Why The Grokster Case Matters

The high court faces a hard choice between innovation and copyright protection

For years, the music and film industries have fought a Sisyphean battle against piracy. Companies estimate that online thieves download 2.6 billion illegal music files and some 12 million movies every month, costing them millions of dollars a year. On Dec. 10 the media bigs landed a rare win: The U.S. Supreme Court agreed to review a lower court's decision against the studios in Metro-Goldwyn-Mayer Studios Inc. (MGM ) v. Grokster Ltd. The studio's complaint has a high-profile list of backers, from the Dixie Chicks to Major League Baseball to the attorneys general of 41 states. If the court overturns the ruling, it could shift an unsteady balance between technology and creativity that has nurtured two decades of innovation in consumer electronics. The key issues:

What do the studios want?

Hollywood and the recording industry have asked the Supreme Court to decide whether Grokster, a file-swapping service, can be held liable if its customers violate copyrights when they use it to pluck songs, movies, and other types of files off the Internet. The U.S. Court of Appeals for the Ninth Circuit said it can't.

Why did the lower court clear Grokster?

The appeals court relied on the Supreme Court's 1984 decision in Sony Corp. (SNE ) v. Universal City Studios Inc., a seminal case that challenged the legitimacy of that era's cutting-edge technology, the Betamax videocassette recorder. The High Court rejected Universal's argument that Sony should be held liable for copyright violations committed when Betamax users taped TV shows. Because VCR technology was capable of "substantial non-infringing use," the court gave video recorders the green light. In August, the appeals court ruled that the same principle applies to peer-to-peer technology used by Grokster and others.

Why are technology companies so worried about the Grokster appeal?

The 1984 Betamax opinion didn't make the world safe just for VCRs. It created a safe haven for dozens of other popular technologies, including CD recorders, music players such as Apple Computer Inc.'s (AAPL ) iPod, and digital video recorders such as TiVo (TIVO ). Indeed, many of these technologies were challenged by the recording and movie industries -- unsuccessfully, thanks largely to Betamax. If the high court changes direction with Grokster, electronics firms worry that copyright holders will try to outlaw any new product or service that could be used to commit piracy. In short, a ruling against Grokster could stifle technology innovation.

Wasn't this debate put to rest when the courts shut down Napster?

The Ninth Circuit chipped away at the Betamax precedent when it took Napster offline in 2001. The court said Napster was liable for piracy because users tapped into its central servers to swap files. Grokster is different because it simply supplies free software that enables individual PCs to talk to each other and swap music and other digital content. Since Grokster has no role in the actual file exchange, it argues that it shouldn't be punished for its customers' bad behavior.

So why do the studios blame it?

Grokster makes money by selling ads that are viewed by visitors who come to its Web site to download free file-sharing software. Studios claim that some 90% of the millions of daily downloads using Grokster software violate copyright. If all those rogue downloaders stopped visiting Grokster's Web site, the company would not have enough traffic to sell ads. That, the studios charge, makes Grokster an "infringement-dependent" business -- one that profits from people who steal music. One question that the court will consider is whether the legal 10% of Grokster activity is "commercially significant" enough to let Grokster off the hook. It might be: In the Betamax case, studies estimated that less than 10% of VCR recordings were authorized by content owners. On the other hand, the damage done by the illegal 90% of Grokster activity is much greater because of the power of digital technology.

But movie studios and musicians are losing millions of dollars to online piracy. Don't they need protection, too?

Of course. The problem is finding a way to protect copyright holders without blocking important innovations such as the iPod. One approach is to sue the pirates. Studios have brought thousands of suits against people who download music and movies. On Dec. 14 the Motion Picture Association of America ratcheted up the legal assault, suing more than 100 people who maintain Internet road maps for finding illegal copies of movies and TV shows.

But targeting individuals is expensive and unpopular: Big studios win no friends by busting music-sharing teenagers. So the content industry would rather choke off piracy by targeting the technologies. That carries risks, too. Until a new balance can be struck, consumers will be caught in the middle.

By Lorraine Woellert

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