MGM v. Grokster: A Chance To Foster Innovation -- And Fight Piracy

A rough way to measure the importance of Supreme Court cases is to tally the number of "friend-of-the-court" briefs filed by people, companies, and organizations with no direct stake in the underlying legal battle. In what appears to be a new record for a business dispute, 55 amicus briefs have been submitted in Metro-Goldwyn-Mayer v. Grokster, which is scheduled to be argued on Mar. 29. The movie studio's supporters include the National Football League, Nobel prizewinning economists Kenneth J. Arrow and Gary S. Becker, the Christian Coalition, and the surviving members of the rock band the Grateful Dead. This once-in-a-lifetime policy confederation is squared off against AT&T (T ), Intel (INTC ), the American Civil Liberties Union, the American Conservative Union, and a platoon of computer science professors, among many others.

The issue that has sparked all this outside interest is whether the peer-to-peer Web site Grokster owes money to the entertainment industry for copyright violations committed by its users. This is just one skirmish in a greater conflict -- the escalating war between content creators and content distributors -- that will shape the future of a big swatch of American business. The high court's resolution of MGM v. Grokster has the potential to determine winners and losers in the music, movie, consumer-electronics, telecommunications, e-commerce, computer hardware, and software industries. Striking the correct balance between the various public and private interests in this case will require some creative thinking.

POWERFUL PRECEDENT. Hollywood and the recording industry have lost the early rounds. In August, a federal appeals court sided with Grokster. The decision was based on the Supreme Court's landmark 1984 ruling Sony v. Universal City Studios, commonly known as the Betamax case. It basically held that producers of technology that can be utilized to illegally copy creative works cannot be held liable if the same technology has "substantial" legal uses. This precedent paved the way for the proliferation of e-mail, iPods, TiVo (TIVO ), and other products that, while generally beneficial, have increased the traffic in illegally copied movies, songs, and software.

But the tide may be about to turn. The fact that the justices have granted an audience to MGM (MGM ) and 27 other entertainment companies is a strong indication that they are reconsidering the wisdom of the Betamax decision. The petitioners are asking the Supreme Court to create a new rule that would essentially outlaw peer-to-peer Web sites, portable music players, and other products if the majority of customers are using them illegally. That may sound like a reasonable position, but it would thwart innovation. The next generation of imaginative digital products and services would face far more risk of expensive litigation -- decreasing the incentive for entrepreneurs, venture capitalists, and executives to take the risk of investing in them.

PROMISING SUGGESTIONS. That's why the Supreme Court needs to preserve the essence of the Betamax ruling: a wide safe harbor for innovative new technology, even if it contains some potential for abuse by copyright pirates. But it would be a mistake for the justices simply to reaffirm their old logic. The Betamax case essentially has offered the Groksters of the world a free pass. They rake in profits from piracy while disingenuously pontificating about the virtue of sharing. Arrow, Becker, and eight other prominent economists have it right in their thoughtful joint brief when they argue that the Sony (SNE ) precedent "gives manufacturers no incentive to deter infringement even when deterrence could be accomplished at a low cost."

This state of affairs needs to be changed. The court's goal should be to devise a rule that encourages the introduction of exciting new products while discouraging easily preventable robbery. That's no simple task. But the good news is that the towering pile of amicus briefs in Grokster actually contains some promising suggestions. One is punishing companies that actively encourage copyright infringement -- for instance, those that highlight the ease of intellectual-property theft in marketing campaigns, show users how to do it, and help them cover their tracks. Briefs submitted by the Business Software Alliance, the American Intellectual Property Law Assn., and others offer several variations on this approach. Another idea is placing an obligation on tech execs to police piracy -- say, by installing software that helps to prevent it. Both of these middle-ground legal standards are fair compromises that would balance the competing values in this case: property rights vs. free speech, artistic creativity vs. technological innovation.

Before it's here, it's on the Bloomberg Terminal.