Does Grokster decision sound the death knell for Internet file sharing?

Earlier this summer, the United States Supreme Court ruled unanimously against Grokster, Ltd. and StreamCast Networks, Inc. for "inducing" copyright infringement arising from the distribution of filesharing software and other affirmative acts of the companies. Is this the death knell for file sharing?

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The key finding was that "one who distributes a device with the object of promoting its use to infringe copyright, as shown by a clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties."

The clarity and common sense of the decision is impressive. The Court said you can't build a business to facilitate and profit from the theft of other people's intellectual property. After all, 'file-sharing' was always an unfortunate euphemism for what would be better described as 'file-stealing.'

This result supplements and clarifies the Supreme Court decision in the well-known Sony Corp. v. Universal Studios or "Sony Betamax" decision, which paved the way for the continued use of the VCR as a recording device. Copyright holders who felt that Sony was somewhat liable for the end-consumer's use of the VCR to record copyrighted works sued Sony. Although Sony knew that infringement could occur, "[t]here was no evidence that Sony had expressed an object of bringing about taping in violation of copyright or had taken active steps to increase its profits from unlawful taping."

The Grokster decision, however, provides that potential or actual lawful use does not preclude the Court from examining an intent to induce infringement when such an intent exists. Thus, the Court kept the Sony-Betamax decision intact while recognizing that the capability of some lawful use is not enough to absolve distributors who actively encourage infringement.

The Court highlighted three main factors to examine when evaluating an alleged intent to cause copyright violations. First, the Court noted that both Grokster and StreamCast were shown to be "aiming to satisfy a known source of demand for copyright infringement" by marketing to former Napster users.

Secondly, neither Grokster nor StreamCast attempted to develop or implement "filtering tools or other mechanisms to diminish the infringing activity using their software."

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Finally, the Court found an intent to induce copyright infringement from the method in which the companies created revenue. Because revenue was derived from the sale of advertising space, the higher volume of usage, "which the record shows is infringing," equates to greater revenue for the companies.

While certainly not a death knell for file-sharing technology, Grokster and StreamCast themselves may face a fate similar to that of Napster. If they ultimately lose after this case returns to the lower courts, they will likely be required to modify substantially their now-tainted business models. Obtaining further investment may also be difficult due to the legal concerns and the fact that any modified business plans are likely to be less lucrative.