Supreme Court rules software manufacturers can be liable for user’s infringements

August 2005

Technology, Internet, Record Labels, Music Publishers
Supreme Court rules software manufacturers can be liable for user’s infringements MGM v Grokster 04-480 27th June 2005

The US Supreme Court has ruled that software developers violate federal copyright law when they provide individuals with the means to share copyrighted files without authorisation. The court stressed that P2P technology has legitimate uses and added that file-sharing service operators can only be held liable if their intention was to encourage copyright infringement. “We hold that one who distributes a device with the object of promoting its use to infringe copyright … is liable for the resulting acts of infringement by third parties,” Justice David Souter wrote in the decision. “There is no evidence that either company made an effort to filter copyrighted material from users’ downloads or otherwise impede the sharing of copyrighted files.” MGM v. Grokster was brought by 28 of the world’s largest entertainment companies against the makers of the Morpheus, Grokster, and KaZaA filesharing software products in 2001. The entertainment companies hoped to obtain a legal precedent that would hold all technology makers responsible for the infringements committed by the users of their products but MGM and the other entertainment companies lost their case in District Court and then lost again on appeal to the Ninth Circuit Court of Appeals. The lower court rulings were based on the Supreme Court’s landmark decision in the 1984 Sony Betamax case, which determined that Sony was not liable for copyright violations by users of the Betamax VCR. However it is important to distinguish this case – note the use of the words ‘intention to encourage copyright infringement’ – which mean that this case is very much decided on the facts and this judgment does not directly overrule the 1984 decision.

The Electronic Frontiers Foundation (EFF) argue that the ruling that could impede makers of all kinds of technologies with expensive lawsuits and note that decision means that P2P software manufacturers can be held liable for the infringing activities of people who use their software. EFF add that the decision relies on a new theory of copyright liability that measures whether manufacturers created their wares with the “intent” of inducing consumers to infringe. It means that inventors and entrepreneurs will not only bear the costs of bringing new products to market, but also the costs of lawsuits if consumers start using their products for illegal purposes. “the Supreme Court has unleashed a new era of legal uncertainty on America’s innovators,” said Fred von Lohmann, EFF’s senior intellectual property attorney and he added that “the newly announced inducement theory of copyright liability will fuel a new generation of entertainment industry lawsuits against technology companies. Lohmann adds that perhaps the threat of legal costs may lead technology companies to modify their products to please Hollywood instead of consumers.” US lawyer Cydney Tune of Pillsbury Winthrop Shaw and Pittman LLP notes that, overall, the Grokster decision is an attempt to “reach a balance that takes into account the need to establish liability for those who induce massive copyright infringement while at the same time trying to avoid stifling new technological innovation” and that the result may “subject technology companies to increased levels of litigation “although it remains unclear to what extent companies will incur heightened liability. Tune adds that the exact practices that will give rise to liability from “inducing” copyright infringement are matters of fact that will be determined by future cases. Still, the Court explicitly stated that “mere knowledge of infringing potential or of actual infringing uses would not be enough to subject a distributor to liability.” Likewise, the ruling does not impose duties to take active steps against infringement. Instead, in order to incur liability, a distributor would need to take active steps to encourage infringing uses or have a clear intent to induce infringement. Tune suggests some steps which can be taken when new technologies are developed in order to protect creators and distributors from potential contributory copyright liability and these include:

·  Keeping records of the invention and development process, making clear the lawful purposes for which the technology and/or product is intended

·  Not promoting potentially infringing uses of the technology or product

·  Taking reasonable steps to avoid or reduce infringing uses by users and other third parties

·  Not publishing any materials instructing the public in how to use the product to infringe

The Supreme Court has ordered the lower court to consider whether peer-to-peer companies Grokster and StreamCast can be held liable under the new standard. StreamCast is confident that it will pass muster under the new, multi-pronged test.

Supreme Court decision (pdf file):

Electronic Frontiers Foundation:

For comment by Mike Godwin see:

Sony -v- Universal City Studios (1984) 104 US 774

For the leading UK authority see CBS Songs -v- Amstrad (1988) RPC 567

COMMENT : John Kennedy, Chairman and CEO IFPI:
“This is a landmark decision, the most important judgement involving the music industry in 20 years. It quite simply destroys the argument that peer-to-peer services bear no responsibility for illegal activities that take place on their networks. The US Supreme Court has ruled, clearly and unequivocally, that technology distributors cannot build a business by promoting copyright infringement. And, in doing so, the Court has given a boost to the development of the legitimate on-line market and the millions of creators and investors, artists and producers working within it, not only in the US but worldwide.” (article by Cydney Tune) (article by Edward J Naughton),,1516173,00.html,1412,68018,00.html?tw=wn_tophead_1

See also John Naughton writing in the Observer (The Networker) and see ( who adds some sensible words and points out that the Supreme Court did not accept the Sony Betamax case as a precedent relevant to the Grokster case.and he adds that whilst the case could be seen as making software manufacturers liable for what end users did with their products what the ruling did was ‘stop short of such a draconian verdict. Instead it proposes a test: have the makers or proponents of the technology engaged in active inducement of users to employ it in illicit ways. If yes, they are liable: If no, they are not. On that test, Grokster and Streamcast were deemed liable. Observer 3rd July 2005.’

And of course the Grokster decision is not biding in other jurisdictions. A Taiwanese district court has just come to the opposite conclusion in an action brought by the IFPI.
And see the Dutch and Australian judgments in Law Updates below.

For a link to a useful review of the uncertain position technology companies find themselves in post MGM v Grosker see the article Remedying ‘Grokster’ by Fred von Lohmann. Mr von Lohmann is a senior staff attorney with the Electronic Frontier Foundation, a San Francisco-based nonprofit devoted to protecting civil liberties and free expression in the digital world:

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