Divisive File-Sharing Issue Tackled by Supreme Court

The Supreme Court struggled Tuesday with a vexing question of copyright law that has divided Hollywood from Silicon Valley: When can Internet companies be sued for helping others download free copies of music and movies?

This is no mere copyright dispute, because the stakes are enormous.

Lawyers for the movie studios and record producers say file-sharing networks that allow users to make copies from one another’s computers are “inflicting catastrophic, multibillion-dollar harm” on the entertainment industry.

“The record industry has lost 25% of its revenues” since millions of computer users began downloading free music, industry attorney Donald Verrilli Jr. told high court justices. He described file-sharing software as a “gigantic infringement machine” that had made piracy into a flourishing business.

Outside the court, two small groups representing both sides of the issue paraded in a circle.

One group carried placards that read: “Feed a Musician: Download Legally.” Some musicians and other artists say they are being cheated by illegal file sharing.

The others’ signs said: “Fight for the Right to Innovate” and “Hands Off My IPOD.” Technology advocates say courts should not allow big Hollywood companies to block innovation and halt the free flow of information on the Internet.

Inside the court, the justices in their questions and comments signaled that they were looking for a narrow rule that could allow the entertainment industry to go after some software companies marketing themselves as offering free copies of protected works.

But the narrow approach would not prohibit file-sharing technology itself. These programs may have legal uses as well as illegal ones, the justices noted.

In the past, the court has been confronted with new copying devices that could be used legally or illegally. For example, a Xerox photocopier from the 1970s could be used to run off illegal, free copies of a new book, but that fact alone would not have allowed book publishers to sue Xerox for violating the copyright laws.

The two file-sharing companies targeted by the lawsuits that reached the high court are Grokster Ltd., which is based in the Caribbean and distributes the Grokster software, and StreamCast Networks Inc., which is based in Woodland Hills and distributes the software known as Morpheus.

Six years ago, Napster Inc. created the first network that enabled users to download music from other people’s computers through the Internet, becoming wildly popular virtually overnight. Users tapped into a central computer index to find songs on others’ PCs. But Napster was sued for copyright infringement and put out of business by the federal courts in California.

The developers of Grokster and Morpheus tried a different approach: Neither has a central computer index. Instead, the software enables users’ computers to compile their own indexes and build networks.

Because the owners of Grokster and StreamCast don’t monitor or control the downloading of copyrighted files, a federal judge in Los Angeles and the U.S. 9th Circuit Court of Appeals in San Francisco rejected a copyright infringement claim against them.

In ruling for them, the 9th Circuit relied heavily on a 1984 ruling of the Supreme Court that upheld as legal the Sony Betamax, which allowed users to make copies at home of copyrighted TV programs. The high court noted that the Betamax could be used for legal purposes, such as copying TV programs that were in the public domain.

In the Grokster case, the 9th Circuit judges acknowledged that 90% of the songs copied on the file-sharing networks were downloaded illegally. But that meant a substantial number -- as many as 10% -- may have been copied legally.

At the start of Tuesday’s argument, Justice Sandra Day O’Connor said the court might be wise to adopt the “active inducement” rule in the file-sharing case, and several of her colleagues repeated this idea later.

Under this approach, companies such as Grokster and StreamCast could be successfully sued if it could be shown that they drew customers by advertising their capacity to provide free copies of protected works.

Verrilli said O’Connor’s approach fell short. He urged the court to adopt a stricter standard that would allow judges to shut down software companies whose main business involves providing free copies.

“Their whole business is built on infringement,” he said.

Verrilli said it would be hard for industry lawyers to prove that a small software maker actually induced its users to violate the copyright laws. Moreover, these small companies could close their doors and start up somewhere else, he said.

“There’s a shell game going on here,” he said. “These companies already operate in the shadows.... We are entitled to effective relief.”

A Bush administration lawyer echoed the industry’s central argument.

The file-sharing companies “build a business model out of copyright infringement” and should be shut down for that reason, said Paul D. Clement, the acting U.S. solicitor general. When more than 90% of a company’s business involves copyright infringement, courts should have no problem declaring that they are violators of the Copyright Act and deserve to be put out of business, he said.

For his part, the lawyer for Grokster and StreamCast urged the justices to stick with the “clear Sony rule.”

“It safeguards legitimate uses” for a new technology, attorney Richard Taranto told the court. If the copyright laws are to be readjusted, Congress should undertake the task, not the high court, he said.

Several justices said they found the Sony rule to be neither clear nor convincing.

“It’s odd that Napster goes one way, and this one goes the other way,” said Justice Ruth Bader Ginsburg, referring to Grokster’s lower-court victory. She added that the file-sharing companies seemed to be asking for a “green light” that would allow them to profit from the illegal copying on a massive scale.

Grokster and StreamCast provide free copies of their software but make money from ads that appear on the users’ screens, lawyers said.

Justice Antonin Scalia also discounted the Betamax decision as a guide for the new case. Don’t “waste your time on this,” he advised Taranto. “This court is certainly not going to decide this case based on stare decisis,” he said, citing the Latin term for stay as decided, or sticking with precedent.

Justice Anthony M. Kennedy also seemed to be unswayed by the arguments in favor of the file-sharing companies: Can you make a business out of “unlawfully expropriated property? That sounds wrong to me.”

Justice David H. Souter questioned whether the law should permit Grokster and StreamCast to help millions of users violate the copyright laws. “Isn’t this a classic case of willful ignorance?” he asked.

The software companies are turning a blind eye to the large-scale piracy of copyrighted works and saying they should escape punishment because they are unaware of what’s going on, he continued. “That’s what we’ve got here.”

The justices will meet this week behind closed doors to discuss the case of MGM Studios vs. Grokster and are likely to hand down a decision in June.