38 Contributory and Vicarious Liability for Peer-to-Peer File Sharing Services: The Napster and Grokster cases

As described above in Part 3 (History and Structure of the Recording Industry), the recording industry in the early 21st century was deeply impacted by rampant copying of digital music files (primarily in the MP3 format) over the internet. The new internet companies that facilitated this process were known as “peer to peer” file-sharing services (“P2P”) because they operated on the principle of a distributed network of users who hosted and shared digital files, rather than the service itself hosting and sharing those files. The P2P service provided the platform and software that enabled its users to find and share files, but did not actually distribute the files among its users. Napster, which began service in June of 1999 quickly became the most popular of these services, peaking in size with a user base of over 26 million in 2001.

Napster was sued for copyright infringement in 2000 by two high-profile artists, Metallica and Dr. Dre, and A&M Records. In the case by A&M records (and other plaintiffs), the federal District Court (Northern District, California) granted a preliminary injunction against Napster to prevent them from uploading, downloading, or otherwise distributing plaintiffs’ copyrighted songs during the case. Given that obeying such an injunction would effectively put Napster out of business for an extended period, Napster not surprisingly chose to appeal that ruling to the federal 9th Circuit Court of Appeal. The 9th Circuit stayed the District Court’s injunction while it held hearings and made its decision. (A “stay” puts a hold on enforcing the injunction until a court can rule on its legality.)

The 9th Circuit ruled largely in favor of the plaintiffs (led by A&M Records), but asked the District Court to modify the injunction. The 9th Circuit’s ruling in 2001, and the imposition of a modified injunction later in 2001, effectively shut down Napster’s existing peer-to-peer business model, forcing it to ultimately settle the lawsuit for approximately $26 million and declare bankruptcy. The Napster name was eventually acquired in bankruptcy by Roxio and subsequently sold to Rhapsody, which used the Napster name for its relatively unsuccessful music streaming service.

The plaintiffs in the Napster case used the contributory and vicarious liability theories from the Sony Betamax case to allege that Napster had committed copyright infringement. Although the Sony Betamax case had ultimately exonerated Sony of liability, the Supreme Court in that case had also validated and provided useful analysis of the contributory and vicarious liability theories to the extent that they were more likely to prevail against a defendant who did not have Sony’s same basis for defense of not knowing to which use its customers would put its recording device. (Having a U.S. Supreme Court opinion to cite in favor of  a legal theory is always the ultimate basis for argument in a federal court, even if the ruling in the cited case happened to be decided against the party asserting that claim due to some particular factual peculiarity of that case.)

In the 9th Circuit’s Napster opinion, the court dealt with the plaintiff’s contributory and vicarious liability claims, as well as Napster’s safe-harbor defense under the Digital Millennium Copyright Act (DMCA). I will summarize the 9th Circuit’s holdings in turn. Contributory liability for infringement, the court summarized, occurs when a defendant engages in conduct that “encourages or assists the infringement” committed by another. In order to show contributory liability, a plaintiff must also show that the defendant knew or had reason to know of direct infringing activity enabled by defendant’s actions or services. The 9th Circuit held that “if a computer system operator [such as Napster] learns of specific infringing material available on his system and fails to purge such material from the system, the operator knows of and contributes to direct infringement.” (A&M v. Napster). The court also acknowledged that, in accordance with the Supreme Court’s decision in Sony, if the computer operator does not know of specific infringement being committed on its system, then the mere possibility that users could commit copyright infringement using the system is not enough to find contributory liability. “Napster,” the court held, “has actual knowledge that specific infringing material is available using its system, that it could block access to the system by suppliers of the infringing material, and that it failed to remove the material.” The court also found that Napster “materially contributes” to the infringing activity of its users by providing easy and free access to those songs through its software.

Turning to the issue of vicarious liability, this occurs when a defendant “has the right and ability to supervise the infringing activity and also has a direct financial interest in such activities.” The court made quick work of finding that Napster benefitted financially from its expanding user base, which was clearly tied to the availability of copyrighted music available through the software. To find an “ability to supervise” the infringing activity, the court relied on Napster’s technical ability to restrict access to the system by users who were found to be downloading copyrighted material. Napster had admitted that it had that ability, but it was also clear that it rarely blocked user access. For the court, that ability to restrict access constituted an “ability to supervise” any potentially infringing activity. “Turning a blind eye to detectable acts of infringement for the sake of profit gives rise to liability,” the court concluded.

Napster attempted to defend itself from copyright infringement liability by claiming safe-harbor under the DMCA. However, the court raised significant doubts about Napster’s DMCA defense based on Napster’s knowledge of the infringing activity and its unwillingness to curb that activity on its system as required by the DMCA. The court found that a preliminary injunction was appropriate given the likelihood that a DMCA defense would fail if taken to trial. (Given that Napster was unable to successfully assert a DMCA safe harbor defense, I will delay discussing the details of that defense until Chapter 39.)

Interestingly, one of Napster’s other arguments against the injunction was that the court should create a new royalty payment scheme that Napster would pay to copyright holders rather than being forced to shut down as a result of an injunction. In effect, Napster in this argument was asking the court to create a new licensing mechanism for MP3 downloads to compensate artists and record labels. The court declined to take such a step, correctly asserting that was a job for Congress and not the courts. But it is interesting that Napster’s argument foreshadowed the world in which we live today, in which just such a compulsory licensing scheme for online streaming is now in place and functioning to channel royalty payments to artists and record companies when consumers stream copyrighted songs online. As we now know, Napster’s greatest fault was that it was too far ahead of the curve of both the industry and the laws supporting the industry.

The Supreme Court’s Grokster Decision

Napster’s demise did little to stem the tide of peer-to-peer networks and mass copyright infringement through MP3 file sharing enabled by those networks. The Napster decision discussed above only related to a preliminary injunction against Napster pending trial. That trial never occurred because the injunction forced Napster into settlement of the claims against it, and ultimately a sale of company’s remaining assets (essentially only its name) in bankruptcy.

So, legal resolution of the issues surrounding copyright infringement by peer-to-peer networks had to wait as additional legal challenges made their way through the federal courts. That wait would not be long. In 2001, the same year of Napster’s demise, another peer-to-peer network, Grokster, had risen to such a level of success that it too was sued by a group of plaintiffs, including movie studios, recording companies, and music publishers. That group of plaintiffs was led by movie studio Metro-Goldwyn-Mayer, so the case became known as MGM v. Grokster.

Grokster and other “second-generation” peer-to-peer networks hoped to avoid legal liability by allowing users to exchange MP3 and other files directly between each other’s computers, without those files passing through the service’s servers. That indirect file sharing protocol meant less control by the service provider and, such providers hoped, less likelihood that they would face legal liability for copyright infringement. Initially, the new P2P network system seemed to be working to avoid legal liability as the District Court issued a summary judgment in favor of defendant Grokster, holding that it could not be found liable as a matter of law for contributory or vicarious infringement due its limited ability to control the exchange of files between its users, and the fact that the system had potentially non-infringing uses.

There was no dispute as to whether or not copyright infringement was occurring on Grokster’s system. An analysis showed that over 90% of all files available on the system were unlicensed copies of copyrighted material. The issue was whether Grokster was contributorily or vicariously liable for that infringement. Following the analysis used in the Sony Betamax case, the District Court found that Grokster’s P2P system was capable of performing substantial non-infringing uses, such as a way to transfer non-copyrighted files, or copyrighted files to which the owner had granted permission for the transfer. The court emphasized that it was not relevant whether the system was actually being used in a non-infringing way, but only whether it was capable of such non-infringing uses and that those non-infringing uses were of some potentially commercial value. Given that finding, the plaintiff’s would not be able to show that the defendant Grokster had constructive knowledge of copyright infringement, and the plaintiffs would thus have to show that the defendant had actual knowledge of specific infringement on its system and failed to act on that knowledge. The District Court held that, because Grokster had no ability to stop its individual users from swapping copyrighted files due to the distributed architecture of its system, and that Grokster did not materially contribute to any infringing activity simply by making its software available that could be used for other purposes, Grokster could not be held to be contributorily liable for those infringements. The District Court also absolved Grokster of vicarious liability because it did not have any supervisory authority over its users behavior with respect to files located only on the users computers rather than on Grokster’s own servers.

In 2004, the 9th Circuit Court of Appeals affirmed the District Court’s summary judgment of the Grokster case in favor of the defendant, setting the stage for an appeal of that ruling by the plaintiffs to the United States Supreme Court. As you are likely already aware, the U.S. Supreme Court is not bound to accept and rule on every appeal that is presented to it. The Supreme Court in fact declines to hear most appeals. The Supreme Court typically receives over 7,000 requests for appeals each year (known as “petitions for writs of certiorari”), but only decides to hear and decide on about 100 of those. The Supreme Court sets a very high threshold to requesting it to hear an appeal and issue an opinion, so it is noteworthy at the outset to acknowledge that in the Grokster, case the Court felt that it needed to weigh in on an important legal issue. The opening pages of the Supreme Court’s Grokster opinion indicate that the Supreme Court accepted this appeal not only to clarify an issue of law, but to do so in a context that it felt the lower courts had failed to appreciate: the alarming growth in digital copying technologies and their potential to rapidly alter the legal and economic dynamics of the recording industry. The Supreme Court summarized this development as follows:

“The tension between the two values is the subject of this case, with its claim that 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. This very breadth of the software’s use may well draw the public directly into the debate over copyright policy, and the indications are that the ease of copying songs or movies using software like Grokster’s and Napster’s is fostering disdain for copyright protection. 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.”

In its Grokster decision, the Supreme Court held that the 9th Circuit Court of Appeals had relied too heavily on a narrow reading of the Sony Betamax case to find Grokster without liability simply because the system had other potentially non-infringing uses and that Grokster did not have actual, specific knowledge of infringement. That analysis, the Supreme Court stated, ignored the fact that there was also significant evidence available that Grokster intended for its users to commit copyright infringement, and that its business model was in fact predicated on that infringing activity by its users. The Supreme Court thus used a different legal theory, that of inducement, to create liability for copyright infringement: “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” (p. 937).

The Supreme Court in Grokster then identified several items of factual evidence that showed that Grokster and another defendant in the case, StreamCast, had actively promoted the infringing use of their software to their users, specifically targeting former users of Napster and urging them to now use their new services to continue the downloading of copyrighted popular music. The court also noted that the business model of these new services, free software supported by advertisements, relied on high-volume use of the service. That high-volume use was predicated on the use of the software for downloading of copyrighted popular music by users; the non infringing uses of the software would have generated nowhere near the volume of use required by the business model.