Copyright Cases to Watch: MGM v. Grokster

Filed as Features on November 5, 2007 11:41 am

With Halloween just past us, this is the time of year where things tend to come back from the dead. That seems to also be true in the legal world.

Many will recall in July of 2005 when the Supreme Court ruled that the file sharing service Grokster, along with its co-defendant StreamCast, could be held liable for the infringements that took place using their software.

It seemed to be a deathblow to the defendants. Given the amount of likely illegal file sharing going on, any amount of damages would easily eclipse their potential value. Grokster, perhaps realizing that there was little hope for their future, closed their doors in November that year as part of their settlement with the plaintiffs.

However, StreamCast, along with this case, lives on. Much like a zombie, this case moves forward at a snails pace, brought back from the dead by a defendant who is not ready to die. But as the case drags forward, it is addressing larger issues of copyright on the Web and having an equally drastic impact on the future of the Web as the original Supreme Court decision.

Background

In October of 2001, over six years ago, a group of movie studios headed by MGM filed suit against Grokster, StreamCast, which was then known as MusicCity and Sharman Networks, the makers of Kazaa. However, the case against Sharman was quickly dropped as the company is incorporated in the small island nation of Vanuatu.

Originally the case was though to be a reevaluation of the Sony Corporation of America v. Universal City Studios, Inc. case, also known as the Betamax ruling. In that case, the Supreme Court ruled that producers and distributors of a product can not be found liable for user infringement so long as the product had substantial legitimate use.

Initially, the lower courts followed that decision and, by the time the case made it to the Supreme Court, Grokster had two wins under its belt, one at the district court level and another at the court of appeals. In both cases, the courts cited the Betamax when ruling in favor of Grokster and noted that the service had many legitimate purposes.

However, the Supreme Court took a different tact with it. It ruled unanimously that Grokster and Streamcast were indeed liable because they had offered their services “with the object of promoting its use to infringe copyright”. This resulted in the creation of an entirely new test, now known as the “inducement” test, to determine whether a product or service could be held liable for infringement by its users.

The ruling did little to clarify the Betamax decision or to clear up the gray area surrounding file sharing and the creation of products to aid in it. It also did very little to resolve the case itself. Though the Supreme Court did find that the defendants were liable, it did not expressly say to what extent and what actions would need to be taken to eliminate that liability.

Those questions, instead, were punted back to the district court where StreamCast is currently fighting on and is working on finding answers to those very important problems.

Where Things Are

Most expected StreamCast to simply follow Grokster and throw in the towel once the Supreme Court ruling came down. With financial damages practically a given, there is little future for the company after the matter is resolved.

However, the case has dragged on in the district court, with the presiding judge, Stephen Wilson, working to balance the issues before him and resolve this case in as equitable a manner as possible. In his latest decision, filed in October, Wilson ruled on two key issues. The first regarding whether or not Grokster and StreamCast caused irreparable damage to the copyright holders and what kind of permanent injunction to file against StreamCast to restrict its operations.

On the first matter, Wilson ruled that StreamCast had caused irreparable harm both because StreamCast would be unable to pay any statutory damages awarded and because of the viral nature of file sharing meaning that the works distributed were now forever out of the copyright holders control.

On the second issue, Wilson ruled that requiring StreamCast to block all infringing material would have been a death sentence to the company and, instead, created a permanent injunction requiring them to use the best filtering system that was practical under the circumstances.

Further decisions, including ones regarding damages, are likely in the future.

What’s At Stake

First off are the two issues supposedly answered by the district court judge in his latest ruling, namely irreparable harm and filtering.

The issue of irreparable harm or irreparable injury is important because the ability to prove such injury not only increases damages likely to be won, but also makes it possible to receive a preliminary injunction, enabling you to stop an infringement earlier in the legal battle. In short, the ability to prove irreparable harm makes it easier and more profitable to pursue copyright matters.

Traditionally, copyright holders, as well as other IP holders, have had a very easy time proving irreparable injury due to the nature of their rights but that has become less true in recent years as courts have set the bar a little bit higher. Still, that bar was met in this case, at least according to the district court judge, and it was met in a way that could affect all Internet services, especially those that distribute “perfect copies”.

The next issue is what kind of injunction should be filed against StreamCast. Given the facts of the case up to this point, this was something of a win for the company. The injunction did not bar StreamCast from operating and acknowledged the legitimate use for the product.

The question here is whether or not StreamCast can hammer out a practical business model under whatever injunction is finalized. It could be possible with the current one, but that is assuming that it stands under appeal. This issue will likely affect services such as YouTube, which are working to build and implement filtering technologies to weed out infringing works.

Finally, there is also the issue of damages. Inducement of copyright infringement as it relates to P2P is relatively unexplored. The question of much money should be awarded the plaintiffs is a difficult one to answer but an important one. If damages are low, it could encourage other companies to move into this field, albeit with greater caution. If they are very high, it could force out some services which are already operating.

These damages would also likely affect any site that facilitated the exchange of copyrighted material including video sharing sites, some wikis and even some blogs depending on the amount of user participation. Since the entire Web operates on a P2P structure, it is easy to see how the Grokster ruling could spread far beyond file sharing.

What it Hinges On

So much of this case delves into new territory that it is hard to determine what exactly it does hinge on. Since the overarching issues were resolved by the Supreme Court, albeit in a less than satisfying manner, we are down to the details and, as important as they are, they can be swayed by the smallest of issues.

However, the big issue and the one the court truly has to ponder is exactly how liable is StreamCast for the infringement it facilitated. Yes, it can be held legally liable according to the Supreme Court but the extent of that liability remains unclear. Though almost any amount of damages would likely be enough to sink the company, the court has to answer how much of the responsibility is on StreamCast and how much is on its users.

This is a tough question, especially with lawsuits against users going on in other courtrooms, but finding the right balance could cause all of the other questions to fall into place.

What is Likely to Happen

This case has been wild an unpredictable. Usually, when you go before the Supreme Court with a 2-0 record in the lower courts, you expect to win. The Supreme Court, however, begged to differ.

The two things that have remained constant in this battle are appeals and delays. It seems likely that every decision ruled at the district level will likely be appealed at least once and that, even with the judge’s most recent ruling, there is still more to be said about these issues.

Given the nature of this case, look for it to drag on for some time and look for it to end whenever StreamCast decides to close up shop and settle. However, that will probably not be for quite some time and likely not before we get a few more rulings from higher courts on the details.

Then again, the other tradition in this case is higher courts not doing much to clarify the hard questions when they go to alter a lower court’s decision. The best thing that can happen is that the higher courts accept the rulings of the district judge, for better or worse.

Given the current rulings from the district court, that seems to be a very likely course of action.

Conclusions

No one really seems to know why StreamCast has held on so long. They have, without any doubt, received some offers to settle the case and could have been done with it years ago. However, more than two years after a Supreme Court ruling effectively doomed their company, they are still fighting on.

The best theory going is that everyone involved wants to fight this case out so they can get some rulings that will help them or others down the road. They want to clear up the uncertainty in this area and are working to make that happen.

The end result may be that they do just that. However, given the history of this case, how much clarification we can actually expect remains difficult to say. So far, the Grokster case has only served to further muddy the waters, let us hope that what follows it at least undoes some of the damage the Supreme Court ruling did.

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  1. By chartreuse posted on November 5, 2007 at 5:49 pm
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    Interesting.
    I would love to find out the real reason the fight continues…I think we all might be missing something.

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  2. By Jonathan Bailey posted on November 6, 2007 at 1:40 pm
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    Chartreuse: I have to agree, it is interesting. I have to think there is something of a “higher calling” here.

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  3. By Robert Nelson posted on November 6, 2007 at 5:37 pm
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    Let us hope that the Supreme Court rule in favor of Streamcast. It is Betamax vs VHS all over again and we all know how badly the movie studios where hurt by first VCR.s and now DVD’s presently 1/3 of movies income is from DVD sales. They cry all the way to the bank.Talk about Greed

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  4. Copyright Cases to Watch: MGM v. GroksterNovember 27, 2007 at 8:48 pm

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