Overview of Paper Whether we believe it is right or not, many of us have become accustomed to the…

Overview of Paper

Whether we believe it is right or not, many of us have become accustomed to the fact that a large number people download copyrighted material regularly using Peer-to-Peer file-sharing software. As a result, the entertainment industry is losing billions of dollars in revenue, and is suffering from the infringements of many copyrights. Who should be held responsible for this? Is it the fault of the people who misuse the software or the fault of the software distributors for allowing this to occur? With the recent case of MGM Studios, Inc. v. Grokster, Ltd., these issues came to an even bigger showdown than the predecessor case of A&M Records Inc. V. Napster in which the violations that its users were directly infringing the plaintiffs’ copyrights, that Napster was liable for contributory infringement of the plaintiffs’ copyrights and that Napster was liable for vicarious infringement of the plaintiffs’ copyrights, particularly after it was discovered that multi-platinum artists were finding their songs leaked to the internet long before an album had ever been released. (Vaver) Thusly, the basis of this paper will be to examine the relationship of Peer-to-Peer (P2P) file sharing services and how they violate copyrights, patents and generally, intellectual property. Further, I will discuss the impact on software developers, artists and the individual user who participates in utilizing P2P software on their individual and public access computer systems. The primary case that will be featured in this discussion is Metro Goldwyn Mayer (MGM) versus Grokster which took place in 2005.

•History of participants (MGM)

Theater magnate Marcus Lowe, who orchestrated the merger of Metro Pictures Corp., Goldwyn Pictures and Louis B. Mayer Productions, formed MGM in April 1924. With visionary Louis B. Mayer and Irving Thalberg at the helm, Metro-Goldwyn-Mayer was a powerhouse of prolific artistry and filmmaking expertise that the studio famously said attracted “more stars than are in the heavens.” During a golden three decades from 1924 to 1954, the Culver City-based studio dominated the movie business, creating a Best Picture nominee every year for two straight decades. One of the more memorable years at the Academy Awards® was in 1939 when MGM’s Gone With the Wind and MGM’s The Wizard of Oz were both nominated for Best Picture. Gone With the Wind took home Best Picture that year, along with 8 other Oscars.

The Wizard of Oz secured two Oscars. United Artists was established on July 15, 1919 by Charlie Chaplin, Mary Pickford, Douglas Fairbanks and D.W. Griffith and was best known as “the company built by the stars.” The budding company quickly left an indelible mark on Hollywood, revolutionizing the motion-picture business by promising creative freedom to actors and filmmakers, while offering the filmmakers a share of the film’s profits. UA’s Midnight Cowboy, released in 1969 starring Dustin Hoffman and Jon Voight, was the first X-Rated film to be nominated and win an Academy Award®. It won 3 Oscars®, including Best Picture. It was changed to an R-rating in 1971. United Artists later joined the MGM family in 1981, and thrived as member of the “lion’s pride.”??MGM boasts a total of 205 Academy Awards® in its vast library.

Among those are 15 Best Pictures. These films include; Rebecca (1940), Best Years of Our Lives (1946), Hamlet (1948), Marty (1955), The Apartment (1960), West Side Story (1961), Tom Jones (1963), In the Heat of the Night (1967), Midnight Cowboy (1969), Rocky (1976), Annie Hall (1977), Platoon (1986), Rain Man (1988), Dances With Wolves (1990), The Silence of the Lambs (1991). Today MGM boasts an impressive library comprised of titles from the United Artists, Orion Pictures, and Goldwyn Entertainment and PolyGram Filmed Entertainment libraries. With approximately 4,100 films and over 10,400 hours of television programming, the library also includes the Rocky and Pink Panther franchises and the celebrated James Bond franchise, the longest running and most profitable series in film history. (MGM)

MGM and other entertainment companies (24 in total): A collection of song-writers, music publishers and motion picture studios who “own or control the vast majority of copyrighted motion pictures and sound recordings in the United States.” Damages were sought as well as an injunction against Grokster for copyright infringement. MGM accused Grokster of distributing software which enabled users to breach copyright restrictions. They insisted that around 90% of data transferred using P2P software was copyrighted, costing them millions of dollars in lost revenues. They also argued that this type of copyright infringement would not occur if Grokster and similar software distributors did not make it possible.

•History of participants (Grokster)

Grokster Ltd. was a privately owned software company based in Nevis, West Indies that created the Grokster Peer-to-Peer file-sharing client in 2001. Grokster Ltd. was rendered extinct in late 2005 by the United States Supreme Court’s decision in MGM Studios, Inc. v. Grokster, Ltd. (Duke) Grokster became popular after the collapse of Napster due partly because of its decentralized architecture. Grokster’s client application licensed the FastTrack network technology. Grokster was in a new client software application that was used to connect to the FastTrack and Gnutella’s decentralized P2P networks to enable its users to share files. This network was quite different from Napster in two primary ways: 1) users could search for any file type (they were not restricted to MP3s like in Napster) 2) the network was decentralized.

The decentralized architecture prevented any single broken link, such as Napster’s index servers, from bringing down the network. Grokster removed the need for centralized index servers through its use of super nodes. Whenever a powerful computer with a high-speed connection running Grokster connected to the FastTrack network, it automatically became a super node and acted as a temporary indexing server for other clients on the network. It was believed that the decentralized nature of the network would insulate it from legal threats, however, this can also intimate a certain level of culpability in the act of sharing the files. (Giblin)

So what is Intellectual Property?

According to WIPO (World Intellectual Property Organization), intellectual property refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. Intellectual property is divided into two categories: Industrial property, which includes inventions (or as we commonly know them: patents), trademarks, industrial designs, geographic indications of source (definition of geographic indications: a name or sign used on certain products which corresponds to a specific geographical location or origin {e.g. a town, region, or country}. The use of a geographic indication may act as a certification that the product possesses certain qualities, is made according to traditional methods, or enjoys a certain reputation, due to its geographical origin… example: Vidalia Onions or Florida Oranges…) and Copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works like drawings, paintings, photographs and sculptures, and architectural designs.

Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and those of broadcasters in their radio and television programs. The innovations and creative expressions of indigenous and local communities are also Intellectual property, but because they are “traditional” they may not be fully protected by existing Intellectual property systems. Thusly, when industrial works and/or literary and artistic works are shared without proper compensation, any business, contract holder, artist or individual related to the copyright or patent has the right to seek damages in what is owed to them in relationship to the work in question.

MGM V. Grokster – Facts and Decision

MGM and several music and motion picture studios brought this suit against Grokster alleging vicarious and contributory copyright infringement for distributing peer-to-peer file-sharing software. According to MGM, over 90% of the material exchanged using Grokster’s file-sharing software is copyrighted material and therefore, copyright infringement occurs every time users exchange the information. MGM contends that Grokster contributes to this infringement by making the file-sharing software available to the public. The district court disagreed with MGM, granting partial summary judgment in favor of Grokster as to the liability that occurred from its present distribution activities. MGM appealed the decision to the Ninth Circuit Court of Appeals. The Ninth Circuit held that Grokster was not liable for contributory infringement because it lacked sufficient knowledge of the infringement and it did not materially contribute to the copyright infringement. According to the court, the peer-to-peer file-sharing software distributed by Grokster was capable of substantial non-infringing uses.

Based on this finding, the court held that Grokster could not be found liable for mere constructive knowledge, but must have had reasonable knowledge of specific infringement at the time it contributed to the infringement. Such knowledge was impossible in this case due to the structure of the network created by the Grokster software. Unlike previous file-sharing networks, Grokster did not maintain a searchable index on a centralized server. Instead, indexes were maintained on the computers of individual users, which prevented Grokster from learning of any infringement until after it had occurred. The network design also prevented Grokster from materially contributing to any copyright infringement because Grokster did not provide the site or facilities for infringement. (Duke) The Ninth Circuit also held that Grokster was not liable for vicarious copyright infringement. According to the court, Grokster lacked the right and ability to supervise the direct infringers.

The peer-to-peer file-sharing software did not allow Grokster to block access to infringing users and did not provide Grokster with any opportunity to filter content. While MGM argued that Grokster could alter the file-sharing software to control user access, the court noted this was not a viable option because the software resided on the computers of the users and not on a centralized server. The court ruled against Grokster’s peer-to-peer file sharing program for computers running the Microsoft Windows operating system, effectively forcing the company to cease operations. The product was too similar in look and feel to Kazaa, which is marketed by Sharman Networks and Morpheus, which was distributed by StreamCast.

Grokster along with Morpheus and Kazaa are considered second-generation peer-to-peer file sharing programs because unlike their predecessor Napster these file sharing programs allowed users to trade files directly between one another without these transactions passing through a centralized server. Because Napster maintained this fraction of control over the transaction of files through its server it was ruled illegal because it should have exercised its power over the server to stop the sharing of copyright infringing files. Grokster and this second generation of peer-to-peer file sharing programs sought to avoid this legal obstacle. (Duke)

Issues at Stake

In a peer-to-peer network each computer is both a server and client. Members need to download only the relevant software file sharing software, free of charge, and they may participate in the network to exchange files, which are more often than not, copyrighted.

The owners of copyrights, in this case MGM believed that the software distributors are liable for copyright infringement of the software users: By providing P2P file-sharing software, MGM believe Grokster should be liable for the actions of the individuals who misuse it.

A major debate rages over the issue that copyrights, no matter how numerous, do not give the holders a veto over certain advancements in technology.
The copyright owners (MGM) relied on the two recognized theories of secondary copyright liability: contributory copyright infringement and explicit copyright infringement. In order for Grokster to be held liable for contributory copyright infringement, it had to be proven that direct infringement of copyrights took place by a primary person, party or group and that Grokster had full knowledge of the infringements. It also had to be determined that they also provided a material contribution to this infringement.

For Grokster to be held liable for explicit copyright infringement there had to have been direct copyright infringement by a primary party, a direct financial benefit to the Grokster and an ability on the part of Grokster to supervise those responsible for the infringements. Precedent: The Betamax Case (Universal City Studios, Inc. et al. v. Sony Corporation of America Inc. et al. 1979) In this case it was held that video-recorders should not be banned, even though there is a chance they might be misused by the owner. This technology has substantial non-infringing uses, and so an outright ban could not be justified. Betamax technology was developed with the aim of allowing users to record television that they would have otherwise missed: thus, it’s intended and advertised use was not as an infringer of copyrights. (Vaver)

Billions of files are shared across P2P networks each month – a large proportion of which are illegal. If Grokster was made responsible for their actions, the amount of files transferred would be expected to reduce significantly as tighter regulations are enforced.

If MGM won their case in its entirety, the owners of file-sharing software would be held responsible for copyright infringements of the software users. Even though MGM was attacking a certain type of software, many other technologies could be affected if MGM had been successful. MP3 players, CD burners, external hard-disks, and so on would have been drastically changed to the leisure (and working) time of many individuals due to the basic operating software included with each of those devices and the nature of their portability from machine to machine and platform to platform. (Vaver)

A precedent would be set against which similar cases in the future could be examined. This is not a new problem, it has been going on for years between the Entertainment Industry and technology, which allows copyrighted material to be duplicated. The ultimate and unresolvable issue here is a trade-off between intellectual property rights and technological innovations, which will become more and more cloudy as social media and technological innovations churn ever forward and change at such a consuming and rapid pace.


In the wake of the case filing, Grokster began warning many users on the main page of their website that their IP (internet protocol: A unique string of numbers separated by periods that identifies each computer attached to the Internet) addresses were being stored. Prosecution of the file-sharing individual relies upon what has commonly been referred to as a process of a doe subpoena. If a doe subpoena is utilized, prosecutors are required to gain a series of subpoenas in order to find out the identity of the user behind the IP address in question. Following the shut down of Grokster blogs became inundated with concerned users fearful of the warning however there were and are no reports of the use of doe subpoenas in this case.

Research into the effects of warnings such as the one left on Grokster’s website has shown that while these warnings can result in a substantial reduction in online file sharing of individuals, the overall availability of downloadable content did not diminish. Furthermore, researchers cannot account for how much of this reduction in individual file sharing is simply shifted to other file sharing programs. In cases where the RIAA has issued threats the users who conduct the most file sharing usually reduced their daily transactions to levels below the level of prosecution. In effect these warnings have only caused only a brief reduction in overall online file sharing. (Duke)

Future Fallout

The fear raised by some is that the Grokster findings would impose far too heavy of a burden on technological development, or discourage the dispersment of community information. The Grokster Court attempted to remain “mindful of the need to keep from trenching on regular commerce or discouraging the development of technology with lawful and unlawful potential.”‘ The Court did not focus on the legality of the P2P networks but rather on the intent and conduct of the defendants. Finding the defendants’ intent “unmistakable,”‘ the Court reasoned that such wrongful intent combined with defendants’ unlawful conduct could make defend- ants liable. Thus, the Court appropriately placed the blame on the malicious con- duct of technology developers rather than on the technology itself. (Grigorian)

Under Grokster, “businesses [can] continue to develop new technologies” provided they do not encourage their users to violate the copyright law. Therefore, it is reasonable to infer from Grokster that P2P file-sharing software and similar technologies remain perfectly legal. This is a legitimate finding because, as the Court pointed out, file-sharing technologies can and have been used for legitimate, non- infringing purposes. For example, universities, business, and government entities use P2P file-sharing software for added efficiency and “a more stable platform on which information can be shared [without being susceptible] to the types of attacks that a centralized server faces.’ (PC Review)

Since the Supreme Court’s pronouncement of Grokster, many legal scholars are eager to know the role the decision will play in future indirect copyright infringement cases, especially those involving file-sharing technology.’ Given the questions that remain unresolved after the Grokster decision, like those regarding the proper interpretation and application of Sony, future plaintiffs are likely to first proceed under the active inducement theory and, alternatively, plead contributory copyright infringement. To establish liability under the active inducement theory, plaintiffs must prove that: 1. The defendant took “active steps” with intent to cause infringement 2. The users of defendants’ technology did in fact engage in infringing activity.

In cases involving P2P technology, proving intent is the trickiest of the two elements. However, copyright holders with legitimate claims will most likely be able to meet this requirement by showing that the conduct and activities of the alleged infringers in developing and marketing their technology would rise to the level of actively promoting the illegal sharing of said works. Courts will then need to examine the alleged infringers’ business models, marketing and promotional strategy and capability of installing filtering and monitoring systems in order to determine whether sufficient evidence of intent exists. Although it’s unclear as to how many of these factors must be present for a court to find wrongful intent, it is reasonable to determine that the more closely a persons behavior resembles that of a Grokster type entity, the more likely a court is to find liability under the active inducement standard. (Grigorian)

This does not indicate that Grokster prefers copyright holders or offers them an automatic win. Some would argue that Grokster makes it more laborious for copyright holders to obtain damages because it forces them to conduct more extensive discovery and incur greater legal expenses in order to successfully prove intent. So while Grokster may appear unreasonably burdensome at first, it actually benefits all parties involved. By setting the burden of proof higher and requiring copyright holders to prove intent, Grokster will likely deter wasteful claims. The newly adopted standard also favors copyright holders because it offers clearer guidelines for those with legitimate claims to seek a legal remedy when their rights are violated. Therefore, in contrast to what some scholars may argue, Grokster successfully maintains a delicate balance between innovation and copyright protection.


The District Court of California and the Ninth Circuit Court of Appeals ruled in favor of Grokster, much to MGM’s disappointment. It was held in both
courts that Grokster escaped liability for a number of reasons: 1.Grokster did not have constructive, adequate knowledge of the infringements. 2.The software distributed by Grokster was capable of substantial non-infringing uses. 3.There was no central server, thus Grokster could only obtain information of the infringement after it had already happened (i.e. they could not block or prevent copyright infringement because they were not able to directly supervise file transfers). 4.Grokster could not be found responsible for materially contributing to any copyright infringement. 5.Grokster did not directly earn money from this software, as it is free for people to download. Instead, they earned money through advertisements on their website. 6.Grokster was unable to change the software to control user access due to the fact that the software resided on the users’ computers and not on a centralized server. In the United States Supreme Court, the ruling of the appeal favored MGM.

The unanimous ruling was that “one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.” Under these conditions, P2P file-sharing companies could now be sued for copyright infringements. Many as the most important intellectual property case have dubbed this case in decades (PC Review) Due to the extent of disagreement, which arose as to whether Grokster is protected under the Sony Betamax case, a new test has been developed to determine whether the ruling in the Betamax case protects the software in question. The test assesses whether or not the distributors of the software have promoted it as a means of copyright infringement. If such intentions were found, then the ruling of the Betamax case could not be used as precedent. As long as new innovations do not affect existing copyrights, then this ruling should not affect them.

It is seen by the Supreme Court as a fair balance between the benefits gained by allowing and promoting technological innovation and the need to respect the intellectual property rights of artists. However, critics do not quite view it in the same light: they are skeptical that the test will work in their favor due to its inherent ambiguity. (PC Review) There are major concerns, however, that despite the good intentions of the court to strike a fair balance between innovation and copyrights, many investors may be put off. If there is a slight chance that a potential project is at risk from this ruling, then ideas are likely to go no further than the drawing board.

This could have huge significance, especially regarding the creation of new digital technologies: Any threat of liability, and the idea dies Many argue that file sharing is not the problem, which needs to be addressed here; it is the issue of the individuals that abuse it. On the other hand, trying to hold millions of downloaders responsible for their (numerous) actions would be logistically impossible, and so a more preventative approach has instead been used. (PC Review)

Therefore, Grokster’s message could not be any louder or clearer: innovators should continue to develop new technologies but they must do so with a lawful intent. In devising a new standard for liability, the Court in Grokster provided an alternative mechanism under which copyright holders could seek redress against technology developers and distributors that infringed on their intellectual property rights by proving un-lawful intent. The new standard appropriately focuses on the infringers’ conduct and intent rather than the technology itself.

Works Cited

1. Giblin, Rebecca. Code wars?: 10 years of P2P software litigation. Cheltenham, UK; Northampton, MA: Edward Elgar Publishing, 2011. Print. 2. Duke University School of Law, “MGM V. Grokster.” Web. 2004 – 2005. http://publiclaw.law.duke.edu/publiclaw/supremecourtonline/certgrants/2004/mgmvgro.html 3. “The Legality of File Sharing – MGM Vs Grokster.” Web. 14 July 2012. http://www.pcreview.co.uk/articles/Consumer-Advice/The_Legality_of_File_Sharing_-_MGM_vs_Grokster/ 4. “The Official Website for Metro-Goldwyn-Mayer (MGM) Studios: Learn More About the History of MGM.” Web. 14 July 2012. http://www.mgm.com/corporate/index.html 5. Vaver, David. Intellectual property rights?: critical concepts in law. London: Routledge, 2006. Print. 6. “WIPO – World Intellectual Property Organization.” Web. 14 July 2012. http://www.wipo.int/portal/index.html.en 7. Grigorian, Kristine. MGM vs Grokster: Adopting Patent Law’s Active Inducement Doctrine and shifting focus to actual infringers. Maryland, Northampton, Journal of Business and Technology, Maryland School of Law, 2005. Print.


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