement closed a potential loophole in the law that had been created by the Ninth Circuit’s decision in Grokster, which had provided a roadmap to potential infringers for avoiding liability. Under the Ninth Circuit’s decision, a person or entity could profit from products or services that were intended to promote infringement so long as the defendant designed its system so that it could not control (and did not have specific knowledge of) acts of infringement by individual users. While the Court’s new intent-based theory of recovery for inducement offers copyright owners an additional potential basis for imposing secondary liability (in addition to contributory and vicarious infringement), the decision includes ample safeguards to protect legitimate technology companies. Compliance-oriented businesses that seek to deter or discourage infringement ultimately should not fear the inducement rule or theory, which encourages (while not necessarily requiring) technology companies to act in socially responsible ways.

(Originally published in Mealey’s Litigation Reporter. Reprinted with permission of the author.)

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Advertiser Liability for Adware Vendors' Actions
By Prof. Eric Goldman
Marquette Law School

Mr. Goldman is an assistant professor at Marquette Law School in Milwaukee, WI.



New York Attorney General Elliott Spitzer’s recent enforcement action against adware vendor Intermix Media has opened up a new front in the battle against adware. Though Intermix claims to have settled the matter for $7.5 million, any disposition of this matter leaves open a number of issues about Spitzer’s ultimate plan – a possible sweep against the entire adware industry.

Spitzer has repeatedly threatened advertisers that run ads with adware vendors. These threats have created a conundrum for advertisers. On the one hand, adware offers advertisers a cost-effective way to reach consumers who derive value from the advertisements. On the other hand, no advertiser wants to get onto Spitzer’s hit list. Thus, if Spitzer’s threat is real, many advertisers will simply forgo adware advertising.

But amid the commotion, a critical substantive question remains ignored: what legal doctrine holds advertisers liable for advertising via adware? We have yet to hear a coherent theory from Spitzer – or anyone else – explaining how this liability arises.

In fact, advertiser liability for adware vendors’ actions would represent a novel and unprecedented application of current law. In other words, to hold advertisers liable, Spitzer will need to create new law.

We can better understand the radical nature of these assertions through some analogies to other advertising contexts. Imagine a newspaper runs a libelous story or illegally obtains consumer subscriptions through deceptive trade practices. Or imagine a Yellow Pages vendor illegally trespasses by throwing copies of its book onto homeowners’ land.

Are advertisers liable in these circumstances? Generally, the answer is emphatically no. Advertisers have no more responsibility for the media partner’s actions than any other customer or vendor. Indeed, such expansive liability might implicate First Amendment concerns.

An exception is if an advertiser has sufficient knowledge of, and control over, the media partner’s bad practices, which could create liability under venerable agency or conspiracy doctrines. However, the requisite level of knowledge and control is high – far higher than most advertisers ever have.

Indeed, many advertisers use intermediate vendors (such as ad agencies or affiliate marketers) to manage ad placement, meaning that the advertisers themselves are often fairly removed from the media partner’s behavior.

In response, Spitzer’s office has intimated that advertisers should know that their ad dollars are finding their way to adware vendors, and further should know that adware vendors are acting illegally.

This logic is extremely unpersuasive. In fact, many adware vendors fully or substantially comply with existing law, so advertisers should hardly assume the worst. Further, even if advertisers know who might get their ad dollars, this is a far cry from the knowledge and control necessary to hold the advertiser liable for someone else’s actions.

In the spam context, the U.S. Congress statutorily created a new type of advertiser liability in the 2003 CAN-SPAM law. Congress or state legislatures could choose to adopt a similar law for adware advertisers.

Until then, adware advertiser liability remains purely speculative. Nevertheless, the specter appears to serve Spitzer’s apparent modus operandi of attempting to starve the few truly illegal actors by cutting off their access to customers. Unfortunately, these threats veer disconcertingly close to vigilantism. Using hypothetical law to spook an industry goes far beyond a prosecutor’s role of enforcing existing law and verges into the realm normally reserved for our elected legislators.

Meanwhile, there is a collateral cost to this vigilantism. Legitimate advertisers may choose not to use legitimate adware vendors to deliver socially beneficial advertising to consumers. We would not tolerate scare-mongering in other media, like newspapers, radio or television, and we should not tolerate it in the adware context either.

Spitzer’s threats against the entire adware industry may garner popular support for him for leading the charge against "spyware," but the threats are based on unprecedented legal theories with broad negative policy implications. We should not allow our current antipathy towards adware to blind us to the radical nature of holding customers liable for what their vendors do.

(Originally published by CNET. Reprinted with permission of the author.)

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The Intellectual Property Subcommittee of the Cyberspace Committee is devoted to the study of intellectual property issues as they relate to the Internet and electronic commerce. For more information, contact I.P. Subcommittee co-chairs Eric Goldman or John E. Ottaviani.
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