On June 27, the United States Supreme Court decided in its highly anticipated opinion in Metro-Goldwyn-Mayer Studios, Inc. v. Grokster Ltd., "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." The Court's opinion is being hailed as a victory for the motion picture companies, music publishers and songwriters who had sued Grokster Ltd. and Streamcast Networks, the two companies that had created and distributed the software that allowed peer-to-peer file sharing of the plaintiffs_ copyrighted works. Looking forward, it will be important for those on both sides of this issue to examine not only what the Supreme Court found to violate the Copyright Act, but also what it found not to violate the Act. In the age of the Internet and the open source movement, electronic transfers of intellectual property (sharing, or finding ways to design around the rules) is a fact of life. Twenty-one years after the Supreme Court addressed consumers_ penchants for recording television programs and movies on VCRs in Sony-Betamax, four years after the Ninth Circuit dealt with Internet file-sharing in Napster, and two years after the Seventh Circuit addressed the same issue in Aimster, the battle lines are still being drawn. In Grokster, the high court sought to address the tension that Grokster's and Streamcast's software was alleged to have created in the "sound balance between the respective values of supporting creative pursuits through copyright protection and promoting innovation in new communication technologies by limiting the incidence of liability for copyright infringement." What, then, does a copyright holder need to show? Under the patent law's "staple article of commerce" doctrine, which the Court had earlier applied to copyrights in Sony-Betamax, selling or distributing a product with both lawful and unlawful uses is permitted; simply knowing that a product may or even will be misused to violate another's rights will not lead to liability. While finding against the defendants in Grokster, the Court noted that "mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor to liability." The "something more" that a copyright owner needs to prove is intent. Looking to common law theories of fault based liability and adopting them for future copyright cases, the Supreme Court wrote: "Thus, where evidence goes beyond a product's characteristics or the knowledge that it may be put to infringing uses, and shows statements or action directed to promoting infringement, Sony_s staple-article rule will not preclude liability." After Grokster, a distributor of a product (not only file-sharing services) may be found liable for acts of infringement by others if the company "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." The defendants were found to have violated this rule because, among other acts, (1) both companies were shown to have targeted the market of former Napster users, "a known source of demand for copyright infringement," (2) neither company made any effort "to develop filtering tools or other mechanisms to diminish the infringing activity using their software," and (3) both companies made "money by selling advertising space." Taken together, this direct and indirect evidence of intent was sufficient for the Supreme Court to hold the defendants responsible for the copyright infringement (downloading) by their customers. The ability and desire of individuals to innovate are boundless. The Grokster opinion will neither save the record companies, nor will it be remembered as the day the (free Internet) music died. Peer-to-peer advocates will attempt to design new programs and distribution systems that meet the Grokster test: they will either not advertise or scale back significantly on advertising; won't (publicly) seek out a certain identifiable class of users (former Napster, Streamcast, Grokster users, for example); and some may decide to develop filters or some other means to prevent infringement by their users. The recording industry, on the other hand, likely will continue to sue companies using the rules announced by the Supreme Court in Grokster, and will seek to have theories of liability borrowed from yet other areas of the law applied to file sharing companies. None of this is new. As the Supreme Court recognized in Sony-Betamax: "From its beginning, the law of copyright has developed in response to significant changes in technology. Indeed, it was the invention of a new form of copying equipment-the printing press-that gave rise to the original need for copyright protection. Repeatedly, as new developments have occurred in this country, it has been the Congress that has fashioned the new rules that new technology made necessary." From the printing press to player pianos, and from television broadcasts to VCRs, the law has had to develop with, and in response to, innovation. For more information, please feel free to contact Casey Del Casino, Mark H. Wildasin or any other member of Waller Lansden's Intellectual Property Practice at (615) 244-6380 The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.