Washington — Peer-to-peer (P2P) file-sharing services can be sued and shut down if they intentionally induce copyright infringement, the Supreme Court ruled in a unanimous decision, but it will be up to a lower court to determine whether file-sharing networks Grokster and StreamCast Networks have intentionally encouraged infringement.

A final decision against the file-sharing services could reduce the amount of content available for playback on portable MP3 players and potentially contribute to slower growth in MP3 portable sales.

In its 9-0 decision, the Court held that “one who distributes a device with the object of promoting its use to infringe copyright[s], 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 also found sufficient evidence of unlawful intent by P2P providers Grokster and StreamCast that they should stand trial for the copyright infringement of their users, said Justice David Souter. He also said that courts can consider a company’s business model in determining liability.

The court failed, however, to define the standards by which companies could be found to be inducing copyright infringement, according to the P2P services, CEA, and the Computer and Communications Industry Association (CCIA). The ruling’s lack of direction will cause technology developers to twice about pursuing innovative technologies for fear of lawsuits by deep-pocket movie and music companies, they contend.

The Court ruled that “active inducement is part of contributory infringement,” but the justices sent “conflicting signals about what inducement means,” Grokster attorney Michael Page said. Technology companies “can’t be sure in advance how it [the decision] will appley [to them],” added Richard Taranto, who argued the case for Grokster and StreamCast before the Court.

The movie and music industries, however, were thrilled with the decision and lauded its clarity and precision. A spokesman for the movie and music industries said the decision reflects “common sense rules based on hundreds of years of common law.” Another contended the decision will foster innovation because it will protect intellectual property from theft.

The ruling is “holding accountable those who promote and profit from theft,” the RIAA (Recording Industry Association of America) added in a prepared statement. Said Edgar Bronfman, Jr., chairman and CEO of Warner Music Group, “We're grateful that the Supreme Court today unanimously agreed that distributors of software intended to promote copyright infringement are liable for the infringements committed by the users of such software.” The decision, he contended, “nurtures technological innovation while at the same time protecting the very content that inspires innovation in the first place.”

CEA VP Michael Petricone disagreed, contending the ruling “makes the legal landscape less clear” and increases the risk of lawsuits against technology companies. The association “is quite concerned” that the ruling “will freeze the introduction of new technology.”

In one indication that the decision is subject to interpretation, advocates disagreed about a part of the court decision focused on a company’s business model. A spokesman for the movie and music industries contended that a business will be liable if it “builds a model and profits on infringement.” On the other hand, Fred vonLohmann, senior staff attorney for the Electronic Frontier Foundation (EFF), contended that a company’s business model “is only one factor in determining intent.” EFF is an advocacy group whose self-described mission is to promote Internet innovation and consumer access to on-line information.

On a positive note for users of recording technology, the decision upholds the 1984 Betamax case, in which the court ruled 5-4 that, even if some consumers use VCRs to violate copyright law, Sony and other VCR makers are not liable for “contributory” copyright infringement because their products offer “substantial non-infringing uses.”

In the Betamax decision, however, the Court did not define “substantial,” nor did it use the Grokster decision as an opportunity to define the term. Also in the Grokster decision, the court didn’t define the standards by which companies could be found to be inducing copyright infringement, according to the P2P companies, CEA, and CCIA. As a result, said StreamCast general counsel Matthew Neco, “every thought and action will be the subject of discovery” in lawsuits brought by copyright holders against a technology company’s marketers and engineers. Lawyers and courts will subpoena internal documents and seek extensive depositions into what employees were thinking, he added.

CCIA president Ed Black agreed, calling it “a very dangerous decision for technology and innovation.” He added, “Hollywood has achieved some of what it wanted.”

Whatever the standards for inducement ultimately turn out to be, Grokster and StreamCast contend they aren’t guilty.

At least one advocacy group, Public Knowledge, said the decision contained “reasons for technology companies and consumers to be somewhat optimistic.” Public Knowledge president Gigi Sohn said the decision “reaffirms the core principles” of the Betamax case, which held that technologies capable of substantial noninfringing uses are legal. “Peer- to-peer services,” she noted, “can be used for sunbstantial noninfringing uses.” She added, “…to the extent that providers of P2P technology do not intentionally encourage infringement, they are exempt from secondary liability under our copyright law.”

StreamCast noted that it makes authorized content available.

For its part, the movie and music industries contend the decision that P2P file sharing of copyrighted material is unlawful, that “you can’t build a business model based on taking someone else’s property,” and that the Betamax decision “is not a free pass” for P2P services,” a spokesman said.

Advocates Share Statements On P2P Ruling

Here’s what various advocates had to say about the decision:

Gigi B. Sohn, president of Public Knowledge: Today's Court decision in the Grokster case underscores a principle Public Knowledge has long promoted -- punish infringers, not technology. The Court has sent the case back to the trial court so that the trial process can determine whether the defendant companies intentionally encouraged infringement. What this means is, to the extent that providers of P2P technology do not intentionally encourage infringement, they are exempt from secondary liability under our copyright law. The Court also acknowledged, importantly, that there are lawful uses for peer-to-peer technology, including distribution of electronic files 'by universities, government agencies, corporations, and libraries, among others.'

The Court is clearly aware that any technology-based rule would have chilled technological innovation.That is why their decision today re-emphasized and preserved the core principle of Sony v. Universal City Studios -- that technology alone can't be the basis of copyright liability -- and focused clearly and unambiguously on whether defendants engaged in intentional acts of encouraging infringement. The Court held expressly that liability for providing a technological tool such as the Grokster file-sharing client depends on 'clear expression or other affirmative steps taken to foster infringement.' What this means is, in the absence of such clear expression or other affirmative acts fostering infringement, a company that provides peer-to-peer technology is not going to be secondarily liable under the Copyright Act."

CEA president Gary Shapiro: The immediate impact of today's ruling is twofold:massive uncertainty and the likelihood of massive legal bills.The Court has done little to provide a clear path for legitimate innovators and manufacturers to avoid lawsuits related to copyright infringement over legitimate products and services.

With this ruling the Supreme Court has handed a powerful new tool to litigious content creators to stop innovation. Innovators must now consider new murky legal rules and potentially overwhelming legal costs before bringing their product to market - or even moving forward with an innovative idea.It is essentially a 'full employment act' for plaintiff's attorneys and a guarantee for further lawsuits.

While the Court appears to have sought to narrowly tailor this decision to protect technological development and provide some guidance to promote innovation, the intent test established under this ruling stands as a heavy burden. Content creators may potentially find any act as an 'infringement to induce' and shut down a new product or service with the threat of a lawsuit.Who knows how many innovative products and services now face a premature death as the result of this ruling?

At the same time, the Court appears to have upheld the critical principles it established in its Betamax ruling, underscoring that products that have substantial non-infringing uses are legal even if they can be used for copyright infringement. The open question, again however, is the lack of clarity in determining intent to encourage infringement.

As we continue to examine the full impact of this ruling we will determine the next steps in our continuing efforts to protect innovation, consumer choice and fair use rights.

Edgar Bronfman, Jr., chairman and CEO of Warner Music Group: The most important message from today's historic decision is that progress and innovation do not have to come at the expense of recording artists, songwriters and the people who make their living in the entertainment industry. As a music company, we fully understand that our ultimate success lies not in preventing people from getting what they want but in providing it to them in new and exciting ways. We must strike a balance, one that nurtures technological innovation while at the same time protecting the very content that inspires innovation in the first place. We're grateful that the Supreme Court today unanimously agreed that distributors of software intended to promote copyright infringement are liable for the infringements committed by the users of such software. This important decision will allow artists and the creative community to prosper side-by-side with the technology industry.

RIAA chairman and CEO Mitch Bainwol: With this unanimous decision, the Supreme Court has addressed a significant threat to the U.S. economy and moved to protect the livelihoods of the more than 11 million Americans employed by the copyright industries.The Supreme Court has helped to power the digital future for legitimate online businesses – including legal file sharing networks – by holding accountable those who promote and profit from theft. This decision lays the groundwork for the dawn of a new day – an opportunity that will bring the entertainment and technology communities even closer together, with music fans reaping the rewards.

Progress & Freedom Foundation Senior Fellow Jim DeLong:This looks like a giant win for everyone. For the tech industry, the Court made clear that Sony is still good law and that simply marketing a product with the knowledge that some people will use it to infringe is not a basis for liability. For the content providers, the Court said that intentional inducement of infringement is illegal and that in proving the existence of the intent, the copyright holders can point to the infringement-dependent business models of Grokster and its kin and to their failure to take any affirmative steps (such as filtering) to prevent infringement.

And for consumers, the unanimity shows that the Court meant what it said about the crucial importance of intellectual property rights when it decided Eldred two years ago, which is crucial to the cornucopia of creativity that the Internet makes possible.

Progress & Freedom Foundation Senior Adjunct Fellow Solveig Singleton:We will hear a million times that Grokster announces a victory for the content side. But the Court has taken the only route that would balance content and tech. A 'bright line' rule sheltering new technologies from liability would have made a mockery of copyright. The decision in Grokster means that consumers win, too -- less free-riding, but more legit options competing fiercely for their dollar. What about innovators of multi-purpose tech? In the absence of actual evidence that they intend to foster infringement, innovators will not be liable. The Court has done its level best to protect innovators, but not every application of every innovation."

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.