Maryland Bar Bulletin
Publications : Bar Bulletin : September 2005

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 Bar Bulletin Focus

Entertainment /Sports Law    

Vicarious Liability
~A consideration of the potential legal, economic and cultural impact of MGM vs. Grokster~

By Laura Possessky

Since the meteoric rise of the Internet, the entertainment industry has grappled with the role of digital technology in content distribution. Digital media like TiVo and web-casting have presented exciting new distribution alternatives. Yet technological innovation threatens established distribution channels and business models. In the midst of it all, the industry’s lifeblood – content – has been under siege with widespread illegal copying of music and movies on the Internet, infringing industry copyrights.

The entertainment industry has fought relentlessly to combat file sharing and eliminate online infringement. The press is littered with accounts of record labels suing college students and similarly mismatched efforts at rights protection. Still, many infringers are either hard to locate or live outside of the U.S., and so pursuing individual infringers has been extremely difficult.

Recording labels and movie studios have also sued companies whose technology facilitates widespread infringement on grounds of vicarious and contributory infringement. This strategy has proven equally problematic. Although recent Copyright Act amendments have established new bases for liability, like criminal sanctions for decrypting codes on DVDs, most of vicarious and contributory infringement law is uncodified and unsettled.

Possibly bringing some relief, the recent Supreme Court decision in MGM vs. Grokster addresses the issue of vicarious liability. In this case, Grokster and StreamCast developed software for peer-to-peer computer networks that allows participants to share digital files. Like Napster, participants access a sizable database of digital files stored on participants’ computers, consisting mostly of music and films posted without permission. In contrast to Napster, neither company indexed the shared files and had no specific knowledge about infringing conduct. MGM and other content-owners sued Grokster and StreamCast for vicarious and contributory infringement, claiming that the companies encouraged infringing conduct through marketing and other activities.

The Court unanimously held that a person who distributes a device with the objective of promoting its use to infringe copyright, either through clear expression or affirmative steps to foster infringement, is liable for resulting acts of infringement by third parties. The decision overturns the Ninth Circuit’s ruling that liability for vicarious infringement requires knowledge of specific acts of infringement. The Court reasoned that evidence showing infringing intent should not be ignored and that requiring evidence of specific acts had the effect of eliminating, not limiting, secondary liability.

Although the Court demonstrated tremendous sensitivity to the balance in copyright law between technological innovation and copyright interests, the effect is likely to be an increased risk of infringement liability for technology companies. Although Grokster articulates a clear vicarious liability standard, it leaves an unanswered question about what constitutes “fostering” infringement. Because establishing vicarious liability will require evidence that a company engaged in conduct to promote infringement (and raises the factual issue of whether the conduct constitutes promoting infringement), future cases are likely to involve protracted discovery.

Moreover, although hailed as a victory for content owners, the decision may dampen growth in the entertainment industry. Industry growth depends upon technological innovation for new methods of content distribution. Because of the increased liability risk that promoting a new technology may be construed as facilitating infringing activity, the decision may have a chilling effect on development of devices that create new content distribution channels. If innovators are reluctant to introduce new technologies, new distribution opportunities for studios and recording labels disappear.

Currently, one of the highest growth areas for the music industry is downloadable ring tones for cell phones. Wireless companies have licensing arrangements with record companies. Still, cell phones may be used as a means to swap music files without permission. Under Grokster, it is unclear at what point cell phone manufacturers or wireless companies foster infringement. Is a wireless company vicariously liable if it advertises downloading music as one of its features? What if it is aware, but has no specific knowledge, that customers are engaged in widespread illegal downloading of music using the telephone technology? What happens to the ring tone business?

Grokster also raises concerns about the collateral impact that vicarious liability risks will have on the accessibility of content. As archivists and librarians will attest, millions of books, tapes and film footage are disintegrating from our cultural heritage because of concerns that restoration or public display will invite an infringement action. Filmmakers have shelved countless projects because of disagreements with rights holders or prohibitive licensing fees that make production economically non-viable. The threat of vicarious liability will only heighten these problems.

The impact of unchecked copyright infringement facilitated by digital technology has caused copyright holders to pursue legal reforms for enforcement of their rights. Grokster will provide an effective basis to limit any ongoing infringement by third parties. However, without careful scrutiny of how these rights are enforced, technological innovation and our cultural heritage may suffer. As a society, we must decide where to strike the balance.

Laura Possessky is a partner in the Washington, D.C., office of Gura & Day. She practices media law and represents artists, producers and businesses on content usage and licensing.

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Publications : Bar Bulletin: September 2005

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