After the U.S. Supreme Court sided with the entertainment industry in Metro-Goldwyn-Mayer Studios vs. Grokster on June 27, attorney John Frankenheimer shared his thoughts with <i>Billboard/ELW</i>. Fr


After the U.S. Supreme Court sided with the entertainment industry in Metro-Goldwyn-Mayer Studios vs. Grokster on June 27, attorney John Frankenheimer shared his thoughts with Billboard/ELW. Frankenheimer is the co-chairman of Loeb & Loeb, a firm whose founders helped to establish Metro-Goldwyn-Mayer and the Academy of Motion Picture Arts and Sciences in the early1900s.

The Supreme Court held 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.

It also held that the 1984 Supreme Court decision in the so-called Sony Betamax decision was misapplied in the Grokster case by the Ninth Circuit Court of Appeals. Beyond this, the court refused to "revisit" the Sony Betamax decision.

Following is the interview with Frankenheimer.

In addition to the court's unanimous opinion written by Justice David Souter, two concurring opinions were issued. One, written by Justice Stephen Breyer, was joined by Justices John Paul Stevens and Sandra Day O'Connor. The other, written by Justice Ruth Bader Ginsburg, was joined by Chief Justice William Rehnquist and Justice Anthony Kennedy. Why, in your opinion, did the Supreme Court justices write two concurring opinions?

Well, they come at it from different points of view. When you read Breyer's concurrence, he seems very focused on trying to bolster the ruling in [the Sony Betamax case]. Ultimately I think that the entire decision allows for these two rulings to exist side by side.

But Breyer seems to want to emphasize, more aggressively, that Sony is still valid -- to reiterate that the concept of "staple article of commerce" doctrine is still valid. He makes small distinctions, but, at the end of the day when you view the fact that the decision was essentially a unanimous decision, I don't think it's going to have a great deal of impact.

I mean he seems to spend his time arguing over whether a significant potential for future legitimate [uses] is something that can be quantified. I don't think it's terribly necessary to delve into that kind of detail, because no one is suggesting that Sony should be set aside. Quite the contrary, I think the court said that Sony was just misapplied here.

[In the 18-page concurring opinion, Breyer wrote: "Sony's standard seeks to protect not the Groksters of this world (which in any event may well be liable under today's holding), but the development of technology more generally. And Grokster's desires in this respect are beside the point. The real question here, I believe, is not whether the record evidence satisfies Sony. As I have interpreted the standard set forth in that case, it does.... Instead, the real question is whether we should modify the standard, as MGM requests, or interpret Sony more strictly, as I believe Justice Ginsburg's approach would do in practice...."]

Do you think the Breyer opinion is going to cause some confusion in the future?

No, I think you can read Breyer's opinion and still, even if you took it to heart, fully accept the balance of the court's rule. I think it's just contrasted with Souter, who talks about really stepping back and having some perspective about what's going on.

I think Souter's opinion is very strong. He concludes by saying that the unlawful objective is unmistakable. He seems to have a very balanced, practical view of what's going on. He again reiterates the three rules in coming to some conclusion about whether there was inducement or not. [Justice Souter wrote: "In addition to intent to bring about infringement and distribution of a device suitable for infringing use, the inducement theory of course requires evidence of actual infringement by recipients of the device, the software in this case. As the account of the facts indicates, there is evidence of infringement on a gigantic scale..."]

I think that was very clear in people's minds. This was a case where it was always apparent that these were businesses that were built upon -- were predicated on -- the widespread use of copyrighted materials, and that infringement was essential to the growth of these businesses. And that's not going to stand.

What about Justice Ginsburg's concurring opinion?

Again, I think it can only benefit the position for the content holders. She does acknowledge the need to strike a balance [between a copyright holder's legitimate demand for effective protection and the rights of others freely to engage in substantially unrelated areas of commerce].

This should never have been allowed to be a debate between content holders and technologies. Unfortunately, those who wanted to see this type of technology grow unimpeded wanted to characterize it as that.

I think that if you talk to the content holders at this point in time, they embrace technology, they see the future. They see this as a tremendous opportunity for them to reach more people, to reach them in a more efficient and effective way. Yes, they're going to have to change some economic models, but they understand where things are moving, and they're no longer intimidated by it. What they've been arguing about is, "It's fine, we'll embrace it, but let's make sure we respect and honor copyright."

How do you feel that this will affect day-to-day business? Will it have any impact on the kinds of deals that are made or on the economics of the industry?

From an industry standpoint, I think everybody sees the potential in digital distribution. It's evident when you're looking at iTunes, or when you're looking at what's going on with Yahoo's move into the marketplace or other big retailers.

What's going to happen very quickly is that the first legitimate [peer-to-peer] services are now going to come online, certainly by the end of the year. All of the music industry content holders -- the majors and most of the significant independents -- have already signed up to be a part of that, and that will open the floodgates for legitimate services.

So if you go back in time over the last couple of years and you talk about what the music industry's objective were, on the one hand they wanted to stop illegitimate use of their content -- unauthorized use of their content. They wanted to pursue that by, one, pursing those who continue to infringe by bringing police action against them -- they wanted to pursue remedies through the court system -- which they have now done effectively. And, two, they wanted to find a way to provide a legitimate alternative, an attractive alternative to the consumer. They have done that now, and they have provided the economics that are much more realistic.

What do you mean by your statement that they have provided the "economics that were much more realistic"?

If there was pushback in the marketplace in the conventional CD-pricing model, there is now an alternative both in terms of absolute pricing and unbundling, that seems to have captured the consumer's imagination.

Although that might be painful in the short run, in the long run it's probably a much more sustainable model. Ultimately I think it will be a very positive thing for the business, although there is short-term pain involved in it.

You see all three things happening concurrently. I think those who wanted to use illegal systems and continue to infringe and take other people's property without paying for it have clearly gotten the message that there are repercussions and consequences for that. All of the surveys indicate that the RIAA's or the MPAA's actions against individual infringers is starting to have an impact, and although you'll never have 100% compliance, most people have figured out that this is not worth it -- as long as there are legitimate alternatives, they should pursue those. The RIAA and the MPAA have been very successful in pursuing their remedies through the court system.

This [decision] is the ultimate indicator. The Supreme Court has come down very clearly in a position that they will not tolerate [P2P operators] where the intentions were just clearly set for to act in an inappropriate manner.

Thirdly, and just as important as the other two -- because you have to provide a pathway for the consumer -- there are already legitimate ways of downloading, as evidenced by the success of iTunes and now the emergence of Yahoo.

Just as importantly, the emergence, I'm sure by the end of this year, of legitimate P2P services, which will be far superior in terms of the experience than anything on the illegitimate side. You'll have a cleaner system, a faster system, it won't be spoofed, there won't be degraded files, and it will have absolute depth. So there's no longer an issue of 500,000 or 800,000 tracks being available; it's going to be millions upon millions of tracks available. Anyone who's really interested in music can go as deep into a catalog as their imagination will allow them, and it's going to be a very invigorating and exciting experience for everyone.

You talk about them being able to go deep into the catalog, but the Copyright Office presented the draft of a proposed bill abolishing the mechanical license and creating Music Rights Organizations. When you start getting into the realities of music licensing, is that a big obstacle to being able to have the millions of files available on a P2P system?

It presents some interesting challenges. In my own view, that proposal that was provided by the Copyright Office is as much a reflection of the frustration of the industry not coming to grips with all of the new technologies available, and distribution opportunities available, as anything else.

I am confident that given time, the industry as a whole -- record companies, the publishers, the recording artist representatives, performing right societies, the unions who represent performers, the guilds -- can resolve this problem internally. I think they're fully capable of doing that. I think they all come to the table with good intentions. I think that this cloud of illegitimate downloading being lifted from the landscape will make it that much easier for people to find a balanced way of addressing all of their respective issue and coming to logical and mutually satisfactory conclusions.

Do you think they'll be able to do it in time -- before a Congressman decides to get a bill out there?

That's a very interesting question. I think Congress' intent, and the motivation for Congress, was to ensure that consumers could have access to as wide a range and variety of creative content as possible. They did not want anyone to impede that -- that's fundamental to the Copyright Act.

But I think Congress' intentions were good and honorable. But there is probably a better solution that can be drafted within the industry because the industry understands the complexities of both the economic models and the licensing requirements that are attendant to that. When you cede that to people who, notwithstanding their good intentions, may not fully understand that complexity, there is a good likelihood that it will be disruptive rather than beneficial.

So the industry really needs to move quickly to keep it out of legislators' hands? Perhaps this draft bill is simply a way to get everyone to the bargaining table quickly to resolve licensing problems for online music?

I think that's the case. And I think that you have to give credit to a number of Congressmen, who have made it very clear that if these problem weren't solved -- and these problems include this whole issue of P2P distribution and everything else -- that they would have to intervene. I think it got people's attention. I see this as a very, very positive first step.

I think the industry is talking internally -- [getting the discussion to] much more elevated levels than they have in years now about trying to resolve the other problems.

Is the Grokster decision a first step?

I think it clears the way now for real dialogue.

It's almost like it takes a big weight off their shoulders.

Absolutely.

You work in the financial arena, putting financing deals together. How do you think this decision is going to affect outside investors who may have been hesitant to invest in the music industry?

Again, it can only be a positive. If you look at the reports from analysts, if you look at the editorial comments from people in the financial press, if you listen carefully to what is being said by investment bankers and the more aggressive private equity groups that work in the media space, the instability caused by Internet piracy has always been part of their articulated reasons for being hesitant to move more aggressively into this space.

I think once that's removed and they see that order can be restored, and they see the advent of legitimate P2P services coming online over the next few months, it really starts to underscore again the unlocked value and content that now can be captured.

You see what has happened with the explosion of revenue coming form DVDs when they tap into something that is analogous to deep catalogue. They're going back into television shows that are five, ten, fifteen years old, 20 years old in some cases -- they're pulling films from the vault that haven't been in active release in quite some time, including television.

I've got the Dean Martin television series DVDs.

We represent the estate of Dean, and we thank you for it. But that's the point. Dean Martin is timeless. Dean Martin is as funny and charming today if you put an 18- or 22-year-old in front of him. He has no perspective on who Dean is, but he gets how special Dean is, and how charming he is.

The same thing holds true for music now. When you can go into deep catalog, people who love music can start connecting the dots between contemporary artists and the artists who inspired them from 20 years ago, and then an artist from twenty years prior to that who inspired that artist in turn. I think you're going to unlock a lot of activity and a lot of value in these catalogs.

Ease of access has always been an issue. Even in the conventional days before the Internet, it was difficult and frustrating when you went to a record store and couldn't find a record that you were really interested in acquiring or buying, and you could only see so many things. The Internet makes it that much easier to search. I think it enhances impulse buying -- there are a lot of real positive attributes, and I think it's the beginning of a really positive period for the industry.

Investment in the industry by outside equity funds sounds like a really good idea to a lot of people who believe that having more money in the industry means, perhaps, that there can be bigger budgets and more can be spent on marketing and developing the talent. But many lawyers and artists were upset when Warner Music gave its investors big bonuses -- it started to make many wonder if outside investment is a good thing. How would you calm their fears, so to speak, or should they be calmed?

Here's the issue, or the issues, that should be acknowledged.

It is certainly better to have more funds available to build out the music industry than less funds. So having more funds is not a bad thing.

How those funds are implemented -- how they're put to use -- is an issue of execution.

I don't think anyone would argue that when in the music business began in the 1970s -- in the late "70s and all through the "80s and ever since then -- that there was a balancing act that was going on.

On the one hand, we were losing some of the great entrepreneurial companies, and some of the great entrepreneurial individuals who built the business.

On the other hand, budgets -- for recording and marketing and promotion -- grew exponentially. Coming from a moment when if someone sold one million albums it was considered an incredible accomplishment, to the point where five million was the new benchmark, and then on to 10 million, and then all of a sudden people started selling 15 million and 20 million units worldwide, that's an incredible thing.

The trick going forward is to balance that opportunity, which has to be driven by capital investment, to achieve greater and greater reach -- and greater and greater sales, and exposure for the creative community -- with the realization that you also need to nurture the individuals within those companies who contribute to that creative process in a very meaningful way.

The balancing of sides will always be an issue. It's not going to be different in the music industry or in the film business than any other industry historically within the United States. There is always a balancing point that needs to be found between investment, size, efficiency, and the end result of people's endeavors.

So I wouldn't be intimidated by the fact that people want to come in, but I'd be careful about what the long-term agendas are -- and making sure that everyone understands what's going on, that there are still wonderful, small, innovative record companies driven by a handful of people who can break an artist.

There will be new models established undoubtedly as record companies continue to morph. There have always been large record companies, at least for the last 50 years. There were always renegade, small companies that swam against the grain, and I suspect that will continue on.

As I speak with executives after the Grokster decision, I hear something in their voices that seems like they feel it is monumental -- that this decision almost opens up the floodgates to all these possibilities. Do you think that, or am I just imagining this sound in their voices?

No, I think you could call this a dawning of a new age. It does create tremendous value and opportunities for the big content library owners.

It also creates tremendous opportunity, and this is the brilliance of legitimate P2P services. It creates tremendous opportunities for small, nimble companies.

As long as they can find ways to reach their audience and expand that audience -- the Internet certainly provides very viable alternatives to traditional media -- they can co-exist, and only time will tell which will become the most effective.

You know, at the end of the day, great music will drive all of this. And the big library content holders are obviously at an advantage because they already have great music in their libraries. But it doesn't forestall the efforts of young companies to identify, nurture, and build the careers of great new artists.

Especially if they find a niche market?

Absolutely. And you know, you look at something like the experience of the Bonnaroo market. You realize that they don't spend a dollar in conventional advertising, but they are very reliant on networking through the various Internet sites of all of the bands that perform there, plus their own site, and they reach an awful lot of people -- 75,000 to 85,000 people find their way to southeast Tennessee every year to have that experience.

There's no reason that that process can't be effective in the conventional record business as well.

Or P2P?

Exactly.