MGM STUDIOS v. GROKSTER
Grokster and other companies distributed free software that allowed computer users to share electronic files through peer-to-peer networks. In such networks, users can share digital files directly between their computers, without the use of a central server. Users employed the software primarily to download copyrighted files, file-sharing which the software companies knew about and encouraged. The companies profited from advertising revenue, since they streamed ads to the software users. A group of movie studios and other copyright holders sued and alleged that Grokster and the other companies violated the Copyright Act by intentionally distributing software to enable users to infringe copyrighted works. The district court ruled for Grokster, reasoning that the software distribution companies were not liable for copyright violations stemming from their software, which could have been used lawfully. The Ninth Circuit affirmed.
Were companies that distributed file-sharing software, and encouraged and profited from direct copyright infringement using such software, liable for the infringement?
Legal provision: 17 U.S.C. 101
Yes. In a unanimous opinion delivered by Justice David Souter, the Court held that companies that distributed software, and promoted that software to infringe copyrights, were liable for the resulting acts of infringement. The Court argued that although the Copyright Act did not expressly make anyone liable for another's infringement, secondary liability doctrines applied here. The software in this case was used so widely to infringe copyrights that it would have been immensely difficult to deal with each individual infringer. The "only practical alternative" was to go against the software distributor for secondary liability. Here the software companies were liable for encouraging and profiting from direct infringement.
Argument of Donald B. Verrilli, Jr.
Chief Justice Rehnquist: We'll hear argument now in number 04-480, MGM Studios versus Grokster, Limited.
Mr. Verrilli Jr.: Mr. Chief Justice, and may it please the Court:
Copyright infringement is the only commercially significant use of the Grokster and StreamCast services, and that is no accident.
Respondents deliberately set out to capture a clientele of known infringers to stock their services with infringing content, they intentionally and directly promote the infringing use of the service, they support infringing use of the service, and they directly--
Justice Stevens: May I just interrupt for the one... you said "the only significant use".
There's a footnote in the red brief that says the figure is some 2.6 billion legitimate uses.
Mr. Verrilli Jr.: --Yeah.
Yes, Your Honor.
Justice Stevens: Is that correct, or incorrect?
Mr. Verrilli Jr.: --Well, I think it's an absolutely incorrect assertion of reality, and perhaps I could delve into it and explain why.
The evidence in this case, which was presented at summary judgement, showed that 90 percent of the material on the services was either definitely or very likely to be infringing.
Justice Stevens: Now, was there a finding of 90 percent?
Mr. Verrilli Jr.: Well, this was submitted on summary judgement, Your Honor, and we lost summary judgement, so the evidence has got to be construed in the light most favorable to us.
And the Ninth Circuit decided the case on the assumption, we'd submit, of 90 percent.
But with respect to that 10 percent, what happened, and we submit is completely wrong, is that the Ninth Circuit drew the inference, because it wasn't shown by our expert study, which, by the way, is the only empirical analysis in the case, to be infringing, that the Court could assume that it was noninfringing and then extrapolate from that to a number along the lines of the number that Your Honor suggested.
And I think that that's completely illegitimate analysis, factually, and, besides, that number is big only because the overall activity is so big.
The scale of the whole thing is mind-boggling.
If there are that many noninfringing uses--
Justice Stevens: It goes to the--
Mr. Verrilli Jr.: --imagine how many infringing--
Justice Stevens: --accuracy of your statement that there is no other significant legitimate use.
Mr. Verrilli Jr.: --I don't think there... I think it's quite accurate on the summary-judgement record, and certainly drawing the inferences in our favor, as we must here on summary... on this summary-judgement record, that there is no commercially significant noninfringing use.
Justice Ginsburg: But there could be.
There could be, both with respect to material in the public domain and with respect to people who authorize the transmission.
Mr. Verrilli Jr.: I don't think, in the context of this record in this case and the business model of these Defendants, Grokster and StreamCast, that that is true, Justice Ginsburg.
I don't think that's right.
I think what Grokster and StreamCast are arguing is that this Court's decision in Sony stands for the proposition that their massive actual infringement is... gets a free pass, a perpetual free pass, so long as they can speculate that there are noninfringing uses out there, such as public-domain uses and authorized uses.
We don't think that that... that Sony stands for any such proposition.
We also want to point out that that doesn't help them... that proposition doesn't help them with respect to one very significant part of this case, and that's the fact that they intentionally built a network of infringing users, and they actively encouraged and assisted infringement.
Now, even if there are commercially significant noninfringing uses, and we submit there most definitely aren't under Sony, but even if there are, that's no defense to a contributory infringement claim based on intentional building up of an infringing business and active encouragement and assistance of infringement, and it can't be; because, otherwise, then the fact that they had commercially significant noninfringing uses, again, would be just a free pass to actively promote infringing uses; not merely to support them, but to promote them.
Justice Souter: Your argument, I take it, would be the same if the proportions were reversed.
Your argument with respect to... your current argument with respect to infringing use would be the same if only 10 percent... if it were assumed that only 10 percent of the use were illegitimate and infringing.
Is that correct?
Mr. Verrilli Jr.: --The active-encouragement aspect of our argument would be the same, certainly.
Justice Souter: That's right.
Mr. Verrilli Jr.: They don't get a... they don't get a free pass to encourage any infringement.
Justice O'Connor: Is that the same as active inducement--
Mr. Verrilli Jr.: Yes.
I think there's--
Justice O'Connor: --as that term--
Mr. Verrilli Jr.: --there's a lot of--
Justice O'Connor: --is used?
Mr. Verrilli Jr.: --Yes, Justice O'Connor, there's a lot of lingo floating around in this case... inducement, active encouragement and assistance.
Justice O'Connor: If we should think that the Respondents are not liable for the type of contributory infringement dealt with in Sony, could this Court reach the question of active inducement on this record?
Mr. Verrilli Jr.: Yes, very definitely.
I think... I think the Court, of course, should find that there's contributory liability under the Sony theory--
Justice O'Connor: I know you do, but--
Mr. Verrilli Jr.: --but with respect to--
Justice O'Connor: --I just said--
Mr. Verrilli Jr.: --that theory--
Justice O'Connor: --could you--
Mr. Verrilli Jr.: --Yes.
Justice O'Connor: --assume, for a moment, that we didn't; could we, nonetheless, address the active inducement--
Mr. Verrilli Jr.: Yes--
Justice O'Connor: --question?
Mr. Verrilli Jr.: --Justice O'Connor, and let me explain why.
The District Court in this case issued a partial final judgement, under Rule 54(b), granting the Respondent's summary-judgement motions.
Now, we argued for contributory liability on two theories in the District Court and in the Ninth Circuit.
We argued that there was a lack of commercially significant noninfringing use under Sony, and we've argued the inducement or active-encouragement theory.
We argued that both theories entitle us to relief against the current operations of the service, entitled us to damages, and entitled us to injunctive relief to eliminate the harmful ongoing infringing consequences of this intentionally built-up infringement machine.
The District Court granted summary judgement against us and gave a clean bill of health, gave absolution, essentially, to the current versions of the services.
The only thing that was left to us, as the Ninth Circuit and the District Court... and the District Court, both, understood the law, is that we can go back and try to show that, with respect to specific past acts of infringement, if we can show that they occurred at a time when we had given them notice that they were about to occur, and that we had the power to... and they had the power to stop them at the moment we gave them the notice, that we can get damages for those specific things, and those specific things only.
That's all that's left in this case.
And I think it's quite clear, from the Rule 54(b) certification order of the District Court that it was only damages with the past services and the past acts--
Justice Kennedy: It's not clear... it's not clear to me from your brief, focusing on the contributory aspect of it, not... and not the inducement part of it... it's not clear to me from your brief what your test is.
What do we tell the trier of fact, that if there is a substantial part of the use which is noninfringement, any part?
Mr. Verrilli Jr.: --Here's what I... here's where I think the test--
Justice Kennedy: Leaving aside the inducement.
Mr. Verrilli Jr.: --Right.
Here's what I... here's what we think the test is on the... what we'll call the Sony aspect of the case, that it's... the question here is... Sony poses to us... is really a touchstone kind of question, not a numerical kind of question.
The question under Sony is whether this is a business that is substantially unrelated to infringement.
In other words, are they building their business on supporting legitimate activity, or, instead, are they building their business supporting infringing activity?
Justice Kennedy: Well, then we just throw this to the birds on the trier of fact in every case--
Mr. Verrilli Jr.: No, I think--
Justice Kennedy: --Well, how do we know--
Mr. Verrilli Jr.: --And that's where you start.
That's the touchstone.
Now, the numbers, the relative proportions of use, are relevant.
In a case like Sony itself, certainly, where the majority use was noninfringing, that's a legitimate business; you don't need to go further.
In a case like this one, where, taking the record at summary judgement in our favor, as it must be, and the Ninth Circuit's assumption that you've got 90 percent infringing use, billions and billions of acts of infringing use, and minuscule actual noninfringing use, it seems to us it's just--
Justice Breyer: You're not saying... now you're using different tests.
Your test is "substantial".
All right, on your test, are we sure, if you were the counsel to Mr. Carlson, that you recommend going ahead with the Xerox machine?
Are you sure, if you were the counsel to the creator of the VCR, that you could recommend, given the use, copying movies, that we should ever have a VCR?
Are you sure that you could recommend to the iPod inventor that he could go ahead and have an iPod, or, for that matter, Gutenberg, the press?
I mean, you see the problem.
Mr. Verrilli Jr.: --Yeah, I think my answer to--
Justice Breyer: What's the answer?
Mr. Verrilli Jr.: --those questions are: yes, yes, yes, and yes.
Justice Breyer: Because in each case... for all I know, the monks had a fit when Gutenberg made his press--
--but the problem, of course, is that it could well be, in each of those instances, that there will be vast numbers of infringing uses that are foreseeable.
Mr. Verrilli Jr.: I disagree with that, Your Honor.
Certainly not... I don't think there's any empirical evidence to suggest, with respect to any of the things that Your Honor just identified... and let me pick out the iPod as one, because it's the most current example, I guess.
From the moment that device was introduced, it was obvious that there were very significant lawful commercial uses for it.
And let me clarify something I think is unclear from the amicus briefs.
The record companies, my clients, have said, for some time now, and it's been on their Website for some time now, that it's perfectly lawful to take a CD that you've purchased, upload it onto your computer, put it onto your iPod.
There is a very, very significant lawful commercial use for that device, going forward.
And, remember, I... what our test... our test is not "substantial".
Our test is that it's a... it's a... when it's a vast-majority use, like here, it's a clear case of contribution--
Justice Scalia: How do you... how do you know, going in, Mr. Verrilli?
I mean, I'm about to start the business.
How much time do you give me to bring up the lawful use to the level where it will outweigh the unlawful use?
I have to know, going in.
Mr. Verrilli Jr.: --Well, I--
Justice Scalia: And it's one thing to sit back and, you know, calculate with this ongoing business, it's 90 percent/10 percent.
But I'm a new inventor, and I'm... you know--
Mr. Verrilli Jr.: --I think the weight--
Justice Scalia: --I'm going to get sued right away.
I know I'm going to get sued right away, before I have a chance to build up a business.
Mr. Verrilli Jr.: --I don't think that's right, Your Honor, and here's why.
To... it's not just the absence of commercially significant noninfringing uses that demonstrates contributory infringement.
I mean, you have to demonstrate that you're making a material contribution, with knowledge that you're doing so.
The inventor, at the outset, is not in that position.
They're not making a contribution with knowledge that they're doing so.
Do they have absolute certainty?
No, they don't have absolute certainty.
Justice Kennedy: --Well, I don't quite understand the... I take it, inventors are profit-motive-driven, and if they know that something they're working on is going to have copyright experience, you... copyright problems, you can't just say,
"Oh, well, the inventor's going to invent anyway. "
Mr. Verrilli Jr.: Well, I... but the problem--
Justice Kennedy: Or did I misunderstand your--
Mr. Verrilli Jr.: --No, I... I think that you have... to show contribution, you should have... you have to be making a material contribution, with knowledge that you're doing so.
Justice Scalia: But the inventor of Xerox does that.
I mean, he puts out the machine.
He knows some... he knows a lot of people are going to use it to Xerox books.
Mr. Verrilli Jr.: --I don't think that's right, Justice Scalia.
I don't think there's anywhere close to a showing... I don't think there could be anywhere close to a showing that you've got the vast majority of use from... for infringement from the time that the device comes out.
I just don't think that's--
Justice Souter: Well, let's go--
Mr. Verrilli Jr.: --realistic.
Justice Souter: --let's go from Xerox back to your iPod.
How is that clear in the iPod case?
I may not understand what people are doing out there, but it's certainly not clear to me.
I know perfectly well I could go out and buy a CD and put it on my iPod, but I also know perfectly well that if I can get the music on the iPod without buying the CD, that's what I'm going to do.
And I think it's reasonable to suppose that everybody else would guess that.
So why, in the iPod, do you not have this Damoclean sword?
Mr. Verrilli Jr.: Well, because I don't actually think that there is evidence that you've got overwhelming infringing use.
I just think that's... it's not a... it's not a--
Justice Souter: Well, there's never evidence at the time the guy is sitting in the garage figuring out whether to invent the iPod or not.
I mean, that's--
Mr. Verrilli Jr.: --I think when you get to the--
Justice Souter: --the concern.
Mr. Verrilli Jr.: --I think when you have vast-majority infringing use, they should be on the hook.
Now, I don't think--
Justice Souter: Okay, but you're--
Mr. Verrilli Jr.: --you have that problem--
Justice Souter: --No, but you're--
Mr. Verrilli Jr.: --with the iPod, and--
Justice Souter: --you're not answering... you're not answering the question.
The question is, How do we know in advance, on your test, anything that would give the inventor, or, more exactly, the developer, the confidence to go ahead?
As was said a minute ago, he knows he's going to be sued immediately.
There isn't a product performance out there, as there is in this case.
So, on your substantiality theory, why isn't it a foregone conclusion in the iPod that the iPod loser... or developer is going to lose his shirt?
Mr. Verrilli Jr.: --Well, first of all, I don't... I think it's just counterfactual to think that there is going to be overwhelming infringing use of the iPod in the way that there indisputably is here.
Second, to the extent you get the closer cases, it is our position, as I gather it is the position of the United States, that you look at... to see what kind of business model the Defendant is operating under.
Is it a... is it... are they marketing it for legitimate purposes?
Are they taking reasonable steps to prevent infringement?
If they are, then they... then they're not liable.
Justice Scalia: That's your second argument, I think.
I thought you were going to just stick with the... with the first one.
I mean, that's an inducement argument.
Justice Souter: Yeah, that's inducement.
Mr. Verrilli Jr.: --No, I don't think it is an inducement argument, because it doesn't go all the way to requiring us to show, as we can show here, that they've got intent.
But I do think that the issue is, you know, really... in the real world, you know, it isn't the case that these guys have gotten immediately sued.
That's just not right.
And the... and the reality is that what happens is what happens here.
There's perfectly valid uses--
Justice Kennedy: --But it is the case under the test you're submitting to us.
Mr. Verrilli Jr.: --No, I don't think that's right, Justice Kennedy.
If there's vast-majority infringing use, and you continue to operate your business with the knowledge that there's vast-majority infringing use, then you've got liability.
Now, of course, we do have all the additional inducement facts here, but we've also got those facts.
And in the real world--
Justice O'Connor: Well, are you dealing with active inducement as just a theoretical add-on, or is that a satisfactory way to resolve this case?
Mr. Verrilli Jr.: --I think that it is a... I think--
Justice O'Connor: I don't understand--
Mr. Verrilli Jr.: --Neither, is the answer.
Justice O'Connor: --your pitch.
Mr. Verrilli Jr.: Neither, is the answer.
It is a basis for resolving this case, but not to the exclusion of getting the law right on Sony.
Justice Ginsburg: But you couldn't get summary judgement.
Your reply brief said,
"This case is so clear that we should get summary judgement. "
If inducement is the theory... you have just said, you have to show intent--
Mr. Verrilli Jr.: Yes.
Justice Ginsburg: --so you could not--
Mr. Verrilli Jr.: We--
Justice Ginsburg: --you'd have to go to trial.
Mr. Verrilli Jr.: --We agree with that.
We think, in a situation where the vast majority of the use is infringing and there isn't any evidence of a legitimate business plan, on the Sony part of the case we would be entitled to summary judgement.
We agree with you, Your Honor, that with respect to--
Justice Ginsburg: Sony itself had a trial--
Mr. Verrilli Jr.: --That's right.
Justice Ginsburg: --a full trial.
Mr. Verrilli Jr.: It came after the trial, that's right.
But the... a key point I think I want to make here is that this is not about this technology.
What happens in the real world is that inventors come up with technology.
Some people use it for lawful purposes and valid purposes, as some people use this technology for; some people abuse the technology to run business that... businesses that are devoted to expropriating the value of copyrights.
That's exactly what's going on in this case.
If I could reserve the balance of my time, Mr. Chief Justice.
Argument of Paul D. Clement
Chief Justice Rehnquist: Very well, Mr. Verrilli.
Mr. Clement, we'll hear from you.
Mr. Clement: Mr. Chief Justice, and may it please the Court:
The decision below allows companies, like Respondents, to build a business model out of copyright infringement without fear of secondary liability.
As long as they avoid obtaining actual knowledge that a particular customer is about to infringe a particular copyright, they are free to operate a system that involves massive copyright infringement with full knowledge that the draw of the entire system for customers and advertisers alike is the unlawful copying.
No matter much how much of that system--
Justice O'Connor: Well, what do you think Sony allowed?
It talked about... if it's, what, capable of substantial noninfringing use, it's okay?
Mr. Clement: --That's right, Justice O'Connor.
And then I think the Court explained and elaborated that the test is whether or not there are commercially significant noninfringing uses.
And I would say what the Ninth Circuit did in this case is basically adopt the test of mere theoretical capability for noninfringing use, plus maybe some anecdotal evidence.
Justice Kennedy: And what... and your test is whether there's a substantial use that's lawful?
Mr. Clement: Well, I think the way we would try to articulate it is that if the way that the business model of the particular Defendant is set up is that they are not involved in a business substantially unrelated from copyright infringement, that there should be liability in that situation.
And I think in an extreme case like this, where over 90 percent of the business... and I think Mr. Verrilli correctly describes that it's not a minimum of 90 percent; it's over 90 percent... because the only evidence on the other side is anecdotal evidence that there are such things as public-domain works.
Chief Justice Rehnquist: Where did the 90 percent figure come from?
I know we have to accept it because it's summary judgement, but where did it come from?
Mr. Clement: It came from a study by Petitioners' experts of the actual operation of the system.
And what they did is, they identified about 75 percent of the works as clearly infringing works, another 15 percent of the works were identified as very likely infringing works, then there were 10 percent they just couldn't tell anything about.
Justice Breyer: I thought it was just limited to music.
Mr. Clement: Well, I think the... it's not... the system is not limited to music.
Justice Breyer: I know, but I thought the study was about music.
Mr. Clement: I'm not sure about that, but--
Justice Breyer: Well, I thought... I mean, you know, we've had 90 briefs in this, and some briefs tear it apart, and others support it, but we also have briefs from the ACLU saying you could put whole libraries within this system.
Mr. Clement: --Well--
Justice Breyer: The question I wanted to ask you is, given that concern, that there are, conceptually anyway, really excellent uses of this thing, does deliberate... what is the word?
Mr. Clement: --Actual inducement?
Justice Breyer: Yes.
Because what you are worried about, it seemed to me that the actual inducement would take care of.
And if you sent it back and said,
"Let's have a trial on actual inducement. "
If this really is the extreme case you're talking about, why wouldn't the Petitioners here be bound to win that trial?
Mr. Clement: Well, based on our review of the record... and we haven't been able to see the entire record... I agree with you, the Petitioners ought to be able to win this case on an active-inducement ground, and that's a narrow way to decide the case.
I do think, though, this Court might have to say something about the Sony issue before it reached that issue.
And if it did feel compelled to do that, I think it would be a mistake to sanction the Ninth Circuit's reading of Sony, because, you're right, there's a theoretical possibility that public-domain works can be exchanged on this system, but it's also true that this system doesn't have much of a comparative advantage for trading in public-domain works.
Justice O'Connor: Well, you got interrupted a bit.
Tell us, in the simplest way you can, what test you think Sony stands for and how the Ninth got it wrong, if you believe it.
Mr. Clement: Justice O'Connor, it stands for... the test is whether or not there are commercially significant noninfringing uses.
The Ninth Circuit got it wrong because it thought that test was satisfied by a combination of two things: being able to point out that there were such things as public-domain works or authorized sharing of the Wilco album, for example, and anecdotal evidence that you could actually do that.
Now, if that were the right reading of Sony, with respect, I would suggest that footnote 23 of this Court's Sony decision would have been the sum total of the Court's analysis, because in that footnote the Court observed that there were broadcasts of public-domain works.
Justice Kennedy: Suppose the owner of the instrumentality, the program, thinks that there's going to be a vast area of lawful use, and he knows that there's going to be some abuse at the... in the short term, but he does everything he can to discourage that.
"This is a two... P2P is going to revolutionize the way we talk to each other, there's things in the public domain. "
"Please don't use this for copyright. "
But he knows that there's going to be some infringement, let's say, but it'll be 50 percent of the use, in the short term.
Can he use the program?
Mr. Clement: If it's 50 percent infringement in the short run?
We think, absolutely, yes.
Justice Kennedy: Yes, that he can--
Mr. Clement: He can--
Justice Kennedy: --use the program.
Mr. Clement: --use the program.
I mean, as we suggest, if you're at a 50-50... I mean, if you're anywhere below 50 percent, we think that there should be no liability under the Sony standard.
If you're above that level and there's sufficient evidence that you're really targeting infringing uses, then I think maybe there would be liability.
But in the hypothetical you suggest, there would clearly not be liability in that situation.
What we would like to suggest, though, is there ought to be enough room for... under the Sony test, before you reach actual inducement, to capture somebody where they've clearly set out, as a business model, to deal with the infringing uses.
And the only thing they point to are the theoretical possibility, anecdotal evidence, that it could be used for public-domain works.
Justice Ginsburg: If there's more, they could bring it out at trial, could they not?
The difference between your position and Mr. Verrilli, I take it, is that you think there should be not summary judgement for the Petitioners, but a trial.
Mr. Clement: I think that's a fair point, Justice Ginsburg.
We're operating in something of a disadvantage, because we haven't seen the entirety of the record.
Based on the record that I've seen, I think there's a close case, unless perhaps once this Court clarifies the legal standard, Respondents put on additional evidence.
I think this is a close case, where you actually could grant summary judgement in favor of the Petitioners.
But certainly we have no objection to having a trial on the Sony issue in this case.
What we object to is the Ninth Circuit rule, which, in every case, is going to obviate the need for a trial, based on a showing that there are such things as public-domain works.
Justice Scalia: The inducement... the inducement point doesn't get you very far.
Presumably a successor to Grokster, or whatever this outfit is called, could simply come in and not induce anybody but say, you know,
"We're setting up the same system. "
know very well what people are going to use it for, but not induce them.
And that would presumably be okay.
Mr. Clement: I think that's potentially right--
Justice Scalia: Which is why you need--
Mr. Clement: --Justice Scalia--
Justice Scalia: --the Sony--
Mr. Clement: --and that's why I think it's important to preserve a role for the Sony test.
And, again, this Court, in Sony, could have adopted a simple theoretical-capability test, but this Court, instead, adopted a test that required there to be shown some commercially significant use for the... noninfringing use.
And even in the patent context, where I think the test is, and should be, more demanding, even in that context, cases like Fromberg, which we cite at page 19 of our brief, show that there is an analysis to make sure that the suggested theoretical noninfringing use is, in fact, a practical use of the item.
Justice Scalia: --Will you give a company ten years to establish that?
Mr. Clement: Well, I don't think--
Justice Scalia: I mean, what I worry about is the suit that just comes right out of the box, as soon as the company starts up.
Will you give the company a couple of years to show that it's developing a commercial use?
Mr. Clement: --Well, Justice Scalia, we have concerns about that, as well.
I don't know that we would give them ten years of, sort of, free space to do as... facilitate as much copyright infringement as possible.
I think what we would say is that when you're... when a suit targets a nascent technology at the very beginning, there ought to be a lot of leeway, not just for observed noninfringing uses, but for the capacity of noninfringing uses.
I don't think, in fairness, that's what you have before you in this case, because this is a case where the peer-to-peer technology was out there, it was employed in a particular way, with a centralized server, in a way that was actually... had a lot of users involved in it, and they were users of the old Napster system, that had a distinct character.
They were using that system for infringing copyrighted musical works.
And then these individuals come along and seek to capitalize on that market.
That is their business plan from day one.
And it's not some newfangled idea.
The only newfangled idea here is that if you give something of value away for free by ignoring the copyright laws, you're likely to draw consumers to your site, and you're likely to attract advertisers.
But that cannot be the kind of innovation that we want to further through development of secondary liability into the copyright laws.
Justice Souter: Mr. Clement, in one way this presents an easy case for answering Justice Scalia's question, but what about a case in which there isn't the Napster example to start with?
Should there be some kind of flexible rightness doctrine in response to suits, as Justice Scalia put it, against the inventor or developer right out of the box?
Mr. Clement: Well, whether you call it a flexible rightness doctrine or you develop the doctrine in a way that is very forgiving--
Justice Souter: Congress of laches.
Mr. Clement: --a brand-new technology.
Justice Souter: Congress of laches.
Mr. Clement: Right.
I mean, I think... the way I would style it is to develop a substantive standard that's very forgiving of brand-new technologies and allows people to point to, in those situations, capabilities for future uses.
I do think that--
Justice Souter: How would you express the... how would you express that, that substantive standard that anticipates, just as you suggested we do?
Mr. Clement: --Well, I was just trying to articulate it, which is to say that this Court has talked about the capacity for noninfringing uses.
I think, with a mature product like this, it's fair to point to how it's actually used in the marketplace.
Chief Justice Rehnquist: Thank you, Mr. Clement.
Mr. Clement: Thank you.
Argument of Richard G. Taranto
Chief Justice Rehnquist: Mr. Taranto, we'll hear from you.
Mr. Taranto: Thank you, Mr. Chief Justice, and may it please the Court:
Because Respondent's software products are tools of autonomous communications that have large and growing legitimate uses, their distribution is protected under the clear Sony rule, that rule should be adhered to by this court, because copyright does not generally step into the role of product control, because doing so would cause overkill.
The Sony rule safeguards legitimate uses by protecting the product and--
Justice O'Connor: Yeah, but active inducement is a doctrine that's been employed to curb the intentional encouragement of noninfringing uses, isn't it?
Mr. Taranto: --Not in copyright law, it hasn't, but that's not my primary point.
My primary point is that it is critical, it is jurisdictionally critical, to separate two separate acts, distributing the product and any of the past acts that the Petitioners allege constituted encouragement, their synonym for "inducement", which were explicitly outside the District Court ruling that was certified for interlocutory appeal.
Questions about past acts not inherent in the distribution of our product remain--
Justice Scalia: But they are inherent.
They are inherent.
I mean, the point is that those past acts are what have developed your client's current clientele.
Mr. Taranto: --No, I don't think so, Justice Scalia.
The Petitioners... this is what I think is key or usable about the past acts.
They claim that there is an intent, as part of the current distribution of the product, to profit from increased use, including generically known infringing use, a point on which the District Court and the Court of Appeals assumed to be the case.
Beyond that, the question whether there were encouraging acts, any kind of promotional activity that says,
"We ask you to, and urge you to, use this product for infringement. "
that is not here, because that was explicitly part of the past activities, removed from the District Court decision.
And when the Petitioners sought interlocutory appeal, they said, expressly, these were "distinct and severable", in their terms... that's a quote--
Justice Souter: But I don't--
Mr. Taranto: --from the past.
Justice Souter: --understand how you can separate the past from the present in that fashion.
One, I suppose, could say,
"Well, I'm going to make inducing remarks Monday through Thursday, and I'm going to stop, Thursday night. "
The sales of the product on Friday are still going to be sales which are the result of the inducing remarks Monday through Wednesday.
And you're asking, in effect... you're asking us... to ignore Monday through Thursday.
Mr. Taranto: No, I'm not.
Let me try to be clear.
There is a theory, not present here, along exactly those lines, which Petitioners are entitled to argue, back in the District Court, without a remand, because that issue remains in the District Court.
It is a theory that says,
"You started your business with illegitimate acts, your current business is a causal consequence of that. "
I will say, there is not one bit of evidence that the Petitioners introduced, in resisting summary judgement, in support of that theory.
It is, in fact, a highly implausible theory, for reasons that the District Court can explain, because users of software like this switch readily.
There is no plausible lock-in effect to this software.
People go from Kazaa to Grokster to eDonkey to BitTorrent week by week.
That was... that is an available theory.
Justice Souter: Then why was current... why was inducement, as a current theory of recovery, even the subject of summary judgement?
It seems to me that to make it a summary judgement is implausible to a non worldly degree.
Mr. Taranto: --I'm not entirely--
Justice Souter: I mean, I thought you were saying that, so far as the inducement theory of recovery is concerned--
Mr. Taranto: --Yes.
Justice Souter: --the only summary judgement that was granted was with respect to current acts of inducement, the way the company is acting now, not the way the company was acting last year.
And my question is... if that is correct, then I don't see how summary judgement could even intelligibly have been considered.
Mr. Taranto: I think... because as the Petitioners insisted when they pressed for interlocutory appeal, they said these were distinct and severable, because, as Justice Scalia referred to before, the important question, on a going-forward basis, is whether the current set of activities... this software, given how it operates, being generally distributed... is a vendor's... the distributor of that software... secondarily liable because somebody else, tomorrow, can do exactly the same thing, without the baggage of any--
Justice Kennedy: Well, I don't want to get us too far off the track on this question, but it just seems to me that what you've done before bears on what you know, or have reason to know, on an ongoing basis.
Mr. Taranto: I agree with that, Justice Kennedy, but there's no dispute about that.
This case was decided on the assumption, which we are not contesting here, that the Respondents here knew that there would be widespread infringing use of a product that they were putting out, and, what's more, that they intended to profit from maximum use of the product, which necessarily would include infringing use, which they had no ability to separate from noninfringing use.
Justice Kennedy: Well, then why don't you tell us what's wrong with the Government's test and with the Petitioner's test, the substantial-use part of it.
Mr. Taranto: Well, I'm not entirely... I think there are several tests, and I'm not sure I followed them all here.
Justice Kennedy: We think it is critical that the Court adhere, for innovation protection, to the very clear Sony rule.
Justice Ginsburg: That, Mr. Taranto, is something I find very puzzling.
There is a statement... one could take it as clear... "capable of substantial noninfringing use".
That would be very clear, I agree.
But Sony goes on for 13 more pages.
If the standard were all that clear, it would have stopped there.
And usually when you're interpreting a document, one rule is, you read on, and if you read on, you find we need not give precise content to the question of how much use is commercially significant.
That doesn't sound very clear to me.
Or if you then read back, as a careful reader would, then you find the statement that the primary use of the Sony machine for most owners was time-shifting, a use that the Court found either authorized or fair, and, hence, noninfringing.
So I don't think you can take from what is a rather long opinion, and isolate one sentence, and say,
"Aha, we have a clear rule. "
Mr. Taranto: --Well, that sentence, Justice Ginsburg, is expressly stated to be the rule of law that is being applied.
And then the Court went on to apply it to say, there are two things that satisfy the test.
The primary thing, of course, is what takes up most of those 13 pages, the question whether in-home time-shifting is fair use, a question that was of considerable interest to tens of millions of individuals throughout the United States.
But the Court, in fact, didn't rely only on that; it said,
"In addition, there was this roughly 7 to 9 percent use of authorized time-shifting. "
It wouldn't have had to even talk about that if the primary use, you know, was the entirety of--
Justice Scalia: Mr. Verrilli, I hope you won't waste a lot of your time on this point.
This Court is certainly not going to decide this case on the basis of stare decisis, you know, whatever else is true.
Mr. Taranto: --Well, I will... let me urge that there is, in fact, considerable weight to stare decisis, because there are major technological industries that have relied on the rule that derives from patent law that there is no, kind of, predominant-use kind of meaning to Sony rule.
In the patent context from which this came, all there has to be, in Professor Chisum's words, is, uses that are not farfetched, illusory, uneconomical for the user.
And the inquiry there is, Is this a product whose... where the same features that are alleged to cause the infringement are also, in some nontrivial way, used for noninfringement?
Justice Breyer: What is... what is the answer to Justice Kennedy's question?
I took it, whether... for the last 21 years, industry throughout America has taken the standard as being approximately whether it is capable of substantial... commercially significant substantial noninfringing uses.
Mr. Taranto: Yes.
Justice Breyer: I... and the country seems to have survived that standard.
There is innovation.
There are problems in the music industry, but it thrives, and so forth.
So there is an argument for just following it, because it's what it is.
But suppose it's totally open.
Why should that be the right test, instead of some other test, like substantial use, et cetera?
Mr. Taranto: I... because I--
Justice Breyer: That, I think, was the question, and I'm very interested in your answer.
Mr. Taranto: --Right.
Because I think any alternative is worse.
A focus on intent to profit means that virtually every business which requires money and has the least bit of sensible forward-looking thinking about what the usage is going to be will be subject to litigation, arguing about their knowing that a substantial amount of the value of the product was going to be based on infringement.
Justice Kennedy: But--
Mr. Taranto: Every--
Justice Kennedy: --but what you have... what you want to do is to say that unlawfully expropriated property can be used by the owner of the instrumentality as part of the startup capital for his product.
Mr. Taranto: --I... well--
Justice Kennedy: And I... just from an economic standpoint and a legal standpoint, that sounds wrong to me.
Mr. Taranto: --Well, I'm not entirely sure about that formulation.
Sony clearly sold many more tapes because of the illicit activity of Library.
Sony presumably sold more machines, maybe even priced them higher, because there was a group of people who wanted the machine for the illicit activity.
The Apple iPod, in the 60 gigabit version, holds 15,000 songs.
Justice Kennedy: So you think that--
Mr. Taranto: --a thousand CDs.
Justice Kennedy: --unlawfully expropriated property can be a legitimate part of the startup capital.
Mr. Taranto: No, I... what I think is that, as a matter of general judicially formulated secondary copyright liability law, there is no better policy balance that the Court can strike, and that only Congress can make the judgements about what the industry-wide facts are.
And I... let me pause there a minute... there are no industry-wide facts in this record.
Every citation in the Petitioner's brief about the magnitude of harm to the industry is extra-record citation.
There are 26 billion--
Justice Ginsburg: Then perhaps there should be a trial so it would all come out.
Mr. Taranto: --Petitioners... it's not just that they didn't have it in their brief, they did not submit any evidence in response to the summary-judgement motion that said the rule of Sony should be applied here because the magnitude of the injury to the recording industry or in... someday in the future, to the movie industry, is at zero--
Justice Ginsburg: Well, they weren't concentrating on the damage to them, they were concentrating on the facilitation of copying that was provided.
And you don't question that this service does facilitate copying.
Mr. Taranto: --As does the personal computer and the modem and the Internet service provider and the Microsoft operating system.
There's... everything in the chain that makes this work is absolutely essential to facilitating the copying.
The question is which pieces, if any, and under what standard, get singled out for a judicially fashioned secondary copyright liability doctrine.
Justice Ginsburg: Well, you said... I think you were saying... this is something for Congress to solve; it's not for the Court.
But the Court is now faced with two apparently conflicting decisions: Aimster, in the Seventh Circuit, the Ninth Circuit decision.
And if you're just looking at this in the abstract, you might say,
"Well, it's... isn't it odd that Napster goes one way in the Ninth Circuit, and this case goes another way? "
Mr. Taranto: Let me suggest why that's not odd and why the cases are not just different, but critically different.
Napster rests... never mind the exact words of the opinion... Napster involves something more than distribution of a product.
Napster, the company, was sending out, in response to requests, "Where is this filed", an answer, the information, "The file is here".
Every time it sent out that information, if it had been told by Mr. Verrilli's client,
"That file may not be shared. "
it was, with specific knowledge to that file, giving assistance.
That is a classic contributory infringement case based on specific knowledge of infringement.
And the reason--
Justice Souter: Why isn't this a classic willful-ignorance case?
Mr. Taranto: --Because willful ignorance is about having possession of information and refusing to look at it.
This... that does not occur here.
This tool of autonomous communication is one in which there is no Mother-may-I system, no chaperone, no information provided to us at the time that there is any regress.
When I ask for a file from you, there is no information that goes back to StreamCast or to Grokster--
Justice Souter: Sure, but I thought willful ignorance was basically a certainty of what was going on without empirically verifying it, so as to, sort of, maintain the guise of one's hands over one's eyes.
And it seems to me, if that's what it is, that's what we've got.
Mr. Taranto: --No, I don't think so, I think, on either account.
My understanding of where in the law willful ignorance has bite is when you do have the information right in front of you, and you refuse to look at it.
And, what's more, the change of system to an autonomous communication tool, where there is no intermediary, which is what all of their filtering systems would require, getting permission in advance, the change of tool is not just some way of blinding oneself to the information.
Justice Scalia: Yeah, I think it would also include disabling yourself from looking at it.
And so, I think it's an important part of your case, that you didn't adopt this new system of decentralizing the file so that it's in the computers, out there, solely in order to get around Napster.
Mr. Taranto: Right.
And I think that the summary-judgement record on this is... it, I mean, doesn't leave any real room for dispute.
Justice Breyer: Well, wait.
In respect to that... I mean, is it open?
If you win on the question of the standard, is it open, or would we have to remand it for them to argue, in light of the history, in light of what they do now, they, your client, with knowledge of infringement, actively encouraged users to infringe copyright using their... using the Grokster technology, and, indeed, knowingly would include willful blindness?
Mr. Taranto: --I think--
Justice Breyer: Because... as I had gotten that from one of these amicus briefs, you know, that's their standard... they say a willful... of willful, deliberate inducement.
And that, it seems to me, important that they be able to argue that.
Now, can they argue it, in your opinion, if we do nothing but affirm the Ninth Circuit?
Mr. Taranto: --I think that they can certainly argue, with an affirmance by this Court, that all of the past acts, to use the District Court's term, constitute a basis for a... inducement liability.
There would be some legal questions about whether there is such a thing as inducement liability, but they get to argue that.
No remand is required for that.
The record in this case establishes that one reason for going to the decentralized system, without a central index and a third-party intermediary, was to... was a reaction to the Ninth Circuit's Napster decision that said, "That's a legal problem".
But it is also, I think, beyond genuine dispute, for summary-judgement proposes, that there were other reasons.
You don't have to have the servers to maintain.
When StreamCast, in particular, was running a Napster-like system, the so-called openNap system, it had ten servers, and quickly maxed out and started crashing, and immediately concluded... I think this is at page 789 or... and 798 of the joint appendix... we would have had to start doubling, tripling, quadrupling the number of services, and we didn't have--
Justice Stevens: Mr. Taranto--
Mr. Taranto: --the money to do it.
Justice Stevens: --can I ask... I'm still a little puzzled about the posture of the case.
Mr. Taranto: Yes.
Justice Stevens: Because I read the District Court opinion.
I think he said... the judge said that both parties agreed that there were no disputed issues of fact that would preclude the entry of summary judgement in either way, no disputed issues relative to whether to grant relief.
And I... it's on page 24a of the cert petition.
And I understand you to be saying that leaving everything alone, affirming would allow the case to go forward with your adversaries seeking damages on an active-inducement theory.
Am I correct?
Mr. Taranto: Yes.
I think... all I read this, page 24a, to say is that both sides filed for summary judgement, so each one, of course, thought that there was... that it was entitled to summary judgement.
Justice Stevens: But it says,
"Both parties believe there are no disputed issues of fact material to Defendant's liability. "
Mr. Taranto: --I think that's just because each side filed summary judgement.
Each side filed extensive--
Justice Stevens: So then your answer to my question is that, yes, if we affirm, as a possibility, they could continue to seek damages on an active-inducement theory.
Mr. Taranto: --Yes, absolutely.
And there are... there are affirmative defenses that are not even part of this motion that, of course, would, by themselves, preclude summary judgement in their favor.
Justice Stevens: And then one other--
Justice Ginsburg: I thought--
Justice Stevens: --question I had.
Does the record contain their proposed form of injunction that they requested?
Mr. Taranto: I don't think it does, beyond the statement at the end of their summary-judgement pleading that asked for a very general injunction, "Stop the Defendants from infringing".
I'm not aware of anything more specific.
Let me comment a bit on what the record says about the substantial legitimate uses.
This is not a question of--
Justice Ginsburg: --Mr. Taranto, before you go back to that, I wanted to be clear on what you were saying would be left over for trial.
Mr. Taranto: --Yes.
Justice Ginsburg: Because, as I read your briefing, it was,
"Well, they can argue about some bad things that Grokster was doing in the past, but this decision says: henceforth, what we're doing is okay. "
"The case zeroed in on now and the future, and the only thing that was left open was something that was over and gone could get damages for it. "
But I thought that this judgement gave you an okay, a green light, from now on.
Mr. Taranto: I... my view that... I mean, this was not talked about in these terms.
I believe it ought to be open to the Petitioners, not only to prove that past acts were, themselves, illegal, but that the causal consequence of those past acts should somehow reach forward into the current acts.
Justice Souter: Then what is the point of the current summary judgement?
Mr. Taranto: The point of the current summary judgement is that there is... the forward-looking character of the activities taking place, starting in September 2002 on forward, has been held, by itself, not to be a basis for--
Justice Souter: So you're saying the summary judgement simply, in effect, says,
"They're not doing anything wrong now, but we have left open the question, not merely of what they have done wrong in the past, but whether what they did wrong in the past can carry forward into the future? "
Mr. Taranto: --As I say, it wasn't stated in those terms, but, yes, I think that--
Justice Souter: That's bizarre.
Mr. Taranto: --Well, I don't think so, because--
--because the important question is, to the Petitioners, the entire recording and movie industry, Is this set of activities, which you and I, tomorrow, can start engaging in, one that they can stop?
There are literally a handful... on page 7 and 8 of their brief--
Justice Souter: So you're saying... what it really says is,
"There's nothing to enjoin, but there may very well be something to recover for-- "
Mr. Taranto: --Yes.
Justice Souter: --"even as to future activity".
Mr. Taranto: Yes, exactly right.
And they would, of course, have had to make the very implausible assertion, in a business in which there is no plausible lock-in, that somehow a set of isolated events... e-mails... a handful of e-mails out of literally, between the two companies, 1700 a day, that might have said,
"Why don't you load some music out +/? "
are somehow the causal... the cause of what is going on today.
Let me say a few words about what the record says about legitimate activities.
Altnet is a company... this is at 1169 and 70 of the joint appendix... they say that they have distributed, on peer-to-peer systems, hundreds of thousands of authorized songs, and, they say, millions of pieces of... of video games, leading to sales.
This is not a trivial number.
JIVE, at page 67 to 68, speaks about 250,000 peer-to-peer downloads of a music video.
The Internet archive, which is talked about in the record, and as you now look at what they are on their Website, now lists some several hundred musical artists with 20,000 recordings which are being put out there for peer-to-peer distribution.
The Creative Commons is licensing all kinds of things for authorized public distribution.
There are musical bands--
Justice Scalia: Because, I gather, that some artists don't make money from the records, but make money from the popularity that draws fans to their concerts.
Mr. Taranto: --My understanding--
Justice Scalia: So they're willing to give away the records for free.
Mr. Taranto: --my understanding is "some" is a great understatement, yes.
The bands talked about at 159 and 160 to '70 of the joint appendix, which have authorized their live concert recordings to be traded among... on... to be traded.
The GigAmerica business is in the business of compiling... this is at 323 of the joint appendix... of compiling musical recordings and other things for authorized distribution.
The world of music distribution and video distribution and movie-trailer distribution and, in small instances now, text distribution, but growing, is changing and making use of this extremely innovative, low-cost tool.
The great innovation of this tool of communication--
Chief Justice Rehnquist: Mr. Taranto?
Mr. Taranto: --Yes.
Chief Justice Rehnquist: In your motion for summary judgement, did you ask that the Plaintiff's claim be dismissed?
Mr. Taranto: Well, we asked for judgement, in our favor on their claim, that our current activities constituted a basis for secondary liability.
I'm not sure if the word "dismiss" was--
Chief Justice Rehnquist: Were there other claims?
You said "on their claim".
Were... did they make other claims?
Mr. Taranto: --They had a generic claim about secondary copyright liability.
We made the motion... or, actually, StreamCast made a motion that said,
"Let's carve this piece out and talk just about whether the set of current activities supports secondary liability. "
The other side eventually agreed that that was distinct and severable from their claim of secondary liability as to past acts and as to past versions of the software, which has... which has changed.
Justice Ginsburg: Where does one find that?
Chief Justice Rehnquist: xxx--
Mr. Taranto: Yes, the motion... well, it... the simplest place, I guess, is in the June 2003 District Court ruling, which is in the Joint Appendix and attached to the brief in opposition, ruled on the Petitioner's motion for an interlocutory appeal under 1292.
Justice Ginsburg: But the motion itself is not there to take it through the opinion of the Court?
Mr. Taranto: No, the motion is not... is not in the joint appendix.
The... most of the motions... in fact, both of our summary-judgement motions and their summary-judgement motion, are in the joint excerpts of record in the Ninth Circuit, can be found in--
Chief Justice Rehnquist: --The text on--
Mr. Taranto: --30 volumes.
Chief Justice Rehnquist: --the text, on pages 23a and 24a, gives the impression that the District Court is disposing of the entire case.
Mr. Taranto: That... it may give that impression on those pages.
Later, the Court explains that it's ruling only on the current versions of the software.
And then in the June 2003 order, the Court was explicit in saying,
"If I haven't been clear enough, let me amend my June... my April order. "
which is what you were just reading from, "to make explicit the limitation".
And we quote that in our brief.
The great virtue of peer-to-peer decentralized software is that it doesn't require anybody to put stuff onto a server and then bear the cost of bandwidth, of being charged by the Internet service provider when a million people suddenly want it.
It automatically scales.
It... the more people who want it, the more people will have it, because it will be out there on a million computers.
That is an inherent distributional economy, together with the autonomy of the user, rather than having a kind of Mother-may-I system, with having to check every communication through some third party to say,
"Am I authorized to make this communication. "
that are the virtues of this system and that make it clearly capable of growing the already large hundreds of thousands, even millions, of uses that this... that these pieces of software already enable people to do.
One final... final word.
We're not disputing that there are, in an industry-wide way, a set of important policy issues here, though there's nothing in the record about what self-help measures... digital-rights management, encryption, other things... there's nothing in the record what... about that.
There's nothing in the record about what kinds of real industry harm is being done by this.
This is all citations to Websites in their brief.
These are classic questions of predictive judgement, industry-wide judgements that Congress should make to decide whether there is a problem in need of solution, and what solutions ought to be considered, whether changing the rule would have a overriding bad effect on other industries.
Rebuttal of Donald B. Verrilli, Jr.
Chief Justice Rehnquist: Thank you, Mr. Taranto.
Mr. Verrilli, you have four minutes remaining.
Mr. Verrilli Jr.: Thank you, Mr. Chief Justice.
I'd like to start by clarifying the inducement issue, and then explain why inducement is not enough, and then have a word, if I might, about the reality of this case.
The reason, Justice Souter, you find it bizarre is because a shell game is going on here.
What the Respondent's position... excuse me... the Respondent's position here is that we can sue for specific infringements that we can show were induced by these specific acts, such as e-mail support.
Our position on inducement is that we are entitled to injunctive relief against the continued operation of this gigantic infringement machine, which was built by the inducement.
Now, I think that the Respondents have quite clearly said that they're... they don't think any injunctive relief is available, going forward.
But we're entitled, under Section 502 of the Copyright Act, to effective relief, not merely a... relief, judgement relief, that says, "Go and sin no more", but relief that undoes the consequences of this inducement, of this massive effort to build a gigantic engine of infringement.
And that is why they're just wrong about that.
And you certainly can't affirm the Ninth Circuit and allow us to go forward with anything like that here, because the Ninth Circuit said the only thing we can sue for... the only thing we can sue for... is a situation in which we can show that we had knowledge of specific acts of infringement at a time when we could stop those specific acts of infringement.
So there's just no way to affirm and let that go forward.
Now, why is infringement... why is inducement not enough?
It's not enough because, as Justice Scalia suggested, these companies already operate in the shadows, and a ruling here, which would be, I submit, a significant cutback of the Sony rule, that inducement is the only available ground of liability, would just need them to paper over... you know, we do have some paper evidence here, a paper trail here, but that'll just... they just won't exist next time.
And it's just... it's just not enough.
And I submit that Sony was quite clear on this.
Sony said that the staple article-of-commerce doctrine, not copyright law, generally, and not secondary liability, generally, but the staple article-of-commerce doctrine, the noninducement part of the analysis, has got to strike an effective balance... a real balance that provides effective protection of copyright, as well as protecting unrelated lines of commerce.
Now, their rule is a rule of immunity.
It's a free pass.
It says, all you've got to do is speculate about noninfringing use, and you can continue with infringement, ad infinitum.
And that's not a rule that protects innovation; that's a rule that destroys innovation.
It certainly destroys the innovation that the creators of the copyright law is supposed to protect, and that's supposed to be the effective protection part of the balance that Sony said this law is supposed to strike.
It also... it also deters legitimate technological innovation moving towards legitimate means of distributing this... of distributing, in a digital format, music and movies through the kinds of companies that filed amicus briefs and that are trying to do this legitimately.
They are inevitably and invariably undercut by the kinds of businesses that Respondents and the others run, so it deters innovation; it doesn't move it forward.
And, beyond that, Justice Kennedy, as you suggested, it isn't just that they get to use our copyrighted... the value of our copyrighted materials as the seed capital, that's the whole business.
That is the whole business.
And that's the reality here, and that's the problem.
They can talk about the hundreds of thousands, or maybe even millions, of uses, but the reality is that there are 2.6 billion downloads, unlawfully, every month.
So what they're talking about as lawful is a tiny, teeny little fraction of what's really going on here.
And the problem with the rule which they say is a clear rule, but it obviously isn't in Sony, because Sony said, "strike a balance".
And the problem with that rule, Your Honor, is that it gives them a perpetual license to keep going forward with billions and billions of unlawful downloads a month.
They never have to do anything to try to bring their conduct into conformity with law.
They're not in the position of that inventor that you identified, Justice Scalia, who has to, sort of, think through, "What am I doing"?
They're just in a position where they have every economic incentive in the world to maximize the number of infringing uses, because they make more money when they do so.
Now, and with respect to the reality of this situation, let me just say... and I must beg to differ, Justice Breyer, with the suggestion that this industry is thriving.
What the... the facts are that we have lost... the recording industry has lost 25 percent of its revenue since the onslaught of these services.
And that's particularly critical, because, remember, this is really... the recording business, in particular, is really a venture-capital business.
Most of the records we put out don't make money.
A few make a lot of money.
Well, what do you think's getting traded on Grokster and StreamCast and the rest of them?
It's the few that make all the money.
So they're draining all of the money out of the system that we use to find new artists and--
Chief Justice Rehnquist: Thank you--
Mr. Verrilli Jr.: --foster development.
Chief Justice Rehnquist: --Mr. Verrilli.
The case is submitted.
Argument of Justice Souter
Mr. Clement: The second case in which I have the opinion to delivery is Metro-Goldwyn-Mayer Studios against Grokster, the number is 04-480.
This case comes to use on writ of certiorari to the United States Court of Appeals for the Ninth Circuit.
The respondents, Grokster and StreamCast are companies in the business of giving away software that allows users to exchange electronic files across peer-to-peer networks, networks where users computers communicate directly with each other and not though any central computer.
The two companies make their money by being paid advertising through the computers that use their software but because of the decentralize software design, Grokster and StreamCast do not know what files their users exchange or when.
What they do know however, is that the vast majority of the billions of files exchanged contain copyrighted music and movies.
Both companies took active steps to encourage copyright infringement by the users of the free software.
For example, each distributed software of a kind known as OpenNap which is compatible with the Napster file sharing service known to be used predominantly for copyright infringement.
StreamCast marketed its peer-to-peer software to Napster users as an alternative to Napster and Grokster tried to divert internet search queries for Napster to its own website.
Both companies provided technical support to users who wanted help in playing copyrighted movies and music.
The petitioners are a large group of copyright holders which we are calling MGM for short who sued Grokster and StreamCast and claimed that the companies were secondarily liable for copyright infringement, i.e. that they were responsible for the copyright infringements committed by the people who used their software.
The District Court granted summary judgment in favor of Grokster and StreamCast and the Ninth Circuit affirmed.
In the Circuit's view, the software was capable of substantial lawful use such as the exchange of public domain works or the authorized copying of media files.
The Circuit read this Court's case Sony v. Universal City Studios as precluding secondary labiality by the provider of a device with substantial lawful uses.
We granted certiorari and as explained in a unanimous opinion filed with the Clerk today, we vacate the judgment of the Ninth Circuit.
In the Sony case, the manufacturer of the video cassette recorder was sued for the unlawful taping of broadcast programs by VCR users.
There was no evidence that the manufacturer induced infringement and there were substantial lawful uses for the VCR.
We held that the manufacturer was not liable.
It had shown no bad faith in distributing the VCR nor could bad faith be imputed solely from the paucity of lawful uses for the device.
But this case is not like Sony.
Long established common law principles indicate that one who distributes product with a purpose such as fostering copyright infringement is shown by active steps taken to promote unlawful uses is liable for the unlawful use that results.
In this case, there is evidence in the record that Grokster and StreamCast each have such a purpose and have taken steps to induce copyright violations.
Evidence shows that each aimed to satisfy the demand for copyright infringement in the market of former Napster users, each promoted and profited from the infringing uses of the software and neither one made any effort to stop the infringement.
In light of this substantial evidence in MGM's favor on all elements of the inducement theory of contributory infringement, it was error to grant summary judgment in favor of the two companies.
The opinion does not reach the further question imposed by MGM about the Sony rule that is how much lawful use is necessary to avoid liability simply for distributing a product used by some others for infringement.
The case is remanded for further proceedings and for reconsideration of MGM's motion for summary judgment on the theory we set out today.
Justice Ginsburg has filed a concurring opinion in which the Chief Justice and Justice Kennedy join; Justice Breyer has filed a concurring opinion in which Justice Stevens and Justice O'Connor join.