- The Washington Times - Monday, June 27, 2005

The Supreme Court ruled yesterday that companies that operate online file-sharing networks can be sued if they encourage their users to share music, movies and other copyrighted materials without paying for them.

In a unanimous decision, the court’s nine justices decided Grokster Ltd. and Streamcast Networks Inc. — two companies that operate networks that allow users to distribute digital music and movie “files” over the Internet — can be held liable if their software is used for illegal purposes.

“We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by the clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties,” Justice David H. Souter wrote for the court.

The ruling is a victory for the entertainment industry, which has been campaigning for years against file-swapping. Billions of music and movie files are traded illegally each month, according to industry estimates.

Until now, the industry essentially has fought online piracy on a case-by-case basis, suing thousands of individual users for illegally downloading music and movies.

Yesterday’s ruling could be far more lucrative for the industry because it will send the case to a lower court, which may force the networks to compensate music labels and movie studios billions of dollars in piracy-related losses.

Attorneys for Grokster and Streamcast said yesterday’s decision will stifle future technological innovation in the United States, and warned that the court has made it more difficult to market gadgets such as the popular IPod digital music listening device.

Justice Souter wrote that “the record is replete with evidence that when [the file-sharing networks] began to distribute their free software, each of them clearly voiced the objective that recipients use the software to download copyrighted works and took active steps to encourage infringement.”

The court’s decision “speaks with such clarity and precision, it should have a very powerful impact and disincentive on illegal behavior,” said Dan Glickman, president and chief executive officer of the Motion Picture Association of America (MPAA), which has helped lead the entertainment industry’s fight against illegal file-swapping.

Proponents for Grokster and Streamcast called the ruling legally murky.

“The legal environment is much less clear. As an innovator, I’m not sure you know what the rule is. You’re not sure what you need to do to avoid being sued,” said Michael Petricone, vice president of technology policy for the Consumer Electronics Association, an industry trade group.

Two lower courts previously held, without a trial, that file-sharing services could not be held liable for the illegal practices of their users. Those courts based their decisions on the Supreme Court’s 1984 decision in Sony Corp. vs. Universal City Studios Inc., which ruled that companies that sell videocassette recorders are not liable if the machines are used to make illegal copies of movies.

File-sharing services have many legal uses, such as giving away music, software and government documents, the lower courts reasoned. And because the services rely on peer-to-peer networks that allow computers to communicate directly with each other instead of a central server, they could not be held responsible, the lower courts said.

Michael Weiss, the company’s chief executive, said yesterday’s Supreme Court decision would not affect how he does business because the company is confident it does not encourage “infringing uses.”

The ruling is likely to “scare” software developers, hurting future innovation, Mr. Weiss said.

But Mr. Glickman predicted the ruling would unleash the entertainment industry’s creative juices because it will be more difficult for online pirates to rob songwriters and screenwriters of financial compensation for their work.

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