On August 19, 2004, the 9th Circuit Court of Appeals issued its opinion in MGM v. Grokster, affirming the lower court’s finding that Grokster’s and Streamcast’s peer to peer file sharing networks are not contributorily or vicariously liable for copyright infringement.
The Grokster case is just one of the many lawsuits that the major record labels, usually represented by the RIAA, have brought against new technologies that have the ability to infringe on their copyrights. In this case, MGM and others filed suit against P2P file sharing networks Grokster and Streamcast under the legal theory of “contributory and vicarious liability”. Since the P2P companies themselves are not directly infringing copyrights – they’re merely providing the means for the filesharing to occur – this theory is currently the only legal recourse copyright owners have to stop the networks from allowing music files to be freely traded on the internet.
This article explains just what “contributory and vicarious liability” means, its use in the past, and how this 9th Circuit decision will impact future litigation and legislation.
The Balance Between Creativity and Control
A delicate balance exists between technology and creative content. Each time a new technology is invented, the owners of creative content get nervous that the new technology will spoil the way they make money from that creativity, putting that delicate balance at risk.
As previous technology advancements have demonstrated, time and market forces usually lead to a solution that benefits both the technology companies and the copyright owners.
Currently, the technology companies have invented P2P networks and many copyright owners are scrambling to eradicate this new technology before the marketplace has a chance to explore the potential benefits to them.
Definition of Contributory and Vicarious Liability
This conflict arises largely because technology systems typically do not directly infringe on copyrights themselves, their users do, by distributing and copying files over the system. Therefore, the record labels want to hold P2P systems liable based on theories of secondary liability alleging that the P2P systems contribute to and profit from the infringing conduct of their users.
Contributory infringement and vicarious liability are court-created theories (i.e., not specified in the Copyright Act) designed to hold a company liable for its participation in unlawful copying. The theory is analogous to the getaway driver in a robbery; everyone knows that the person who drives the getaway car will be in trouble, even if he does not rob the store. The imposition of secondary or indirect liability  is common throughout the law. Those who aid or abet the commission of wrongs, or who benefit from them, are frequently held liable.
Secondary liability is an especially important tool in copyright enforcement. Often, alleged contributory infringers may be in the best position to prevent or police violations. And suing many individual direct infringers may be impractical or expensive. However, secondary liability can create disincentives to innovation and entrepreneurship. Generally products have legitimate uses as well as infringing ones, and liability may inhibit firms from serving beneficial purposes. The Supreme Court’s decision in Sony Corp. of America v. Universal City Studios limited the circumstances in which liability for contributory infringement may be imposed on a technology company simply because it provided a product that was used for infringement.
The copyright laws do not expressly provide for secondary liability for copyright infringement. But the courts, in a long series of cases, have imposed liability on those who facilitate or profit from copyright infringement. Thus there are two main strands of secondary liability for copyright infringement: contributory infringement and vicarious liability.
CONTRIBUTORY INFRINGEMENT LIABILITY
The standard definition for contributory copyright infringement is when the defendant, "with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another."  In other words, the record labels must not only show ownership of a valid copyright and unlawful copying but must show that the P2P company 1) had knowledge of the infringing activity and 2) materially contributed to the infringing conduct. Again, this is for the purpose of holding someone other than the infringer liable for copyright infringement.
VICARIOUS INFRINGEMENT LIABILITY
Vicarious liability is another means of holding someone liable for copyright infringement even when that person or party is not the one who did the infringing. In order to find a defendant liable under the theory of vicarious liability for the actions of an infringer, it must be shown that the defendant 1) has the right and ability to control the infringer’s acts, and 2) receives a direct financial benefit from the infringement. Unlike contributory infringement, knowledge is not an element of vicarious liability. However, courts have determined that the combination of the right and ability to control the infringer’s acts and the receipt of a direct financial benefit from the infringement suffices to hold a defendant vicariously liable for copyright infringement, even if the defendant had no knowledge of the particular infringement.
The Sony Standard
Back in the early 1980’s, the VCR raised the potential for widespread copying and archiving of over-the-air television broadcasts of copyrighted material. Copyright owners feared reduced value of syndication rights, lost sales and rentals of tapes of movies and videos, and lost revenues from commercials (from fast-forwarding through ads). On the other hand, the VCR offered substantial benefits that would be reduced if makers were liable for copyright infringement from use of the record feature. This raised concerns among movie studios, and two brought actions against Sony, charging contributory and vicarious infringement.
In Sony, the Supreme Court found that as long as a technology has “substantial non-infringing uses”, it cannot be held liable for contributory or vicarious liability.
The Sony case stated that it was Congress’ job to look at innovations and make adjustments to copyright law as needed. Since that decision, Congress has enacted the Digital Millennium Copyright Act of 1998 (DMCA).
The DMCA was passed as a set of responses to the complicated copyright and other issues that came with the rise of the Internet. Specifically, the DMCA provides several safe harbors to protect internet service providers (ISP’s) from copyright infringement liability.
While the DMCA has a savings clause that ensures the validity of Sony, it is questionable whether the Sony Court’s claim applies in the context of secondary liability for online infringement. The DMCA specifically addresses problems of secondary liability in an online context.
The Internet Complicates Copyright Law
The recording industry responded to internet piracy by legal actions against P2P file-sharing companies, alleging secondary liability for copyright infringement. A series of cases (Napster, Aimster, Grokster) have littered the courts in attempting to figure out a balance between beneficial technologies and copyright owner’s rights. The cases have been decided both ways, depending on the type of system.
In the Napster case, Napster argued that file sharing was just like the VCR and therefore constituted fair-use. The court rejected this argument and held that Napster was liable for contributory and vicarious liability, stating, “if a defendant could show that its product was capable of substantial or commercially significant noninfringing uses, then constructive knowledge of the infringement could not be imputed. Rather, if substantial noninfringing use was shown, the copyright owner would be required to show that the defendant had reasonable knowledge of specific infringing files.” It also found that the DMCA’s safe harbors did not apply to Napster because the service did not fall within the definition of an ISP. The Sony and Napster cases are completely different from one another in magnitude of piracy and quality of copies.
Similarly, the court found that Aimster was liable for contributory infringement and that it could not qualify for protection under the DMCA safe harbor since it invited repeat infringement.
The plaintiffs are music and movie industry copyright owners. The defendants are companies that distribute P2P software that enables the individual users to infringe the plaintiff’s copyrights. The individual infringers are not defendants in this suit and the opinion pertains to contributory and vicarious liability.
In the District Court, the plaintiffs filed a complaint against Grokster, Streamcast, and Kazaa, alleging contributory and vicarious infringement. In April 2003, the District Court held that Grokster’s and Streamcast’s P2P file sharing networks do not contributorily or vicariously infringe the copyrights of the holders of music and movie copyrights.
After this decision, the plaintiff’s appealed to the 9th Circuit Court of Appeals, but this court agreed with the District Court, and found that the P2P companies were not liable for contributory and vicarious infringement.
Since Grokster and Streamcast are decentralized systems, and since the P2P software is capable of substantial noninfringing uses such as trading public domain works as well as copyrighted works which owners allow to be placed on the P2P networks, the 9th Circuit said that P2P networks are allowed to exist and cannot be held liable for contributory and vicarious liability.
The Legislature Steps in Again
The RIAA and major record labels recently lobbied Congress to pass a bill called INDUCE, which would give copyright owners an additional way to sue P2P networks. Besides contributory and vicarious liability, copyright owners would be able to bring an action for inducement to infringe.
If the INDUCE bill passed, it would effectively circumvent the case law in Sony, Napster, Aimster, and Grokster. Many in the technology industry have argued that the bill is overbroad and would stifle innovation. Senators Leahy and Hatch invited members of the technology and music community to work together to arrive at a sensible balance between allowing new technologies to flourish while protecting the copyrights of musicians, but these negotiations fell apart. At this point (October 2004) the INDUCE Act has died in committee. However, more action to protect copyrights is expected to appear in Congress in the near future.
Wendy Harman was FMC’s Operations Manager in 2004-2005. After graduating with a BA in English and Psychology from Emory University in 1998, Wendy worked for a year as an artist manager at Harrington Management in Atlanta. She left Harrington in 1999 to pursue a law degree at Northeastern University School of Law in Boston, where she concentrated on entertainment, technology and intellectual property issues.