High Court Prepares for Case Against File Sharing

The entertainment and technology industries’ most important legal dispute in two decades hinges on a question Hollywood confronts every day: What makes a bad actor?

The Supreme Court will ponder that question Tuesday when it hears arguments from studios and record labels eager to hold the distributors of two file-sharing programs -- Morpheus and Grokster -- liable for the wide-scale piracy committed by their users.

Seven major studios, four major record companies and 25,000 music publishers claim that StreamCast Networks Inc. and Grokster Ltd. are “bad actors” in the high-tech world that built businesses around people making illegal copies of movies and music.

“Grokster and StreamCast cannot escape the reality that copyright infringement is their business,” lawyers for the movie and music companies contended in court papers, adding that a company should be liable whenever the “principal or primary use” of its product is piracy.

The case has triggered a fierce response from the high-tech and consumer electronics industries, which argue that the entertainment conglomerates are trying to blur the line between good technology and bad behavior. They want the high court to reaffirm its landmark 1984 ruling in the Sony Betamax case, which protected companies whose products were capable of substantial legitimate uses as well as illegitimate ones.

“Software doesn’t steal content, people steal content,” said high-tech entrepreneur Mark Cuban, echoing a line that gun makers often use when sued for crimes committed by their customers.

How the court rules could shape the digital evolution of entertainment and technology, industries that have long been uneasy partners. A win for StreamCast and Grokster could force the studios and labels to work with their file-sharing nemeses or redouble their attacks on individual downloaders, more than 9,000 of whom have already been sued. A win for the entertainment companies could make entrepreneurs and investors balk at developing new entertainment and communications technologies.

However the case turns out, the loser is widely expected to take the issue straight to Congress, where lawmakers have struggled to reach consensus on online piracy.

The case has driven a wedge between two groups -- large-scale copyright holders and technological innovators -- whose works and ideas receive special protection under federal law. Both sides contend that they have as much or more at stake as they did when the court took up two studios’ lawsuit against Sony Corp. over the Betamax home video recorder.

The Betamax was the first device that television viewers could use to record broadcasts or play prerecorded programs. Ultimately embraced by Hollywood, such video cassette recorders spawned the multibillion-dollar home video industry.

File-sharing programs such as Grokster and Morpheus provide a powerful, inexpensive way to distribute digital goods and data around the globe by letting users copy items stored on one another’s computers. One consequence: Millions of people download billions of movies, songs and other digital works free each month without permission from the copyright owners.

The companies that distribute these programs have found several ways to cash in on their huge audiences, such as displaying advertisements in their software, selling advertisement-free versions of their programs and delivering other companies’ programs to users. StreamCast and Grokster also collect fees when users download authorized copies of songs, games and videos from companies that support file sharing, but StreamCast Chief Executive Michael Weiss said those fees were a minor part of his company’s revenue.

One reason is that the major labels and studios have refused to let online music and movie services do deals with StreamCast, Weiss said, accusing them of “blacklisting” his firm.

The effect of the downloading on the entertainment industry has been hotly disputed. Nevertheless, many record-label executives say downloading is at least partially to blame for the steep drop in CD sales since 2000 -- a slide that was halted last year but appears to have resumed in early 2005. And numerous studio executives say they risk a similar downturn as Internet connections get faster.

The major labels and studios used lawsuits to kill early file-sharing networks such as Napster and Scour, spawning a second generation of networks that had no central monitoring or control. A federal judge in Los Angeles and the U.S. 9th Circuit Court of Appeals ruled that these decentralized technologies were legal despite evidence that most of the music and movie downloads were unauthorized.

The rulings forced the labels and studios to start suing the tens of millions of people using file-sharing networks.

“If these services are not shut down,” said attorney Michael Graif of Chadbourne & Parke, an expert in intellectual property law, “then copyright infringement and unfettered copying of music and movies is essentially being condoned.”

Many tech firms, meanwhile, worry about the ground rules for an era when all text, audio and video is digital and nearly every device or software program is designed to connect to the Internet at high speed. They do not want the threat of liability to let Hollywood dictate how products are designed.

As lawyers for the Consumer Electronics Assn. noted in a court filing, “all digital technologies operate by making copies of millions upon millions of bits.” If the court removes the protections provided by the Sony Betamax ruling, technology such as computers, digital cameras, video recorders and even the Internet “would be subject to claims that it ‘promotes,’ ‘contributes to,’ ‘benefits from’ or even ‘induces’ infringement,” they wrote. “Technology developers would face massive liability should any such claim succeed,” they added.

Some consumer advocates, copyright experts and artists contend that the major entertainment companies are trying to use copyrights to choke off independent sources of music and video. Fare from the major labels and studios has a stranglehold on radio, television and the multiplex, but file-sharing networks give people an extremely inexpensive way to expose their creative works to the public.

The fight over these issues heated up in Washington last summer, when the entertainment companies persuaded Senate leaders to introduce a bill to hold companies liable if they intentionally helped or prompted people to commit piracy.

But the Inducing Infringement of Copyrights Act stalled when lobbyists for the entertainment industry, technology firms, consumer electronics manufacturers and consumer groups could not agree on a way to target “bad actors” without chilling innovation.

Now, the studios and labels hope to persuade five justices to give them what lawmakers hesitated to: a clear way to stop those who promote or profit from piracy.

Their case makes two main arguments.

First, companies that promote piracy -- in their advertising, customer support or even in the features they choose to build into or leave out of their products -- shouldn’t be shielded by the Sony Betamax decision.

Second, companies that distribute a device or program used mainly to violate copyrights, regardless of their intent, may be liable for that infringement unless they change the product to deter piracy.

“When the product is being used for overwhelmingly infringing purposes, then they’re on the hook,” said Dean C. Garfield, director of legal affairs for the Motion Picture Assn. of America. “The focus is not necessarily on your intent but on your continued conduct.”

Under their view, Grokster and StreamCast would be liable because the overwhelming majority of their users’ downloads are unauthorized, and because piracy is crucial to sustaining their businesses. And instead of using measures to protect copyrighted works and punish infringers, the entertainment companies’ lawyers argue, Grokster and StreamCast have moved the other way, making it harder for copyright holders to protect themselves.

Opponents contend that the entertainment industry is trying to gain control over the digital technologies that are transforming how people entertain, create and communicate. The right test, they say, is the one already laid out in the Sony Betamax ruling: If a product is capable of a substantial non-infringing use, then it is protected regardless of what users do with it.

Requiring firms “to anticipate potential uses of their innovations, to correctly guess which uses will predominate, and then to design their technologies to prevent infringing uses (even if it were technically and practically feasible to do so) would stifle innovation and dramatically increase the cost of such technologies,” lawyers for Intel Corp. argued in court papers.

Several copyright experts predicted that the court would try to adapt Betamax to the Digital Age, offering at least a clearer definition of “capable of substantial non-infringing use.” If the Betamax shield applied to any product that could someday be put to legitimate use, then every technology would be protected, said attorney Georges Nahitchevansky of Fross Zelnick Lehrman & Zissu, a firm that represents numerous entertainment companies.

“You can’t let technology developers just say, ‘All right, I’m going to come up with alternative usages,’ knowing full well [their product] is going to be used to facilitate infringement,” Nahitchevansky said.

Said Stacey Dogan, an associate professor of law at Northeastern University: “It’s easy to oversimplify the Betamax case. It’s easy to describe it as ‘technology must always prevail.’ But the Supreme Court in that case was actually trying to achieve some balance between the interests of copyright holders and those of technology developers.”