Case Analysis: Metro-Goldwyn-Mayer Studios, et al. v. Grokster Ltd., et al. (Aug. 19, 2004)

Copyright owners sued Grokster, StreamCast and others for copyright infringement based on the companies' peer-to-peer file-sharing software. In resolving but one aspect of the case, the federal Ninth

Copyright owners sued Grokster, StreamCast and others for copyright infringement based on the companies' peer-to-peer file-sharing software. In resolving but one aspect of the case, the federal Ninth Circuit Court of Appeals in California held, in its published opinion issued Aug. 19, that Grokster and StreamCast were not liable for contributory or vicarious copyright infringement. This decision is based only on the software in use when the District Court granted the distributors a partial summary judgment.

Following is an analysis of the court's opinion.


Plaintiffs in the consolidated case are songwriters, music publishers, labels and motion picture studios -- copyright owners. Defendants Grokster Ltd. and StreamCast Networks freely distribute software that allows users to share computer files.

The copyright owners claim that more than 90% of the files exchanged through P2P software offered by defendants involve copyrighted material, 70% of which is owned by plaintiffs.

The copyright owners claim the distributors are liable for vicarious and contributory copyright infringement. The distributors were granted a partial summary judgment in their favor with respect to this aspect of liability.

The court briefly explained the difference between a routine Internet transaction and a P2P network. In the routine transaction, a user connects his computer (the "client") with the "server" that hosts a Web page, and the client obtains information from the server's centralized source.

A P2P network's information is decentralized, so software must provide some method of cataloguing the available information for users to access. This index of files available for sharing is a "critical component of peer-to-peer file-sharing networks."

The court noted, in "an extremely simplistic overview," that at present there are three methods of indexing: (1) a centralized system that maintains a list of available files on one or more centralized servers; (2) a completely decentralized system in which each computer maintains a list of files available on that computer only; and (3) a "supernode" system in which a select number of computers act as indexing servers.

The first version of Napster employed a centralized indexing software architecture in which a collective index of available files was maintained on servers it owned and operated.

According to the court, StreamCast's software, Morpheus, now uses a decentralized index. Morpheus is derived from open-source software created by Gnutella, in which each user maintains an index of only those files he wishes to make available to others. The software broadcasts a search request to all computers on the network, and the collective results are routed back to the requesting computer. (Open-source code is either public domain or is copyrighted and distributed under a license that allows modification of the software, subject to some restrictions.)

The supernode architecture was developed by KaZaA BV, a Dutch company, licensed under the name of FastTrack technology. Grokster used FastTrack. A number of select computers on the network are designated as indexing servers. The user initiating a search connects with the most easily accessible supernode, which conducts the search of its index and supplies the user with the results. Any computer on the network could function as a supernode if it met the technical requirements.

Both StreamCast and Grokster distributed their software free of charge.

Copyright Infringement Discussion:

Direct copyright infringement by Grokster and StreamCast is not at issue in this case.

There are three elements required to prove contributory copyright infringement: (1) direct infringement by a primary infringer, (2) knowledge of the infringement and (3) material contribution to the infringement.

Direct infringement by others is undisputed.

In determining the element of knowledge, the court examined whether the distributors had constructive knowledge or actual knowledge of the infringing activity.

The court followed Sony Corp. of America v. Universal City Studios, Inc. (1984) 464 U.S. 417 (the "Sony-Betamax" case). In that case, the court held that the sale of videotape recorders could not give rise to contributory infringement, even though Sony knew the machines were being used to commit infringement, if the defendant showed that the product was "capable of substantial" or "commercially significant noninfringing uses."

The U.S. Supreme Court held that the videotape recorder was capable of commercially significant noninfringing uses, so "constructive knowledge" of the infringing activity could not be imputed from the fact that Sony knew the recorders, as a general matter, could be used for infringement.

In the present action, the court first determined what level of knowledge is required in the case. If the product isn't capable of substantial or commercially significant noninfringing uses, then the copyright owner need only show that the defendant had constructive knowledge of the infringement. If the product is capable of substantial or commercially significant noninfringing uses, then the copyright owner must demonstrate that the defendant had reasonable knowledge of specific infringing files and failed to act on that knowledge to prevent infringement.

The Appellate Court affirmed the District Court's finding that the software distributed by each defendant was capable of substantial noninfringing uses. Thousands of bands authorized free distribution of their music through the Internet, and the software has been used to share thousands of public domain literary works, as well as historic public domain films.

The copyright owners argued that the evidence established that the vast majority of people used the software for copyright infringement, but the court noted that under the Sony-Betamax standard, a product need only be "capable" of substantial noninfringing uses. In this case, the P2P software products are capable of substantial noninfringing uses and have commercial viability. Therefore, constructive knowledge was not the standard of review; the owners were required to show reasonable knowledge of specific infringement "to satisfy the threshold knowledge requirement."

The time at which such knowledge was obtained is significant. The court noted that the owners were required to show that the distributors had specific knowledge of infringement at a time at which they contributed to the infringement, and they failed to act upon that information.

In the context of this case, the court stated that the software design "if of great import." Since no central index was maintained and the distributors had no control over index files, users of their products could continue sharing files with little or no interruption, even if the distributors "closed their doors and deactivated all computers within their control." Therefore, they would have no knowledge of specific infringement.

Finally, the distributors did not materially contribute to the infringement. They did not provide the site and facilities for infringement, and they did not otherwise materially contribute to direct infringement since the messages and file indices didn't reside on their computers. They had no ability to suspend user accounts. They were not access providers, and they didn't provide file storage and index maintenance.

On this basis, the distributors could not be held contributorily liable for copyright infringement.

The three elements necessary to prove vicarious copyright infringement are: (1) direct infringement by a primary party, (2) a direct financial benefit to the defendant and (3) the right and ability to supervise the infringers.

Direct infringement and a direct financial benefit from advertising revenue are undisputed. This claim rests on the right and ability to supervise.

An ability to supervise involves a relationship between the defendant and the direct infringer. In the case of the first version of Napster, the company had an express policy reserving the right to block infringers' access for any reason, which is evidence of the right and ability to supervise.

In this case, neither defendant had the ability to block access to individual users. Grokster nominally reserved the right to terminate access, while StreamCast didn't maintain a licensing agreement with persons who downloaded Morpheus. With the lack of a registration and log-in process, even Grokster had no ability to actually terminate access to file-sharing functions. The court held that the third element of the ability to supervise infringers was not present. Therefore, the distributors could not be liable for vicarious copyright infringement.

This decision does not end the case. The court pointed out that its ruling is "limited to the specific software in use at the time of the District Court decision."

The copyright owners also seek relief based on previous versions of the software, "which contain significant -- and perhaps crucial -- differences from the software at issue." The court expressed "no opinion as to those issues."

Case: Metro-Goldwyn-Mayer Studios, Inc. et al. v. Grokster Ltd., et al., No. 03-55894, D.C. No. CV-01-08541-SVW

Court: U.S. Court of Appeals for the Ninth Circuit, before Robert Boochever, John T. Noonan, and Sidney R. Thomas, Circuit Judges, Opinion by Judge Thomas, filed Aug. 19, 2004