The P2P Threat From Your PC - Latham & Watkins, LLP

The P2P Threat From Your PC November 16, 2004

Robert Steinberg

Yury Kapgan*

* Robert Steinberg is a partner in the corporate and litigation departments, as well as a member of both the Venture

& Technology and Intellectual Property and Technology practice groups in the Los Angeles office of Latham & Watkins. Bob has a J.D. from Georgetown University and B.S. degrees in Systems Science Engineering and Economics from the University of Pennsylvania. Bob has an extensive background in business, law and engineering. His practice focuses on all aspects of negotiations, transactions and litigation and rights acquisitions concerning technology and media. He has represented start-up companies, emerging and middle market companies, major international corporations, entertainment studios, venture capitalist and investment banks, including companies such as America Online, Broadcom and Disney.

Yury Kapgan is an associate in the corporate and litigation departments at Latham & Watkins in Los Angeles. He has a J.D. from the University of California, Boalt Hall School of Law and a B.A. from UCLA.

Special thanks to Roxanne Christ and Dan Schecter, partners in the Los Angeles office of Latham & Watkins, for their comments on this paper.

The positions and opinions taken by the authors are not necessarily representative of their employers or clients. This notice also disclaims any responsibility with regard to actions taken or results obtained on the basis of this paper.

© Copyright 2004 Latham & Watkins LLP. All rights reserved. Latham & Watkins operates as a limited liability partnership worldwide, with an affiliate in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership.

I. INTRODUCTION

Not since the advent of the VCR over 20 years ago has copyright law had the potential to affect

the behavior of so many Americans so significantly. The computer technology at the heart of the recent

uproar over Internet file-sharing is used by tens of millions Americans for downloading music.1 Peer-to-

peer (P2P) technology essentially permits the trading online of music, movies, videogames, and

practically any other file between the hard-drives of participating home computers.2

It should not be a surprise that such file-sharing has garnered a great deal of attention from big

business as well as big government. The recording and motion picture industries in particular have

come to believe that P2P is to blame for their declining revenues, especially the revenue decline seen by

the music industry,3 which has suffered a 31 percent drop in compact disc sales since mid-2000.4 In

response to this perceived threat to their livelihood, the major recording labels, their distributors, and the

Recording Industry Association of America (RIAA), as well as film studios, performers, and various other

associated parties have launched scores of lawsuits. Starting with P2P service providers like Napster,

Aimster, Kazaa, Grokster, and StreamCast, these suits have swelled to include individual downloaders,

financial investors and traditional Internet service providers (ISPs) who refused to reveal clients’ names

in the face of subpoenas.5 The Motion Picture Association of America (MPAA) and most of the large

movie studios are now following the recording industry’s lead by suing individuals who download

movies illegally.6

Though the infamous Napster cases7 decidedly carved out the copyright landscape for P2P

technology, the law on point has become part of a dynamic process whose twists and turns have been

1 See, e.g., Carl Bialik, “Key Questions in Crackdown On File Sharing by Music Firms,” Wall Street Journal Online

(June 30, 2003), available at http://www.mediadefender.com/press%20about%20MD/wsj_6_30_03.htm.

2 In a conventional Internet system, users access information from servers rather from each other. A peer-to-peer system is premised on the goal of allowing users to communicate directly with each other, such that each user becomes both a client and a server that can both receive and disseminate information. See Damien A. Riehl, Peer-to-Peer Distribution Systems: Will Napster, Gnutella, and Freenet Create a Copyright Nirvana or Gehenna?, 27 Wm. Mitchell L. Rev. 1761, 1765 (2001).

3 By some estimates, the record industry’s profits have tumbled “about 10 percent annually for the past few years.” Rebecca Dana, Colleges Tackle Music Piracy, Washington Post (August 28, 2003), available at http://stacks.msnbc.com/news/958371.asp.

4 Jeordan Legon, 261 Music File Swappers Sued; Amnesty Program Unveiled (Jan. 23, 2004), at http://www.cnn.com/2003/TECH/internet/09/08/music.downloading/index.html.

5 Id.; Jen Rogers, Music Industry Suing 532 Song Swappers (Jan. 26, 2004), at http://www.cnn.com/2004/TECH/ internet/01/22/online.music/index.html; John Borland, RIAA Takes Hundreds More ‘John Does’ to Court (June 22, 2004), at http://news.com.com/2102-1027_3-5243587.html; Reuters, RIAA Sues 744 More Over File-Sharing (Aug. 25, 2004), available at http://msnbc.msn.com/id/5819566.

6 Jon Healey & Lorenza Munoz, “MPAA Plans Suits to Stop Film Piracy,” Los Angeles Times, Nov. 4, 2004, at C1, C10.

7 A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896 (N.D. Cal. 2000), aff’d, 239 F.3d 1004 (9th Cir. 2001) (“Napster”).

reported in almost daily news headlines. Technological innovation has always pushed copyright law to

adapt in due turn, forcing the law to embrace technologies and acts that were hardly, if at all, in

existence when the Copyright Act of 1978 or even the Digital Millennium Copyright Act (DMCA) of 1998

came into being. Just a few years ago P2P file-sharing systems were fairly rare, such that copyright law

hardly could have envisioned the range of conduct at issue. As a result, judges have been forced to try

to adapt the general legal theories and defenses of copyright law to the particular oddities and nuances

of the P2P environment. Plaintiffs have urged the courts to stretch contributory and vicarious

infringement doctrines, in particular, to fit a new range of acts and actors. As the law has evolved and

theories of liability arguably expanded, P2P services have responded by trying to design around and

distance themselves from the features that felled Napster. Some such efforts may yet prove successful,

as evidenced by the recent Ninth Circuit Court of Appeals victory for P2P services Grokster and

StreamCast,8 while others like Aimster have failed and still others await their fates, leaving some

uncertainty as to the future of P2P.

This paper discusses the cutting-edge legal issues surrounding P2P technology, including the

most recent court decisions, in the hope of providing some guidance in navigating this precarious field in

copyright law.

II. OVERVIEW OF P2P SYSTEMS

From a technical standpoint, all P2P networks help link individual computers together, allowing

one user to search and access the hard-drives of and download files from other logged-on users. If the

file in question is a music file, as is often the case, User 1 might offer one music track to User 2 in the

hopes of receiving a different track off the system in return. In effect, a P2P system is a virtual

cooperative in which individual users afford complete strangers access to their computer files.9 In fact,

the millions of computers linked together from time to time in this sort of ad hoc relationship have been

said to create a massive computer “network,” built from scores of unrelated PCs in homes and

businesses across the country and around the world.10

P2P providers generally distribute their software free of charge (or for a nominal fee), permitting

individual users to download the P2P providers’ software onto their personal computers. It can be said

that P2P providers supply the base platform from which end users exchange digital media and create the

so-called P2P transfer network. A user may choose to share files from his own computer, including, for

8 Metro-Goldwyn-Mayer Studios, Inc. v. Grokster Ltd., 259 F. Supp. 2d 1029 (C.D. Cal. 2003), aff’d, 380 F.3d 1154

(9th Cir. 2004) (“Grokster”). The plaintiffs filed a petition for a writ of certiorari to the United States Supreme Court on October 8, 2004; the defendants filed their opposition brief on November 8, 2004.

9 Profit from Peer to Peer, The Economist, June 21, 2001, available at http://www.cfo.com/article/ 1,5309,5869,00.html.

10 Id.

example, “music files, video files, software applications, e-books and text files,”11 or merely access the

files of other logged-on users. When launched, the software automatically connects the user to a P2P

network “and makes any shared files available for transfer to any other user currently connected to the

same peer-to-peer network.”12 A user can then search for specific files, whether audio, audiovisual or

text, by using some combination of keyword, title or artist terms, as available, to retrieve the exact items

desired.13

In terms of practical mechanics, P2P technologies tend to span a continuum, from systems in

which individuals trade files without the intervention of servers or computers controlled by a P2P

provider (a “decentralized system”), to systems in which the P2P provider’s central servers serve as a

hub to help connect users and enable them to perform search functions (a “centralized system”). In a

decentralized system, the P2P provider’s role is intended to be nominal, more akin to a software provider

who contributes the back-end program but theoretically little else towards facilitating the swapping of

files among users. In this sense, once the software has been transferred to the client, the provider’s role

is complete, and it is “hands-off” from that point. In a centralized system, the P2P provider’s role is

conceptualized as more ongoing, like that of a service provider, interacting with and facilitating end

users’ online file-swapping in a more “hands-on” capacity. This distinction makes all the difference in

copyright law.

Napster’s technology followed the “hands-on” model. Napster’s centralized system was based

on servers it allegedly controlled that enabled individual users to search for and retrieve files from other

users. This control meant that Napster could detect and block illegal downloading using its network

and, therefore, was obligated to do so.

More recent P2P technology is of a purer P2P nature, devoid of central servers or intermediary

contributions from the P2P provider. The FastTrack technology, employed originally by StreamCast and

Grokster, apparently performs no indexing functions through provider-controlled computers, instead

leaving such tasks to the computers of certain individual users known as “supernodes.”14 A supernode is

a computer with a high bandwidth connection which sits in the home or business of an individual user

11 Grokster, 259 F. Supp. 2d at 1032.

12 Id.

13 Id.

14 In a decision finding personal jurisdiction over Sharman Networks—the entity behind Kazaa from which Grokster originally licensed FastTrack—the district court in Grokster described the technology as follows: “[o]nce a search commences, the . . . software displays a list (or partial list) of users who are currently sharing files that match the search criteria, including data such as the estimated time required to transfer each file. The user may then click on a specific listing to initiate a direct transfer from the source computer to the requesting user's computer. When the transfer is complete, the requesting user and source user have identical copies of the file, and the requesting user may also start sharing the file with others. [Kazza’s] software includes other features, such as facilities for organizing, viewing and playing media files, and for communicating with other users.” Grokster, 243 F. Supp. 2d 1073, 1081 (C.D. Cal. 2003).

and is tapped by the P2P network (usually unbeknownst to the user) to host a directory of files available

for downloading. By some accounts, once a user connects to a supernode, “local search hubs” compile

an index of files offered by the user for downloading. In response to a search request, the supernode

reviews its own index of files and, if it does not find what has been requested, searches the indices of

other supernodes; “[h]ence the index of files available at any point in time is distributed throughout the

various SuperNode computers maintained by users of the network.”15 Kazaa, Grokster and other “pure”

P2P service providers maintain that the pure P2P network technology makes it impossible to exert any

control over the use or conduct of client computers, such that even if all of a provider’s computers were

taken off-line, its “network” would continue functioning without interruption16—indexing, searching,

making connections and downloading files. The dichotomy, as framed by one court, comes down to

numbers: Napster functioned on one supernode, which it controlled and owned, while FastTrack entities

operate through many supernodes, spread among individual computers throughout the country, which

are allegedly neither owned nor controlled by the P2P providers.17

The purest of P2P systems are those that dispense with supernodes and all other intermediary

indices, instead passing search requests from user to user until a desired item is found. Though slow,

these networks may stand the best chance of avoiding secondary copyright infringement liability. In

fact, as exemplified by such second-generation P2P systems, the best chance for surviving liability for

copyright infringement appears to be to invest in a strategy of doing more to appear to do less.

III. LEGAL PRINCIPLES

A. Direct Infringement in Copyright Law

An end user who uploads or downloads copyrighted music through a P2P network without the

copyright owner’s authorization is liable for direct copyright infringement. The Copyright Act of 1976

provides that “anyone who violates any of the exclusive rights of the copyright owner . . . is an infringer

of the copyright.”18 These exclusive rights include reproduction and distribution of copyrighted

material.19 If a P2P network user downloads a copyrighted song to his hard drive, he has reproduced

that song (and the musical composition in the song). If he allows other P2P network users to access the

15 See David Hayes, Copyright Liability of Online Service Providers, 19 No. 11 Computer Internet Lawyer 15, 16

(Nov. 2002) (citing to Complaint in Lieber v. Consumer Empowerment, Civ. No. 01-09923 (C.D. Cal. 2001), later consolidated into Metro-Goldwin-Mayer Studios, Inc. v. Grokster Ltd., Civ. No. 01-08541).

16 See, e.g., Kazaa BV’s Answer to MGM Complaint at ¶ 114.

17 See Grokster, 259 F. Supp. 2d at 1039-40. Questions remain, however, concerning the existence and control of certain types of supernodes called “root supernodes,” which are said to connect users to the network by directing them to then active supernodes. The FastTrack software apparently contains a list of such root supernodes, which—depending on their function—may reintroduce questions concerning provider control reminiscent of those Napster suffered with its central servers. See id. at 1040.

18 17 USC § 501.

19 Id. § 106.

copy of that song from his hard drive, he has distributed that song. If these actions are taken without

permission of the copyright owner or a valid defense,20 such reproduction and distribution constitute

direct copyright infringement,21 subject to damages of between $750 to $150,000 for each such

reproduction or distribution. There is no dispute that most users of P2P services such as Kazaa,

Morpheus, and Grokster are downloading and uploading music without permission and are therefore

direct infringers.22 In contrast, the providers of the services, who do not actually engage in the

reproduction or distribution of the copyrighted material themselves, cannot therefore be direct infringers.

The question then becomes whether such P2P providers are secondarily liable for the direct infringement

of their network users. And this is where the challenge begins.

B. Contributory Infringement

U.S. copyright law provides for secondary liability based on contributory or vicarious

infringement, extending to those who enable others to directly infringe. Cases brought against P2P

providers, like Napster, Aimster and Grokster, are based on these two indirect liability theories.

A contributory infringer is “one who, with knowledge of the infringing activity, induces, causes

or materially contributes to the infringing conduct of another.”23 The Supreme Court has described a

contributory infringer as one who “was in a position to control the use of copyrighted works by others

and had authorized the use without permission from the copyright owner.”24 To prevail on a

contributory copyright infringement claim, a plaintiff must show (1) direct infringement by a third party;

(2) that the defendant knew of the direct infringement; and (3) that the defendant materially contributed

to the infringement.25

The first element of the claim—direct infringement by a party—has not been disputed with

respect to P2P providers whose users swap music and other files. The individual file-swappers are direct

infringers, as noted above. For the second element, according to the Ninth Circuit Court of Appeals,

20 For example, “fair use” is one limitation on the copyright holder’s rights. See 17 USC § 107. According to Section

107 of the Copyright Act, factors to consider in determining whether a particular use is fair include: (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

21 Napster, 239 F.3d at 1013-14.

22 See generally Fred von Lohmann, Electronic Frontier Foundation, IAAL: Peer-to-Peer File Sharing and Copyright Law after Napster (Jan. 2003), at www.eff.org.

23 Napster, 114 F. Supp. 2d at 918; Napster, 239 F.3d at 1019.

24 Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 437 (1984) (“Sony-Betamax”); see also 3 Nimmer on Copyright § 12.04[A][2][a].

25 Grokster, 380 F.3d at 1160.

constructive knowledge of infringement may be imputed to a P2P provider if its software is not “capable

of substantial” or “commercially significant” non-infringing uses.26 Going beyond the Ninth Circuit’s

articulation of this element, the Seventh Circuit Court of Appeals has held that “[e]ven where there are

noninfringing uses of an Internet file-sharing service, . . . if the infringing uses are substantial then to

avoid liability as a contributory infringer the provider of the service must show that it would have been

disproportionately costly for him to eliminate or at least reduce substantially the infringing uses.”27

Otherwise, if constructive knowledge of infringement cannot be imputed, a copyright owner must show

that the P2P provider has knowledge of specific infringement.28 Finally, the third element requires a

copyright owner to show that the P2P provider materially contributed to the infringement by, for

example, providing the “site and facilities” for the infringement (such as a central server for hosting an

index of available files) and failing to take steps to prevent the infringement, or inducing infringing uses

through advertisement.29

In Napster, the district court concluded, and the Ninth Circuit affirmed, that the P2P service

provided by Napster materially contributed to the direct infringement by end users: “Napster, Inc.,

supplies the proprietary software, search engine, servers, and means of establishing a connection

between users’ computers. Without the support services defendant provides, Napster users could not

find and download the music they want with the ease of which defendant boasts.”30 As explained by the

district court in Grokster, Napster’s “material contribution” was more than just its software; its network

constituted the “site and facilities” for infringement to take place because it hosted the central list of

available files, so “each and every search request passed through Napster’s servers,”31 thereby enabling

Napster to block access by infringing users. Napster “served as the axis of the file-sharing network’s

wheel. When Napster closed down, the Napster file-sharing network disappeared with it.”32 On the

other hand, if “users search for and initiate transfers of files using [the P2P provider] . . . without any

information being transmitted to or through any computers owned or controlled by [the P2P provider],”

those acts alone do not constitute material contribution by the P2P provider.33 In sum, the “critical

26 Id. at 1162. 27 In re Aimster Copyright Litigation, 334 F.3d 643, 653 (7th Cir. 2003). 28 Id. at 650 (requiring “knowledge of infringing uses”); Grokster, 380 F.3d at 1162 (requiring “reasonable

knowledge of specific infringement”). 29 Id. at 1163; Sony-Betamax, 464 U.S. at 435-38 (discussing advertising as a factor in contributory infringement). 30 Napster, 114 F. Supp. 2d at 919-20.

31 Grokster, 259 F. Supp. 2d at 1039.

32 Id.

33 Id. at 1040.

question is whether [the P2P providers] do anything, aside from distributing software, to actively

facilitate—or whether they could do anything to stop—their users’ infringing activity.”34

1. The Staple Article of Commerce Doctrine and Substantial Noninfringing Uses

The decision in the Napster case, as well as Grokster and Aimster (discussed further below), are

rooted fundamentally in the Supreme Court’s twenty year-old Sony-Betamax decision. In deciding Sony-

Betamax, the Supreme Court borrowed from the “staple article of commerce” doctrine of patent law.

The Court held that the manufacturer of a VCR could not be held contributory liable for the infringing

activities of purchasers who used the VCRs to make unauthorized copies of copyrighted works, since the

VCR—a “staple article of commerce”—was capable of substantial noninfringing uses, such as recording

one television program while viewing another or simply recording a program for later viewing. In the

words of the Court, “the sale of copying equipment, like the sale of other articles of commerce, does not

constitute contributory infringement if the product is widely used for legitimate, unobjectionable

purposes. Indeed, it need merely be capable of substantial noninfringing uses.”35

The Court in Sony-Betamax recognized that a different decision would have allowed copyright

owners to unduly extend the reach of their copyright monopolies to articles of commerce that had little to

do with the copyrights themselves. Analogizing to patent law, the Court noted:

When a charge of contributory infringement is predicated entirely on the sale of an article of commerce that is used by the purchaser to infringe a patent, the public interest in access to that article of commerce is necessarily implicated. A finding of contributory infringement does not, of course, remove the article from the market altogether; it does, however, give the patentee effective control over the sale of that item. Indeed, a finding of contributory infringement is normally the functional equivalent of holding that the disputed article is within the monopoly granted to the patentee.

For that reason, in contributory infringement cases arising under the patent laws the Court has always recognized the critical importance of not allowing the patentee to extend his monopoly beyond the limits of his specific grant. These cases deny the patentee any right to control the distribution of unpatented articles unless they are “unsuited for any commercial noninfringing use.” Unless a commodity “has no use except through practice of the patented method,” the patentee has no right to claim that its distribution constitutes contributory infringement. “To form the basis for contributory infringement the item must almost be uniquely suited as a component of the patented invention.” “[A] sale of an article which though adapted to an infringing use is also adapted to other and lawful uses, is not enough to make the seller a contributory infringer. Such a rule would block the wheels of commerce.”36

Recognizing that “there are substantial differences between the patent and copyright laws,” the Court

nonetheless concluded that the “staple article of commerce doctrine must strike a balance between a

34 Id. at 1039.

35 Sony-Betamax, 464 U.S. at 442.

36 Id. at 440-41 (footnote and citations omitted).

copyright holder’s legitimate demand for effective—not merely symbolic—protection of the statutory

monopoly, and the rights of others freely to engage in substantially unrelated areas of commerce.”37

That balance fell in favor of Sony. Unlike “cases involving an ongoing relationship between the direct

infringer and the contributory infringer at the time the infringing conduct occurred,” the Court was

particularly mindful that “[t]he only contact between Sony and the users of the Betamax . . . occurred at

the moment of sale.” 38

By contrast, the Ninth Circuit in Napster emphasized that, unlike in Sony-Betamax, where Sony

simply manufactured and distributed VCRs but lacked control over what buyers did with them

subsequently, Napster actually retained ongoing control over its service.39 Napster’s refusal to exercise

its retained power, after having acquired actual knowledge of end user infringement, destroyed its

substantial noninfringing use defense.40 Thus, in the context of an ongoing service relationship, rather

than a one-time sale of a product, where the provider is arguably in a position to supervise the use of its

service, once the service provider is notified of the specific infringing activity of its end users, its failure

to use its power to prevent further infringing activity can give rise to liability for contributory copyright

infringement.

C. Vicarious Liability

The other indirect liability theory—vicarious copyright infringement—arises when a defendant

“has the right and ability to supervise the infringing activity and also has a direct financial interest in

such activity.”41 In the P2P context, failure to police the system over which a party has control, coupled

with a showing of financial benefit from the continued availability of infringing files on a system, leads to

the imposition of vicarious liability.42 Neither an intent to infringe nor knowledge of direct infringement

37 Id. at 442.

38 Id. at 437-38.

39 The district court in Napster noted that “[i]n Sony, the defendant’s participation did not extend past manufacturing and selling the VCRs: ‘the only contact between Sony and the users of the Betamax . . . occurred at the moment of sale.’ Here in contrast, Napster, Inc. maintains and supervises an integrated system that users must access to upload or download files. Courts have distinguished the protection Sony offers to the manufacture and sale of a device from scenarios in which the defendant continues to exercise control over the device’s use. Napster, Inc.’s facilitation of unauthorized file-sharing smacks of [] contributory infringement . . . rather than the legitimate conduct of the VCR manufacturers. Given defendant’s control over the service, as opposed to mere manufacturing or selling, the existence of a potentially unobjectionable use like space-shifting does not defeat plaintiffs’ claims.” Napster, 114 F. Supp. 2d. at 917 (citations omitted).

40 Napster, 239 F.3d at 1021.

41 Id. at 1022 (citation and internal quotations omitted).

42 Id. at 1024.

is an element of this tort.43 In addition, the Ninth Circuit has held that the Sony-Betamax “substantial

noninfringing use” defense does not apply to vicarious copyright infringement.44

Financial benefit exists where the availability of infringing material “acts as a draw for

customers.”45 In Napster, the Ninth Circuit concluded that Napster’s revenue, though yet nonexistent,

was dependent on an increase in its user base, such that Napster benefited financially from the draw of

copyright-protected works on its system.46 More recently, P2P entities more clearly derive a financial

benefit from the draw of consumers by generating substantial revenue from advertising dollars.

A defendant’s ability to supervise the infringing conduct establishes the final element of a

vicarious liability claim, reinforcing the importance of control over the P2P system. A capacity to block

infringers from access to a particular environment, for any reason whatsoever, is evidence of the right

and ability to supervise.47 In Napster, because the company had the right to control access to its system

and terminate accounts, it had a duty to police to the fullest extent, such that “[t]urning a blind eye to

detectable acts of infringement for the sake of profit gives rise to liability.”48 Napster’s ability to locate

infringing material on search indices, along with its right to disconnect user access to the system, was

indicative of such supervisory capacity.49 Accordingly, in the Ninth Circuit’s subsequent decision in

Grokster, as discussed below, the court found two other P2P providers lacked the ability to exercise such

control, and therefore escaped vicarious liability despite being able to benefit financially therefrom.50 By

contrast, the Seventh Circuit’s decision in Aimster suggested that when a P2P provider’s software

architecture is arguably designed with the intention of depriving the provider of otherwise available

supervisory control, the supervisory control element can be found to exist.51

43 Id. at 1022-24 (failure to police system combined with financial interest in ongoing infringement was sufficient to

justify preliminary injunction given likelihood of success on vicarious liability claim).

44 Id. at 1022; see generally 3 Nimmer on Copyright § 12.04[A][2][b].

45 Napster, 239 F.3d at 1023 (citing Fonovisa v. Cherry Auction, Inc., 76 F.3d 259, 263-64 (9th Cir. 1996), for proposition that financial benefit may be shown where infringing performances enhance the attractiveness of a venue).

46 Id.

47 Id.; see also Fonovisa, 76 F.3d at 259 (swap meet operator had right to supervise because it could terminate vendors, including those that were violating copyright law).

48 Napster, 239 F.3d at 1023.

49 The Ninth Circuit departed from the district court when it noted that “the right and ability to police is cabined by the system’s current architecture” but nevertheless went on to hold Napster vicariously liable because “Napster . . . has the ability to locate infringing material listed on its search indices, and the right to terminate users’ access to the system.” Id. at 1024.

50 Grokster, 380 F.3d at 1164-66. 51 In re Aimster Copyright Litigation, 334 F.3d 643, 654-55 (7th Cir. 2003). The Seventh Circuit, in the context of a

preliminary injunction against P2P provider Aimster, did not squarely decide whether the recording industry would likely prevail against Aimster on the issue of vicarious infringement, noting that whether Aimster’s failure to

IV. POST-NAPSTER LAW ON P2P

The legal demise of Napster appeared to signal a major undoing for P2P networks. However,

more recent Ninth Circuit case law suggests there may be a safe haven for certain types of P2P

technology, much to the dismay of the music, videogame and motion picture industries. By all accounts,

the recent decision by the Ninth Circuit Court of Appeals in Grokster (in which a petition for a writ of

certiorari to the Supreme Court is pending) is one of the most significant in the P2P field to date.

Initiated in October 2001 in the Central District of California by plaintiffs comprised of virtually every

major motion picture and music studio, including MGM, Columbia Pictures, Disney, New Line Cinema,

Time Warner, Twentieth Century Fox, Universal, Arista Records, Atlantic, Capital Records and Sony,52

the case was predicted to ensure another plaintiff’s victory. Targeting the second-generation of P2P

systems—Kazaa, Grokster, and StreamCast—plaintiffs sought to replicate their Napster successes by

bringing claims of contributory and vicarious infringement against P2P service providers whose end

users were indisputably widely infringing the studios’ copyrights. Instead, the district court granted

summary judgment in favor of Grokster and StreamCast, which the Ninth Circuit recently affirmed.53

The decisions in favor of Grokster and StreamCast highlight the central significance of the

technological distinctions upon which this area of copyright law turns. Yet the Ninth Circuit’s decision

may conflict with the Seventh Circuit’s decision a year earlier upholding a preliminary injunction against

P2P provider Aimster. Consequently, the following sections of this paper focus on how technological

distinctions in software can affect secondary liability of P2P providers for infringing uses of their P2P

systems by consumers, in the context of analyzing the commonalities and conflicts between Ninth and

Seventh Circuit case law.

A. Grokster

If there is one factor that most significantly determines secondary liability for infringement in

P2P systems, it is this: control. Relying on Sony-Betamax and Napster, the Ninth Circuit affirmed

summary judgment in favor of Grokster and Streamcast, holding that neither could be secondarily liable

for the infringing activity of end users.

eliminate its software’s encryption feature and monitor use of its system was “academic,” because “its ostrich-like refusal to discover the extent to which its system was being used to infringe copyright is merely another piece of evidence that it was a contributory infringer.” Id. For unrelated reasons having to do with the theory of agency, however, the Seventh Circuit cast doubt on the district court’s finding in favor of the recording industry on Aimster’s vicarious infringement. See id. at 654 (“we are less confident than the district judge was that the recording industry would also be likely to prevail on the issue of vicarious infringement should the case be tried”).

52 The Grokster case was consolidated in the district court with Lieber v. Consumer Empowerment, in which music composition copyright holders advanced the same copyright claims against the same defendants.

53 Grokster, 259 F. Supp. 2d 1029 (C.D. Cal. 2003), aff’d, 380 F.3d 1154 (9th Cir. 2004). During the pendency of the litigation at the district court level, Kazaa ceased defending the action, and default judgment was entered against it. See Grokster, 380 F.3d at 1159 n.4. Sharman Networks, the successor-in-interest to Kazaa, remains a defendant in the district court.

The Grokster court adopted wholesale what it called the district court’s “well reasoned

analysis”54 and succinctly framed the important lesson to be learned: “the software design is of great

import.”55 Like the district court, the Ninth Circuit contrasted Napster’s “centralized set of servers that

maintained an index of available files” to “StreamCast’s decentralized, Gnutella-type network and

Grokster’s quasi-decentralized, supernode, KaZaa-type network [where] no central index is

maintained.”56 That made the difference. Grokster and StreamCast appeared to reap the rewards of the

decentralized model adopted by second-generation P2Ps struggling to distance themselves from the

Napster model. As the district court put it:

Neither StreamCast nor Grokster facilitates the exchange of files between users in the way Napster did. Users connect to the respective networks, select which files to share, send and receive searches, and download files, all with no material involvement of Defendants. If either Defendant closed their doors and deactivated all computers within their control, users of their products could continue sharing files with little or no interruption. [¶] In contrast, Napster indexed the files contained on each user’s computer, and each and every search request passed through Napster’s servers. Napster provided the “site and facilities” for the alleged infringement, affording it perfect knowledge and complete control over the infringing activity of its users. If Napster deactivated its computers, users would no longer be able to share files through the Napster network. 57

With respect to contributory infringement, the Ninth Circuit held that constructive

knowledge of infringement could not be imputed to Grokster or StreamCast because their

systems were capable of substantial or commercially significant noninfringing uses. In support,

the court cited “numerous declarations by persons who permit their work to be distributed via

the software, or who use the software to distribute public domain works.”58 Though it held that

constructive knowledge could not be imputed, the Ninth Circuit did not go so far as to hold that

“actual knowledge” was therefore required. Instead, the court held that “the copyright owner

would be required to show that the defendant had reasonable knowledge of specific infringing

files,”59 with the added caveat that such knowledge must have been acquired “at a time at

which [defendants] contributed to the infringement, and failed to act upon that information.”60

Contribution to the infringement required, moreover, that Grokster and StreamCast have

54 Grokster, 380 F.3d at 1160. 55 Id. at 1163.

56 Id.

57 Grokster, 259 F. Supp. 2d at 1041 (emphases added; citations omitted).

58 Grokster, 380 F.3d at 1161. “Indeed, the record indicates that thousands of . . . musical groups have authorized free distribution of their music through the internet. In addition to music, the software has been used to share thousands of public domain literary works . . . as well as historic public domain films[.]” Id.

59 Id.

60 Id. at 1162 (alterations and internal quotations omitted).

provided the “site and facilities” for infringement or materially contributed in some other way.61

The court held they had not. “Infringing messages or file indices do not reside on defendants’

computers, nor do defendants have the ability to suspend user accounts,” and the recording

industry did not provide “evidence that defendants materially contribute in any other manner.”62

The court noted that while StreamCast “maintains an XML file from which user software

periodically retrieves parameters,” such as “addresses of websites [containing] lists of active

users,” and while “[t]he owner of the FastTrack software [licensed by Grokster], Sharman,

maintains root nodes containing lists of currently active supernodes to which users can connect,”

these activities were “too incidental to any direct copyright infringement to constitute material

contribution.”63 Therefore, Grokster and StreamCast could not be held liable for contributory

infringement.

With respect to vicarious infringement, although Grokster and StreamCast benefited

financially from advertising revenue, the Ninth Circuit again held that because they lacked the

right and ability to supervise the infringing conduct of end users, no vicarious infringement

could be found. In contrast to the control Napster exerted through its “integrated service,”

“Grokster and StreamCast are more truly decentralized, peer-to-peer file-sharing networks.”64

The Grokster network was based on the FastTrack technology licensed from and controlled by a

separate entity, Sharman. Similarly, StreamCast’s technology was based on the Gnutella

platform, which is open-source and outside the control of any single entity.65 In the words of the

court:

It does not appear from any of the evidence in the record that either of the defendants has the ability to block access to individual users. Grokster nominally reserves the right to terminate access, while StreamCast does not maintain a licensing agreement with persons who download Morpheus. However, given the lack of a registration and log-in process, even Grokster has no ability to actually terminate access to filesharing functions, absent a mandatory software upgrade to all users that the particular user

61 Id. at 1163.

62 Id. at 1163, 1164. 63 Id. at 1164. The district court described the supernode system in more detail:

One of the central features distinguishing FastTrack-based software from other peer-to-peer technology is the dynamic, or variable use of “supernodes.” A “node” is an end-point on the Internet, typically a user’s computer. A “supernode” is a node that has a heightened function, accumulating information from numerous other nodes. An individual node using FastTrack-based software automatically self-selects its own supernode status; a user’s node may be a supernode one day and not on the following day, depending on resource needs and availability of the network . . . . It is unclear whether or to what extent entities other than Grokster can control this process or other aspects of the FastTrack network, but there is no evidence—and Plaintiffs do not argue—that Defendants have any such role.

Grokster, 259 F. Supp. 2d at 1040 & n.5 (citations omitted). 64 Grokster, 380 F.3d at 1165. 65 Id. at 1159.

refuses, or IP address-blocking attempts. It is also clear that none of the communication between defendants and users provides a point of access for filtering or searching for infringing files, since infringing material and index information do not pass through defendants’ computers.66

Thus, what the Ninth Circuit viewed as a lack of control by Grokster and StreamCast

over users of their P2P networks was the most significant factor for the court in rejecting the

imposition of both contributory and vicarious liability.

B. Aimster

In Aimster, the Seventh Circuit affirmed a preliminary injunction which effectively shut down a

P2P provider in a case brought by various record companies, songwriters and music publishers.67

Aimster was a P2P service that used AOL’s Instant Messenger service (“IM”) to allow members to

exchange files and messages, but “greatly expand[ed] the file transferring capability of AOL IM . . . by

designating every Aimster user as the ‘buddy’ of every other Aimster user. In this way, every Aimster

user [had] the ability to search for and download files contained on the hard drives of any other Aimster

user (provided that the user [had] previously designated those files to be available for searching).”68

Aimster users could also identify “buddies” who had interests in the same subject matter. Aimster also

provided a service called “Club Aimster”—“a repackaged version of the basic Aimster service that

greatly enhance[d] the ability of its members to locate and download copyrighted music” for a monthly

fee. Using a unique member name and password, and paying the monthly fee to Aimster, users could

download 40 “hot new releases”—virtually all of which were copyrighted and owned by the plaintiffs.

Moreover, a tutorial explained how to use the Aimster software and provided “as its only examples of

file sharing the sharing of copyrighted music, including copyrighted music that the recording industry

had notified Aimster was being infringed by Aimster’s users.”69

In upholding the preliminary injunction, the Seventh Circuit held that while there was the

possibility of substantial noninfringing uses of Aimster, in the face of evidence put forth by the recording

industry that the vast majority of files exchanged between Aimster users were infringing, the burden of

proof shifted to Aimster, which Aimster failed to meet by not “produc[ing] any evidence that its service

has ever been used for a noninfringing use, let alone evidence concerning the frequency of such uses.”70

Writing for the court, Judge Posner employed a balancing test for contributory infringement: “when a

supplier is offering a product or service that has noninfringing as well as infringing uses, some estimate 66 Id. at 1165. 67 In re Aimster Copyright Litigation, 252 F. Supp. 2d 634 (N.D. Ill. 2002), aff’d, 334 F.3d 643 (7th Cir. 2003), cert.

denied, 124 S. Ct. 1069 (2004) (“Aimster”).

68 Aimster, 334 F.3d at 642.

69 Id. at 651.

70 Id. at 652, 653.

of the respective magnitudes of these uses is necessary for a finding of contributory infringement.”71

Based on the evidence introduced by the recording industry and Aimster’s failure to produce any

credible evidence to the contrary, Aimster fell on the wrong side of this balance.

In contrast to the Ninth Circuit’s discussion in Napster and Grokster concerning the degree of

control exerted by the defendants over their respective networks, the Seventh Circuit made hardly any

mention of the control exerted by Aimster over its own network. There was good reason for this

omission. In the district court, Aimster had attempted to distance itself from Napster by arguing that it

did not maintain a central index of files available on its system, which the recording industry vigorously

disputed. However, no evidentiary hearing was ever held on the matter because the proprietors of

Aimster filed for bankruptcy protection and a hearing was precluded by an order of the bankruptcy

court.

Although evidence of Aimster’s control remained undeveloped, the evidentiary development of

other facts absent in Grokster proved to be Aimster’s undoing.72 The Seventh Circuit found the material

contribution that was lacking in Grokster (and Sony-Betamax) in the form of the “Club Aimster” service

and the tutorial that the court called “the invitation to infringement.”73 Whether or not Aimster provided

the “site and facilities” for infringement was irrelevant in the face of such damning conduct.

The one aspect of Aimster’s control over its system that was apparent from the record was the

presence—like in Napster but unlike in Grokster—of a registration and log-in process for end users of

the software, indicating that Aimster could block access to its system by particular users. Although the

Seventh Circuit rejected the recording industry’s argument that the substantial noninfringing use

defense set forth in Sony-Betamax was inapplicable to services such as Aimster, it agreed with the

industry that “the ability of a service provider to prevent its customers from infringing is a factor to be

considered in determining whether the provider is a contributory infringer.”74 However, Aimster’s

degree of control over individual users and ability to prevent them from infringing copyrights became

important for the court only in rejecting Aimster’s argument that it lacked knowledge of infringing

activity because of encryption built into the software. Although encryption technology within the

Aimster software assured users of their anonymity, Aimster could not thereby avoid contributory liability

by contending it was powerless to control infringing uses. The Seventh Circuit held that Aimster had

willfully blinded itself by selectively applying that encryption technology when it was not shown that the

71 Id. at 649. 72 The district court in Aimster noted that its reasoning “would hold regardless of whether or not Aimster maintains a central database of

files available for transfer.” Aimster, 252 F. Supp. 2d at 641 n.6. 73 Aimster, 334 F.3d at 651-52. 74 Id. at 648.

technology added value to the service or saved Aimster significant cost.75 Aimster’s resulting inability to

produce evidence of noninfringing uses was, therefore, a “self-inflicted wound.”76

C. A Conflict?

Although Grokster and StreamCast’s apparent technological decentralization was undoubtedly

the most important factor contributing to their victory in the Ninth Circuit, that court left open the

possibility that other factors could have been more important given other circumstances. Even though

Grokster and StreamCast had not provided the “site and facilities” for infringement, they still could have

been held liable had they “otherwise materially contribute[d] to direct infringement.”77 The Ninth

Circuit did not suggest what other factors might constitute material contribution, and the recording

industry pointed to none, as they could in Aimster (such as the “Club Aimster” service and Aimster’s

tutorial).

Interestingly, in affirming summary judgment in favor of Grokster and Streamcast, the Ninth

Circuit noted in passing a potential conflict with the Seventh Circuit in its interpretation of the

“substantial noninfringing use” standard.78 Indeed, the courts had reached different conclusions with

respect to two seemingly similar P2P systems: Grokster and Streamcast were absolved from liability

because their services were capable of substantial noninfringing uses (and they did not otherwise

materially contribute to infringement), but Aimster was enjoined from proceeding because although its

service may have been capable of substantial noninfringing uses, the defendants failed to put forth

evidence that it in fact was used in substantial noninfringing ways. The Ninth Circuit characterized the

difference as a legal one: “Aimster is premised specifically on a fundamental disagreement with

[Napster’s] reading of Sony-Betamax”79 and “determined that an important additional factor is how

‘probable’ the noninfringing uses of a product are.”80 In other words, the Ninth Circuit read Sony-

Betamax to preclude finding that a P2P provider has constructive knowledge of infringement by its users

where it demonstrates its system is capable of substantial current and future nonfringing uses.81 The

Ninth Circuit characterized Aimster’s reading of Sony-Betamax to impose the additional requirement

75 Id. at 650-51, 653-54. 76 Id. at 654. The Seventh Circuit did not decide the likelihood of Aimster’s liability for vicarious infringement, noting that the issue

was “academic” because Aimster’s “ostrich-like refusal to discover the extent to which its system was being used to infringe copyright is merely another piece of evidence that it was a contributory infringer.” Id. at 655. However, the Seventh Circuit did note that it was “less confident than the district judge was that the recording industry would prevail on the issue of vicarious infringement should the case be tried.” Id. at 654.

77 Grokster, 380 F.3d at 1163. See also id. at 1164 (“The Copyright Owners have not provided evidence that defendants materially contribute in any other manner.”).

78 Id. at 1162 n.9

79 Id. 80 Id. 81 Napster, 239 F.3d at 1020-21.

that such uses must be shown to be probable before precluding the imposition of constructive

knowledge.82 But does requiring a showing that a system is capable of substantial current and future

noninfringing uses not inherently require a showing that those uses are probable? Put differently, could

substantial nonfringing current and future uses be shown, yet also be improbable?

It is not clear that the “important additional factor” that the Ninth Circuit claimed Aimster

imposed was really that—an additional factor at all—or that it was anything different from what the

Ninth Circuit in Grokster implicitly took into account. In determining whether Aimster was capable of

substantial noninfringing uses, the Seventh Circuit had the occasion to question how “probable” were

the purported uses of the service because the only evidence submitted by the defendants was a

declaration by Aimster’s founder containing a list of potential noninfringing uses of the software, but “no

evidence whatsoever . . . that Aimster is actually used for any of the stated noninfringing purposes.”83 In

contrast, the Grokster defendants “submitted numerous declarations by persons who permit their work

to be distributed via the software, or who use the software to distribute public domain works”84—i.e.,

actual evidence (not just a probability) of substantial noninfringing use. The court in Grokster might

have reached a different result had there been no actual evidence submitted of current, noninfringing

uses.

Indeed, both courts relied on Sony-Betamax to reach different results. In concluding that the

Betamax VCR was capable of substantial noninfringing uses, the Supreme Court in Sony-Betamax relied

on actual evidence of the product’s noninfringing uses, such as recording a copyrighted program without

objection from the copyright owners or for later viewing at home. The Court pointed to evidence that

included the “considerable testimony” of copyright owners who did not object to the practice of

consumers who recorded their programming for private home use, and noted this “was sufficient to

establish a significant quantity of broadcasting whose copying is now authorized, and a significant

potential for future authorized copying.”85 The Court also relied on evidence that unauthorized but

noncommercial home recording caused no actual harm to the copyright owners and no demonstrated

likelihood of future harm.86 While it mentioned that a product “need merely be capable of substantial

noninfringing uses” for its manufacturer to avoid contributory infringement, the Court did not purport to

rest its decision simply on the theoretical capabilities of VCRs without examining actual evidence of

82 Grokster, 380 F.3d at 1162 n.9. 83 Aimster, 334 F.3d at 653 (quoting district court opinion; emphasis in original). 84 Grokster, 380 F.3d at 1161. 85 Sony-Betamax, 464 U.S. at 444. 86 See id. at 447-54.

current as well as potential future uses, among other factors. Such other factors included, incidentally,

the fact that Sony apparently did not encourage through advertising any infringing uses of its VCRs.87

Moreover, both Grokster and Aimster support the notion that the liability of P2P providers for

contributory infringement depends upon the balancing of factors that Sony-Betamax considered. Is there

an “ongoing relationship between the direct infringer and the contributory infringer at the time the

infringing conduct occurred”?88 Can the P2P provider stop infringing uses of its software? What is the

absolute number and proportion of the software’s consumers who use the software in noninfringing

ways? What is the likelihood that future consumers will use the software in noninfringing ways? Does

the P2P provider encourage illegal copying and distribution by consumers? Because the answers to

these questions depend upon intensely factual determinations, the differing results in Grokster and

Aimster may not be surprising. Generalizations about what features, factually, a P2P system must have

in order to be held liable for contributory infringement can therefore be difficult as well as misleading.

Undoubtedly the future of the Kazaa P2P service—the remaining defendant in the district court in

Grokster—will turn on the particulars of its software and behavior.89

While the divergent conclusions reached in Grokster and Aimster might have resulted merely

from differing facts and procedural postures, the court in Aimster did diverge in legal principle from

Grokster by suggesting that to avoid contributory infringement P2P providers could be obligated to

modify their software if infringing uses were substantial: “Even where there are noninfringing uses of an

Internet file-sharing service, moreover, if the infringing uses are substantial then to avoid liability as a

contributory infringer the provider of the service must show that it would have been disproportionately

costly for him to eliminate or at least reduce substantially the infringing uses.”90 In Grokster the

recording industry presented evidence that the vast majority of consumers who used the defendants’

software were infringing copyrights. This evidence, according to the reasoning of the Aimster court,

should have shifted to the defendants the burden of showing that “it would have been disproportionately

costly for [them] to eliminate or at least reduce substantially the infringing uses.” The Grokster court

imposed no such burden on the defendants.

87 Id. at 438. 88 Id. at 437-38. 89 As might be expected, the plaintiffs in Grokster allege that Kazaa/Sharman indeed retains control over its service,

with its central servers registering, identifying and logging-in users, then connecting them to supernodes. The various complaints also detail other alleged control-related activities, such as Kazaa monitoring transactions and controlling the entire system through encryption. MGM Complaint at ¶ 46. The plaintiffs have, at times, further alleged that Kazaa’s servers actually create a connection between the user who selects an unlawful file for copying and the user who offers the unlawful file for copying, making the entire infringing transaction possible. Lieber Complaint at ¶ 37.

90 Aimster, 334 F.3d at 653.

The Ninth Circuit accepted the fact that Grokster and StreamCast’s architecture and software

design did not enable the P2P providers to supervise their users, and seemed untroubled by the fact that

the systems were deliberately engineered in such a way as to avoid control over their networks. After

all, “the software design is of great import.”91 That software design included no central servers and no

log-in or registration process, such that the networks would continue functioning without Grokster or

StreamCast’s further participation. While a software upgrade could have been, as a technical matter,

pushed down to end users to change this, the Ninth Circuit observed: “‘Failure’ to alter software located

on another’s computer is simply not akin to the failure to delete a filename from one’s own computer, to

the failure to cancel the registration name and password of a particular user from one’s user list, or to the

failure to make modifications to software on one’s own computer.”92 With respect to software design or

architecture, the Ninth Circuit simply does not require that any affirmative steps be taken by a P2P

provider to avoid liability. Accordingly, the court concluded, the Grokster defendants did not materially

contribute to their users’ infringement.

In contrast, the Seventh Circuit did not simply accept Aimster’s architecture and software

design. Although, as noted above, no evidence was presented with respect to the control Aimster’s

software allowed the company over individual files and file indices, Aimster argued that it had no

knowledge of infringement because of encryption technology that was built into its software. In

rejecting this argument, the Seventh Circuit concluded that even if there were noninfringing uses of

Aimster’s software, in the face of substantial infringing uses Aimster failed to meet its burden that it

would have been disproportionately costly to eliminate or substantially reduce the infringing uses by

“failing to present evidence that the provision of an encryption capability effective against the service

provider itself added important value to the service or saved significant cost.”93

In the end, liability for contributory and vicarious copyright infringement by P2P file-networks

may largely depend upon the distinction between products and services that the Supreme Court

articulated in Sony-Betamax. The VCR was a product that could be used in a variety of legitimate ways

without requiring or, more to the point, enabling Sony’s continued contact with customers once sold. In

contrast, Napster’s software required ongoing service and customer contact. Somewhere between those

two ends of the continuum fall Aimster, Grokster and StreamCast, whose systems clearly do not require

ongoing customer contact but could be designed or used to facilitate supervision for supervision’s sake.

Whether such systems can avail themselves of the Sony-Betamax “substantial noninfringing use”

defense remains to be seen.

91 Grokster, 380 F.3d at 1163

92 Id. at 1163-64.

93 Aimster, 334. F3d at 653 (emphasis in original).

The Grokster plaintiffs have petitioned the Supreme Court for review, urging it “to resolve the

conflict between the Ninth and Seventh Circuits” and “to clarify the standards for secondary liability

applicable to Internet-based services that facilitate copyright infringement.”94 The plaintiffs’ petition has

been joined by the amicus briefs of forty state attorney general offices, among others.95 Indeed, the case

may provide a unique opportunity for the Court to clarify the reach of its two-decades-old Sony-Betamax

“substantial noninfringing use” defense for P2P providers. In their opposition to the plaintiffs’ petition,

Grokster and StreamCast contend that Congress is better suited to and already in the process of

determining secondary liability rules for digital technologies, and that no circuit split is presented by the

case.96 Whether or not the Supreme Court grants review, the entertainment industry has already begun

its war on other fronts, discussed below.

V. THE NEWEST CHAPTERS IN P2P SUITS

A. Individual Users of P2P services

Lawsuits over copyright infringement of P2P systems have not been limited to the gatekeepers of

such file-sharing. Notwithstanding prevailing wisdom and the court’s recognition in Aimster that

lawsuits against direct infringers can be impractical and futile,97 the music industry has sued individuals

for their uses of file-sharing services.

The RIAA first announced in June 2003 that it would be launching a major offensive against

individual offenders.98 Notwithstanding what users might have believed, the RIAA could and did locate

and identify the online music collections of individual users. As a prelude to its actions against

individuals, the RIAA subpoenaed99 Verizon, a major Internet service provider, demanding that it

provide the names of subscribers whose Internet addresses the recording industry had identified as

rampant copiers and distributors of copyrighted music.100 Verizon resisted the subpoena but in the end

was forced to provide the names to the RIAA. Indeed, the RIAA won approval for more than 1,300

94 Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., Petition for a Writ of Certiorari at 2 (Oct. 8, 2004).

95 John Borland, States, Artists Urge Top Court to Hear P2P Case (Nov. 8, 2004), at http://news.com.com/2102-1027_3-5443812.html.

96 Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., Brief in Opposition at 15-16 (Nov. 8, 2004).

97 Aimster, 334. F3d at 645. The court noted that “chasing individual consumers is time consuming and is a teaspoon solution to an ocean problem.” Id. (quoting Randal C. Picker, Copyright as Entry Policy: The Case of Digital Distribution, 47 Antitrust Bull. 423, 442 (2002)).

98 Recording Industry to Begin Collecting Evidence and Preparing Lawsuits Against File “Sharers” Who Illegally Offer Music Online, RIAA press release (June 25, 2003), at http://www.riaa.com/news/newsletter/062503.asp.

99 The subpoena power was granted per the DMCA, 17 U.S.C. § 512(h).

100 In re Verizon Internet Services, Inc., 257 F. Supp. 2d 244 (D.D.C. 2003).

subpoenas compelling Internet service providers to identify computer users suspected of illegally sharing

music files on the Internet.101

On September 9, 2003, armed with the names it had subpoenaed, the RIAA proceeded to file 261

federal lawsuits in courts across the country, targeting those it claimed had distributed an average of

more than 1,000 copyrighted music files each and warning that thousands more such suits would follow.

The suits targeted a grandfather in Texas, whose grandchildren had downloaded music on his home

computer during visits, a Yale University professor, a 12-year-old honor student living in a housing

project, and assorted other individuals from New York to Boston to San Francisco.102 The RIAA also

announced an amnesty program aimed at forcing admissions of liability from users in return for a

promise not to sue. With its most recent campaign, as the total number of defendants has risen to over

6,000, the RIAA promises to expose more and more people to copyright liability in the digital age.

But the RIAA is not the only entertainment trade organization flexing its muscle. The MPAA

recently announced that it is launching a flurry of lawsuits against individuals who offer copyrighted

movies on file-sharing networks.103 Joining the effort are at least five of the MPAA’s seven large movie

studio members. While movie-swapping is not nearly as widespread as music-swapping, largely due to

still-limited broadband access, the movie studios have undoubtedly taken a cue from the recent victories

for Grokster and StreamCast and the record industry’s years-long reluctance in suing individual

infringers, perhaps in the hope that a preemptive strike will deter would-be movie pirates. Whether

such lawsuits make a meaningful dent in illegal file-sharing of music as well as film remains to be seen.

B. Investors in P2P Companies

In addition to P2P providers and individual file swappers, recent suits have also targeted the

financial backers of P2P services, hoping to sever their financial pipelines. In April 2003, two record

labels filed suit for contributory and vicarious infringement against Hummer Winblad Venture Partners

(HW) and two of its partners over HW’s $13.5 million investment in Napster.104 Relying on the favorable

outcome in Napster, the plaintiffs allege that the investors controlled Napster during that period of time

when the Napster system enabled billions of acts of infringement and that they knew copyrighted works

were being illegally copied and distributed through the Napster system when it made its decision to

101 The RIAA’s tactics raised concerns among many, including the chairman of the Senate Governmental Affairs’

Permanent Subcommittee on Investigations, who called for hearings on the industry’s use of copyright subpoenas to track downloaders. Associated Press, Revealed: How RIAA Tracks Downloaders (Aug. 28, 2003).

102 See Associated Press, Elderly Man, Schoolgirl, Professor Among File-Swapping Defendants (Sept 9, 2003), available at http://www.usatoday.com/tech/news/techpolicy/2003-09-09-riaa-defendants_x.htm.

103 Jon Healey & Lorenza Munoz, “MPAA Plans Suits to Stop Film Piracy,” Los Angeles Times, Nov. 4, 2004, at C1, C10.

104 UMG Recordings, Inc. v. Hummer Winblad Venture Partners, No. C-04-1166 MHP (N.D. Cal.); see Stefanie Olsen, Record Labels Sue Napster Investor (Apr. 22, 2003), at http://news.com.com/2100-1027-997860.html.

invest in Napster.105 The suit further asserts that the defendants knowingly and materially contributed to

the infringement, controlling Napster in the period after the investment and thus facilitated the

infringing acts.106 In the claim for vicarious infringement, the plaintiffs allege that the defendants had a

direct financial interest in the infringing conduct and the right and ability to supervise and/or control

that conduct.107 They allege that the defendants could have shut down the site and facilities, prevented

Napster users from gaining access to the Napster servers or terminated the index feature with links to

infringing music files.108 In July 2004, the district court denied pretrial motions filed by the defendants to

dismiss the cases, noting that they mischaracterized plaintiffs’ complaints as alleging “tertiary

infringement”—a questionable theory on which to pin liability.109 “Rather than alleging that defendants

merely supplied Napster with necessary funding . . . or accusing defendants of contributory and

vicarious infringement in conclusory fashion[,] plaintiffs have specifically accused defendants of

assuming control over Napster’s operations and directing the infringing activities that gave rise to the

original Napster litigation.”110 The court cautioned that the plaintiffs’ allegations “may be wholly

unfounded” but were more than sufficient at the pleading stage to state claims of secondary liability for

infringement.111 It expressly reserved the question of how much control was sufficient to state a claim.

If the case ever goes to trial and the defendants lose on the merits, the ramifications could be

huge. Venture capital firms and other investors could be held secondarily liable for infringement,

although presumably the court would establish guidelines requiring a high degree of control over their

clients before the imposition of liability. Thorough intellectual property due diligence would also

become more important. Disclosures to co-investors, venture capital fund investors, lenders, and the

panoply of other financially-interested parties could become extensive and spun to support the merits of

the plaintiffs’ contentions. And a victory for the plaintiffs would undoubtedly encourage more lawsuits

and widen the search for more deep-pocket defendants, but discourage investment in the advancement

of technology.

105 UMG Recordings, Inc. v. Hummer Winblad Venture Partners, Complaint for Contributory Copyright Infringement,

Vicarious Infringement of Copyrights, Violation of California Civil Code Section 980 and Misappropriation, Statutory and Common Law Unfair Competition, and Conspiracy, CV-03-2785 (C.D. Cal.) at ¶ 38.

106 Id. at ¶ 46-47.

107 Id. at ¶ 54.

108 Id.

109 Memorandum & Order Re: Defendants’ Motion to Dismiss, No. C-04-1351 MHP, at 7 (N.D. Cal. July 14, 2004).

110 Id.

111 Id. at 9.

C. The Future of P2P

Emerging P2P providers continue to learn from the hits and misses of their ancestors, innovating

away from liability while continuing to cater to their user base.112 Aware that users might be frightened

off by the risk of their own legal exposures, the P2Ps have already begun focusing more and more on

new tools designed to shield the end user, including encryption. Freenet, an open-source project, was

created to address information privacy concerns.113 Where Napster was a file-sharing service, Freenet

has been characterized as a file-storage service that pushes information to other computers (nodes) for

storage.114 A node does not necessarily know what files have been pushed into it since the data is

encrypted. Messages in this system do not travel directly from sender to recipient, but rather wend their

way through a number of nodes. Each node only knows the next node in the chain (either before or

after) and does not know if its neighboring node was the originator or final recipient of the message or

just one link in the chain.115 Users insert a file into the Freenet by creating a “key” (somewhat akin to a

filename) and making the file available on their node. As other users request the file, it is copied onto

additional nodes, distributing it across Freenet.116 Not only does Freenet’s existence as an open-source

tool eliminate a central facet indicative of control, but the encryption and communication systems make

it difficult for plaintiffs to monitor and document the wide-scale copyright infringement of individuals.117

In fact, not only is it difficult to identify end users who may have reproduced copyrighted material, but

the fact that any given user is unaware of the information cached on his node complicates the issue of

distribution of copyrighted works. Napster users knew what files they were sharing; Freenet users only

know that they have made space available for shared files, but due to encryption, not what those files

contain.

However, if federal circuit courts follow Aimster’s lead, or if the Supreme Court grants review in

the Grokster case, commercial P2P services may not be able to shield themselves through such

encryption, although end users may enjoy some protection to the extent encryption makes it more

112 From a technological standpoint, Kazaa’s supernode system is actually an advance over the Gnutella process in

which a request for a file goes to every user on the system. Newer tools enhance this capability even further by creating temporary indexing responsibility for specific file categories at the level of individual computers (eDonkey), and splitting files into smaller pieces that can be distributed independently and more quickly (eDonkey and BitTorrent). The IP addresses of the information downloaders are exposed on both eDonkey and BitTorrent, which would allow antipiracy enforcers to track down these users. See John Borland, File Swapping Shifts Up a Gear (May 27, 2003), at http://zdnet.com.com/2100-1104-1009742.html.

113 See Ian Clarke et al., Protecting Free Expression Online with Freenet, IEEE Internet Computing, 6(1) (Jan./Feb. 2002) at 40, available at http://freenetproject.org/papers/freenet-ieee.pdf.

114 Id. at 42.

115 Id. at 43.

116 Ryan Roemer, The Digital Evolution: Freenet and the Future of Copyright on the Internet, 2002 UCLA J.L. & Tech. 5, at 3 (2002), available at http://www.lawtechjournal.com/articles/2002/05_021229_roemer.php.

117 Id. at 8.

difficult to track illicit uses. Undoubtedly the variety of architectural permutations P2P providers will

employ in their software will continue to challenge secondary liability in copyright law.

VII. Conclusion

With each new court decision, P2P services have come away with a kernel of knowledge on how

to adapt to their copyright environment, hoping to improve their chances of survival. Although P2P

providers may continue to reap short-term benefits, their long-term survival remains in doubt. Even if

P2P entities are completely vindicated, the P2P industry might still be weakened if users are frightened

away on a large scale by the RIAA and MPAA’s direct infringement actions.

The relative success of services like iTunes,118 Rhapsody,119 and Movielink120 suggest that, at the

right price points, legal music and movie subscription services are economically viable. Just as the Sony-

Betamax case presaged a very profitable video and DVD industry at the time the movie studios thought

that VCRs would completely undermine their business, online music and movie distribution could

conceivably become more lucrative than capital- and labor-intensive distribution of tangible recordings.

Perhaps cooperation between the recording and movie industries on the one hand, and their

once arch rival P2P networks on the other, is inevitable. Indeed, Bertelsmann had surprised industry

observers by investing in Napster in 2000. In late 2003, Sony and Bertelsmann agreed to merge their

respective recorded music businesses into Sony BMG. Although Sony’s music division was a plaintiff in

the Grokster case prior to the Sony-Bertelsmann venture, Sony BMG recently announced that it is

cooperating with Grokster in a venture to combine free music sampling with paid downloads.121 Details

remain sketchy at the time of this writing, but Sony’s move may signal a capitulation by the recording

industry in its legal attack on P2P services—or at least slow its momentum. What results from the

cooperation between Sony BMG and Grokster, and whether other record companies will follow suit

individually or in manner that pools their catalogues, remains to be seen. Making your enemies your

friends—at least those to whom you have lost—may be the entertainment industry’s new tagline.

118 See www.apple.com/itunes.

119 See www.listen.com.

120 See www.movielink.com.

121 Jon Healey, “Sony BMG, Grokster Join Forces,” Los Angeles Times, at C1 (Oct. 29, 2004).

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