Bazaar Wars: Motion Picture Studios Battle Digital Pirates

The war against digital piracy has entered a new phase. This fall, litigation was commenced against several popular Internet peer-to-peer services that allegedly permit users to share copyrighted material free of charge. According to the complaint, the three defendants — Grokster, Ltd., MusicCity.com, Inc. and Consumer Empowerment BV — "have created a 21st century piratical bazaar where the unlawful exchange of protected materials takes place across the vast expanses of the Internet." While this description could apply equally to Napster and other similar music-based Internet services, this most recent case is different. This time, Grok-ster and the other defendants are accused of trafficking in pirated versions of first-run motion pictures, including a number of titles that presently can only be seen in theaters.

As with the Recording Industry Association of America’s highly publicized battle with Napster, the stakes are high and the timing all important since the studios recently have begun to publicly disclose their plans to use the Internet as a new form of home video distribution. Over the past several months, the motion picture studios have announced the formation of or alliances with Internet-based motion picture distribution systems. One such new venture, currently known as "MovieFly," promises Internet users on-demand access to a library of motion pictures on a pay-per-view basis, and signals the industry’s first home-grown attempt to tap the Internet as an additional home video revenue stream. Other services, such as Intertainer and Movie.com, have announced license agreements with major studios and are in the process of launching similar services that will offer on-demand access to first-run motion pictures on a subscription fee basis.

No doubt mindful of the impediments Napster is alleged to have placed in the way of the recording industry’s efforts to tap into the seemingly-insatiable demand for digital music, the member companies of the Motion Picture Association of America (MPAA) have gone on the offensive to make sure that legitimate Internet movie services will not face competition from pirates. After all, why would consumers "buy the cow" if they can get the milk for free?

If the MPAA ultimately is able to shut down the virtual film bazaars to make way for new, legitimate fee-based movie delivery services, it may very well have the RIAA to thank. As a result of the RIAA’s ongoing (and thus far successful) efforts to shut down music-based file-sharing services, the Ninth Circuit earlier this year issued an opinion in the Napster case that likely will serve as a clear and well-marked roadmap for the MPAA to follow. [A&M Records, Inc. v. Napster, Inc., No. 00-16401 (9th Cir. February 12, 2001).] Essentially, the Ninth Circuit held that consumers who use peer-to-peer services to obtain copyrighted unauthorized copies of copyrighted sound files are themselves committing acts of copyright infringement. The Napster Court further found that if the peer-to-peer service knew or had reason to know of these activities, the service then is liable as a contributory or vicarious infringer. This decision, although damning for Napster, did not automatically doom all peer-to-peer systems, only those that knowingly are used to distribute infringing material. As a result of the Ninth Circuit’s decision, the RIAA then was able to obtain an injunction which required Napster to remove and/or filter out all infringing files from its service. Napster’s inability to comply with this order ultimately caused the district court to order it to shut down pending more effective screening measures.

In light of these legal developments, the key question facing the MPAA is whether Grokster and the other defendants will be able to distinguish themselves from Napster in a meaningful enough manner to prevent the MPAA from obtaining a paralyzing injunction. To decide whether the video services are similar or dissimilar from Napster requires an analysis of each of these services.

Napster for its part, allows anyone with Internet access to download proprietary MusicShare software that permits the user to access the computer hard drives of the millions of fellow Napster subscribers. Napster’s software creates a connection directly between the searching computer and the "host" computer that has stored the desired MP3 music file. The selected MP3 file is transferred directly from user to user rather than through Napster’s network or servers. At the peak of its popularity, Napster was able to connect 100 users and facilitate the sharing of 10,000 MP3 music files every second.

It was clear from the RIAA’s evidence that the vast majority of files retrieved from Napster were unauthorized MP3 copies of the plaintiffs’ copyrighted sound recordings. The RIAA also was able to admit proof that Napster executives clearly knew that their service was being used to facilitate the transfer of these copyrighted music files. Equally apparent and perhaps most damaging to Napster, was evidence that Napster not only had the ability to detect what sound recordings were available through its system, but also had the means to differentiate and filter out infringing from non-infringing files. Faced with these facts, Napster was left with very few factual defenses and was forced to rest its future on a series of rather weak legal theories and defenses. Even then, the court rather easily disposed of Napster’s lead defense of "fair use" by applying a line of longstanding authorities.

According to the allegations in the MPAA’s complaint, the Grokster and MusicCity services may well operate very much like Napster. The defendants each allegedly offer similar versions of software that facilitate connections allowing users to search for and obtain specific audiovisual files from fellow users. The complaint further alleges that the connections established via each system are encrypted so that only those logged onto the system can access these files. Most significantly, the complaint alleges that each defendant has full knowledge that the primary use of each defendant’s respective system is the "unlawful distribution and reproduction of copyrighted works" and further that "defendants have engaged and continue to engage in the business of knowingly and systematically participating in, facilitating, materially contributing to, and encouraging the . . . unauthorized reproductions and/or distributions of copyrighted Motion Pictures." Although probably not helpful at all to defendants, there is one apparent difference between these new systems and Napster; namely, that each of these video services is able to generate revenues from companies that place advertisements on their websites. Napster on the other hand, was able to argue that it made no money at all from any unauthorized activity.

Plaintiffs’ allegations, if proven, would appear to fall well within the bounds of the Napster decision and suggest that the defendants may have a difficult time drawing enough meaningful distinctions to stave off an injunction. Indeed, one of Napster’s chief defenses was that its system had a legitimate non-infringing use because it gave emerging, unsigned artists the ability to distribute their works to a wide audience without having to go through the traditional record label system. Whether Grokster can also make this claim remains to be seen. But even if it can, this alone will not legitimize other non-infringing uses, such as facilitating the transfer of the plaintiffs’ motion picture. To be sure, it will be easy for the MPAA to identify this type of infringement because, at the time the complaint was filed, any studio released film available on the Internet by definition is unauthorized.

One fact that the defendants might point to that was not available to Napster is that each defendant does post a conspicuous warning that its users may not use the service to share unauthorized copyrighted material. Grokster’s site, for example, contains the following warning:

Please note that Grokster respects the right of copyright owners and is fully committed to protect their rights. Grokster expects all Grokster desktop users and Grokster web site users to do the same. We, therefore, ask you to pay special attention to avoid violating copyright laws and regulations. As a condition to use the Grokster products and services, you must agree that you will not use Grokster to infringe the intellectual property or other rights of others in any way. Unauthorized [sic] copying, distribution, modification, public display, or public performance of copyrighted works is an infringement of the copyright holders’ rights.

Although the sufficiency of this type of warning was not considered by the Napster court, it may have little or no persuasive effect if the plaintiffs are nonetheless able to prove that Grokster knew that infringing material was being traded on its service and took no action to remove it. As a consequence, the critical question may come down to whether Grokster and the others will be able to effectively challenge the contention that they had actual knowledge of how their services were being used and/or whether they have the ability to control what is being transmitted. Napster’s inability to mount any credible challenge on either of these points ultimately proved fatal in its dispute.

A final distinguishing factor is that two out of the three defendants — Grokster and Consumer Impowerment BV — are located offshore. Although this should have no impact on the merits of the case, this may present new procedural or jurisdictional issues and also may create additional hurdles to the plaintiffs’ ability to obtain an effective injunction. Regardless of the outcome, the MPAA’s case sends a clear message that the studios intend to create new business models to exploit the vast revenue potential of the Internet and, if necessary, will use the courts to bring down any pirates who stand in their way.