II. How Did Grokster Infringe Copyrights?

A. Copyright Law

The United States Constitution grants Congress the power to enact copyright law in the Copyright Clause: “Congress shall have the power . . . to promote the progress of science and useful arts, by securing for limited times to authors and inventors, the exclusive right to their . . . writings and discoveries.”5 Title 17 of the United States Code details the scope and subject matter of copyright protections, defines “infringement” and prescribes remedies.6 Copyrightable material must be original to the author.7 The philosophy behind granting copyrights is that the public benefits from creative works, and in order to ensure the production of creative works, individuals must be rewarded with exclusive rights in their works.8 Thus copyright law aims to make available to the public creative works,9 while rewarding the authors of such works.10

B. Notable Exceptions

Generally, copyright infringement occurs when original elements of a work owned by a valid copyright holder are copied without permission.11 Each instance of copying without permission does not necessarily constitute infringement,12 but instead may be deemed “fair use”13 or covered by another statutory exception. Section 107 of Title 17 of the United States Code sets out the doctrine of fair use: “[T]he fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright.”14 There are many ways that reproduction of works can be deemed “fair use.” One example is the use of parts of copyrighted material for parody.15 Another example occurs when a teacher copies a short poem for use in classroom instruction.16 Four of the factors used to determine whether or not use is “fair” are: (1) the purpose and character of the use; (2) the nature of the use; (3) the portion of the work used; and (4) the effect of the use on the product's market.17 In previous litigation, involving file-sharing websites, defendant websites argued that users sharing of music files via an online file-sharing program was fair use.18 The defendant companies in Grokster, however, did not argue that the majority of the file-sharing enabled by their software was fair use, but instead advanced an argument that many of the works users downloaded were not copyrighted. Therefore, the Grokster software had potential non-infringing uses.19

A copyright is a type of property that can be bought, sold, and licensed.20 The copyright owners who sued Grokster and StreamCast (hereinafter collectively referred to as “Grokster”), included recording companies, musicians, music publishers, and movie studios.21 In the Grokster decision, 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.”22

Grokster involved Grokster, Ltd.,23 whose software allowed users to share electronic files, including music files, by communicating directly with other users.24 The resulting peer-to-peer (“P2P”) network25 was similar to a bulletin board that is used to exchange information. The information was not stored at a central hub, but rather consisted of files stored in users' personal computers, just as an item for sale on a bulletin board is not stored on the bulletin board, but is in the possession of the party posting a bulletin board advertisement. By making their file libraries available to Grokster, users could make known to other users which electronic files they had available and other users could search for the files they wanted. If one user had a file that another user wished to obtain, the software provided by Grokster allowed them to share that file.26 It is estimated that one million songs per day were downloaded illegally, and artists and studios were not being compensated appropriately.27 Once a song is downloaded, it can be uploaded onto an iPod or similar device or burned onto a compact disc (“CD”) almost immediately.28 In effect, this online bulletin board offered a substantial amount of free stolen goods.

When copyright holders sued Grokster and StreamCast, they successfully argued that what the companies were doing was analogous to copying keys; it is not illegal to copy keys, but when one copies keys so that other people can break into houses, it becomes aiding and abetting a theft.29 Further, copyright holders claimed that Grokster and StreamCast “abus[ed] the technology.”30 This idea of abuse is critical for an analysis of when the law should properly place obstacles in the path of technological innovation. In the Grokster decision, the Court repeatedly took notice of the need to balance the interests of users of copyrighted works in taking advantage of technological innovation and the rights of copyright holders,31 ultimately siding with the copyright holders.32

C. Vicarious Liability and Inducement to Infringe

The Court noted that Grokster did not play a merely passive role in encouraging copyright infringement.33 Instead, they used marketing techniques and software that was compatible with software used by Napster,34 a company which had been enjoined from distributing copyrighted materials to its users.35 In A&M Records, Inc. v. Napster, Inc.,36 the Ninth Circuit determined that a file sharing company, Napster, Inc. (“Napster”) allowed users to illegally download sound recordings using Napster's digital technology.37 Napster's software, MusicShare, enabled users to access, and then to download and transfer music files from other users computers.38 In Grokster, the plaintiff copyright holders, in essence, accused Grokster and StreamCast of seeking to get around the Napster ruling, by providing an alternative technology that functionally served the same purpose as Napster.39

Vicarious infringement occurs when a defendant interacts with the infringer and has some control over the infringer's actions as well as a financial stake in the infringing activity.40 Contributory infringement occurs when a defendant has knowledge of another party's infringing activity and “induces, causes, or materially contributes” to it.41 Inducement to infringe requires a finding that the inducing party communicates a message, such as an advertisement, encouraging the target audience to engage in infringement.42

Since Napster allowed rampant copyright infringement by its users and took no affirmative steps to curb it while profiting from the illegal downloads,43 the Ninth Circuit found Napster to be a vicarious infringer.44 Similarly, plaintiff copyright holders in Grokster argued that Grokster was guilty of contributory infringement.45 In contrast, the Ninth Circuit ruled in favor of Grokster and StreamCast,46 relying on the decision in Sony Corp. of America v. Universal City Studios, Inc.47 (“Sony”) by interpreting its holding to mean that if there were a substantial non-infringing use for a technology, the designer could not be held liable.48 On appeal, the Supreme Court determined that the Ninth Circuit misinterpreted Sony,49 and that Sony in factstood for the proposition that secondary liability must be based on something more than “design or distribution” of a product that is capable of an infringing use.50 The Court found that Grokster and StreamCast did much more than design a product that was capable of infringing use; it in fact encouraged infringement.51

However, the Court in Grokster declined to determine whether Grokster and StreamCast were guilty of vicarious infringement, because it found that they were liable on a theory of inducement to infringe.52 Thus, by enabling users to reproduce and distribute copyrighted works illegally,53 Grokster and StreamCast were legally liable for copyright infringement. The Court's ruling was broad enough to encompass secondary liability for both vicarious liability or as inducement to infringe: “We hold 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.”54 This powerful notion concerning of secondary liability for online companies is likely to have serious implications in various areas of cyberspace,55 by introducing a legal theory that may be applicable in other areas of law touched by Internet technology.

The fact that StreamCast and Grokster profited by encouraging users to break the law was argued by petitioner copyright holders56 and noticed by the Court,57 which found “the business models employed by Grokster confirm that their principle object was use of their software to download copyrighted works.”58 In other words, the more users Grokster generated, the more advertising revenue they could earn. In short, Grokster needed as many users as possible to make money, and because they did not charge a user fee, they encouraged illegal use, because illegal use is precisely what drew the most traffic.59