Concerns about innovation abound.

Filetrading companies were less than thrilled with today's Supreme Court (June 27) ruling against fellow P2P company Grokster. But they weren't alone in expressing concern about how the decision may challenge the process of - and prospects for - innovation.

The Supreme Court ruled unanimously against Grokster, favoring the entertainment industry’s position that P2P companies can be held liable for infringing uses of their technology.

Tech companies both in and out of the P2P realm expressed concern that the ruling created a legal noose that might rope the unintended. Representatives from companies ranging from digital music stores to internet service providers said that, when it came to defining what constituted liability for digital copyright infringement and what the penalties will be, the court's language was ambiguous.

“What the court did today was to write a set of standards whose most notable immediate feature was their lack of clarity,” says Rich Taranto, a partner with Farr and Taranto who argued the case for Grokster.

Critics say the ruling, by not explicitly stating what actions constitute copyright liability and which do not, essentially allows content owners to make accusations at will and force the courts to sort it out case-by-case, setting their own punitive damages along the way.

“This decision seems somewhat Orwellian to me in that it seems the copyright and entertainment industries now become the thought police,” adds Matt Neco, general counsel for StreamCast Networks. “(Technology companies’) every thought and every action will now be subject to discovery in expensive litigation. Lawyers are going to be pulled into every aspect of innovation and business. It’s not a great way for a business to function.”

Fred von Lohmann, senior staff attorney for the Electronic Frontier Foundation, says that while the decision largely upheld the Sony-Betamax decision protecting technology innovation, technology companies now have a greater burden of proof when defending themselves against lawsuits from content owners.

“America’s entire innovation sector is going to now face a new theory of copyright liability,” he says. “The important question for innovative companies is whether they could face a lawsuit on this new theory that could potentially cost them millions to defend. The Supreme Court has opened the door for lawyers asking to see engineering notes, marketing plans and e-mails of technology company executives. That’s a very expensive threat.”

This expense may be prohibitive to start-up companies and individual inventors, affecting both their business models and their search for investors.

“Of more concern to me is for the guy in the garage coming up with the next great product,” says Michael Pettricone, VP technology policy for the Consumers Electronics Association. “The legal environment (they’re) facing is much less clear. As an innovator, I’m not sure you know what the rule is and what you have to do to avoid being sued.”

Internet service providers like telecom and cable companies offering high-speed Internet networks may be on the hook for not including technology in their networks that prohibit unauthorized content distribution, he says.

“It makes it harder for them to negotiate with content providers if they’re vulnerable for suit and that discovery process,” says Ed Black, president of the Computer and Communications Industry Association. “Not that it will happen all the time. But the threat of that actually taking place allows (content owners) to extract concessions.”

One such ISP, Verizon, expressed no such concern, however.

“Verizon remains committed to continuing to work with copyright owners and Congress to find appropriate solutions to the difficult issues of copyright liability,” said Sarah Deutsch, Verizon vice president and associate general counsel in a statement.

Even companies working with copyright owners, operating “legitimate” online services feel somewhat uneasy with the potential legal threat against their future products and services.

“We do have those concerns,” says David Pakman, eMusic COO. “We don’t think that stings us down the road based on the current service we have. But we constantly look at new features that we can deploy that may have a combo of infringing and non-infringing use. We now have to question if we can offer a feature that can be used legally by our users but illegally by others, are we liable? That puts a cloud over development activities over innovating new features.”

“It’s not that we’re worried about bad conduct being caught,” adds Black. “It’s that a whole lot of benign and ambiguous content is now subject to challenge with all the heavy burden that entails.”
Now that the Supreme Court has sent the Grokster case back to District Court to be reconsidered, several tech executives expressed a hope that the lower court would provide more clarity.

“The ruling should lead the district court to provide clarity about rules of engagement between content providers and technology suppliers in the digital realm generally, and with respect to P2P file-sharing in particular,” said the CEO of the Distributed Computing Industry Association in a written statement.

Today’s peer-to-peer operators are reacting to the ruling in different ways. One such service, iMesh, announced its plans to launch a fully authorized version of their service later this year. The company has hired the former president of RCA Records and Sony Music International, Robert Summer, as its new executive chairman to lead this transition.

The new service will operate as a combination of a paid subscription service and an ala carte download store for most copyrighted material, and continue with the P2P service for what it called “long tail” content from unsigned and or other independent acts who authorized their content for such distribution.

The future for Streamcast, the company behind the Morpheus P2P network, remains unclear until the lower courts finalizes its case. But Streamcast CEO Michael Weiss says it will be "business as usual," for now.

“We don’t induce infringement at all," says Weiss. "In fact, we go far in trying to be sure the users out there know about the infringing uses they cannot do. We’re just going to continue to innovate and come up with new products ... We intend to continue our fight. The David vs Goliath battle will continue, and we’re staying in this for the fight.”

Most agree the Supreme Court’s opinion did not rule against P2P as a technology, and expect P2P services to remain around for some time.

"P2P is not going to go away," says Gigi Shone, president of Public Knowledge, a DC-based digital rights advocacy group that has long-supported Grokster. “There’s still going to be P2P and Hollywood and the recording industry are still going to have to deal with it. And they’re going to have to try to modify their business model to take advantage of it and not try to kill it. This is a pyrrhic victory for them, at best."

More Coverage:
* The Supreme Court's rules in favor of the entertainment industry.
* Read Billboard Legal Editor Susan Butler's case summary here.
* Independent labels voice varying reactions.
* International trade groups salute decision.
* Read early responses from trade groups, congressional leaders and other interested parties.
* Read the Syllabus of the opinion.
* Check back for updates on this story.