[Politech] Roger Parloff on Grokster, Kazaa, Morpheus litigation

From: Declan McCullagh (declan@private)
Date: Wed Oct 22 2003 - 14:27:41 PDT

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    From: "Roger Parloff" <rparloff@private>
    To: <declan@private>
    Subject: grokster litigation
    Date: Wed, 22 Oct 2003 15:39:48 -0400
    here’s an article I wrote for fortune magazine on the litigation against 
    grokster, kazaa, and morpheus, and on related matters. hope it’s of 
    interest. (it’s in the issue cover dated 10-27-03. also available for free 
    at the moment at <http://www.fortune.com/>www.fortune.com , but at some 
    point a firewall probably comes down and people have to pay.)
     >From Betamax to Kazaa: The Real War Over Piracy
    A legal battle is raging over the "Magna Carta of the technology age." At 
    stake: the balance of power between entertainment and technology.
    Monday, October 13, 2003
    By Roger Parloff
    In late February 2002, the users of an online file-sharing service called 
    Morpheus found themselves suddenly cut off from their network. Their mass 
    freezeout, it developed, had been engineered by a rival file-sharing 
    service called Kazaa, from which Morpheus licensed key software. Kazaa 
    claimed that Morpheus had fallen $30,000 behind in its licensing payments, 
    so it pulled Morpheus's plug.
    What made this otherwise mundane business spat so startling was that the 
    network Kazaa and Morpheus were using wasn't supposed to be capable of 
    being switched off­by anyone. On the contrary, it was thought to be 
    decentralized and "self-organizing"­a network that would continue to exist 
    even if Kazaa and Morpheus were to vanish.
    If you happened to read about this incident at the time, you probably 
    dismissed it as a matter of interest only to techies or teenagers. Yet it 
    has become a matter of transcendent interest to lawyers for every major 
    record label, motion picture studio, consumer-electronics manufacturer, 
    telecommunications carrier, and information technology player in the world. 
    The puzzling shutdown has triggered an international wild-goose chase that 
    has sent entertainment industry lawyers bouncing from Los Angeles to 
    Amsterdam to Sydney to Estonia to Guernsey, to chase down arcane but 
    legally crucial details of the network's inner workings. That chase, futile 
    so far, demonstrates why the U.S. Supreme Court or Congress may soon have 
    to revisit a landmark 1984 court ruling that has been hailed as the "Magna 
    Carta of the technology age."
    Entertainment companies say that the time has come to modify that court 
    decision­popularly known as the Sony Betamax ruling. Equipment 
    manufacturers insist that it remain inviolate. As judges try to force 
    perplexing new technologies into the outdated conceptual pigeonholes 
    bequeathed by the Betamax ruling, they are reaching conflicting results. 
    While attention has focused on the record industry's suits against 
    individual file sharers, this battle, a far more important one for the 
    future of entertainment and technology, has been rolling implacably toward 
    the highest court in the land.
    For two technologically eventful decades, the Betamax case­formally, Sony 
    Corp. of America v. Universal City Studios­has defined the tense frontier 
    that divides the rights of entertainment companies from those of technology 
    providers. The conflict arises from a fundamental tension. Copyright laws 
    grant creators a monopoly over the right to reproduce and distribute their 
    works during the term of a copyright. Technology providers make devices 
    that enable consumers to reproduce and distribute copyrighted 
    works­photocopying machines, VCRs, TiVo, "ripping" software, CD burners, 
    and high-bandwidth cable and DSL lines, to name just a few. Does that mean 
    those technology providers are facilitating copyright infringement by their 
    customers? Must technology providers be perpetually seeking permission from 
    entertainment companies every time they want to develop a new invention 
    capable of reproducing a copyrighted work?
    Since 1984, the answer in the U.S. has been a resounding no. In the Betamax 
    case the court decided that Sony, by marketing VCRs, could not be held 
    liable for facilitating copyright infringement, even though it knew that 
    some consumers would use its VCRs illegally. The VCR's "primary" uses, 
    Justice John Paul Stevens noted, were noninfringing. But his ruling then 
    went a step further. He suggested that any technology provider should be 
    protected as long as the device it marketed was "capable of substantial 
    noninfringing uses"­even if the device was not currently being used that 
    way. The idea was that courts should not stifle potentially beneficial 
    technologies in their infancy, before their usefulness might be fully 
    In the intervening 19 years digital technologies have supplanted analog, 
    and technology providers have devised ever faster and cheaper ways for 
    their customers to copy and distribute content. As a result, the perils 
    those technologies pose to copyright holders have increased. At the time of 
    the Betamax ruling the studios had not yet been able to show any actual 
    revenue loss attributable to VCRs, even though VCRs had already been in 
    circulation for almost a decade. In contrast, since 1999, when a 
    19-year-old college kid launched the first music file-sharing service, 
    Napster, unit sales of recorded music have dropped 26% and record industry 
    revenues have fallen 14%­a $2 billion decline. It was a measure of the 
    industry's desperation that last month the Recording Industry Association 
    of America sued 261 file-sharing music fans, knowing full well that it was 
    asking for a public-relations shellacking. Predictably, a 12-year-old girl 
    was among those swept up.
    Record industry executives have proved an unsympathetic lot, easily 
    caricatured as overpaid middlemen with ponytails and Malibu beach houses. 
    But the potshots are a diversion. Yes, most recording artists never see any 
    back-end royalties. That's because most recordings never make back the 
    artist's front-end advances and other investments that companies charge to 
    their artists' accounts. But regardless of whether you think these 
    contracts are fair, it should go without saying that when the back-end 
    royalties dry up, so do the front-end advances and investments. The 
    artists­particularly unestablished ones­do pay.
    As a practical matter the incomes of songwriters are even more directly 
    tied to CD sales than those of recording artists. "At first I didn't know 
    what was happening," says Barbara Dozier, the wife of Motown songwriter 
    Lamont Dozier. For more than 20 years she has handled her husband's 
    business affairs, monitoring his royalties from more than 600 songs, 
    including 76 top-ten hits. ("Stop! In the Name of Love," "How Sweet It Is," 
    and "Bernadette" are among them.) A few years ago she began to notice that 
    while Dozier's radio royalties were holding up, his royalties from CD sales 
    were plummeting. "Finally I realized it was the file sharing," she says. An 
    income stream that Dozier had counted on to serve as an annuity has been 
    cut in half, she says.
    While Dozier's personal predicament is troubling, it is the public interest 
    that the copyright laws are supposed to protect. On the one hand, a large 
    part of the public loves having access to all of Dozier's work free. But 
    copyright laws also seek to set up financial incentives so that creators 
    choose to use their gifts­which also benefits the public. We don't want the 
    next Lamont Dozier to see what happened to the last one, chuck his artistic 
    aspirations, and become a software developer.
    "Contemporary technologies­and not just the file-sharing services­are 
    putting a lot of pressure on the Sony formula," says Stanford Law School 
    professor Paul Goldstein, a copyright specialist. "We're talking about 
    technologies with effects that are different from those of a VCR. Whether 
    it's going to be the U.S. Supreme Court or Congress, I think at some point 
    it's going to get reexamined."
    Kazaa, Morpheus, and Grokster are all descendants of Napster. They quickly 
    sopped up Napster's audience after the recording industry chased Napster 
    through the courts and into oblivion in July 2001. (The unrelated Napster 
    2.0, which launched this month, is fully licensed and not peer-to-peer.) 
    Like Napster, the second-generation file-sharing services enable their 
    users to search one another's PC hard drives and copy digital files. Unlike 
    Napster, however, which was limited to music, these services also offer 
    access to movies, videogames, software, images, and text. At peak volume 
    last month, the Kazaa system attracted almost 4.5 million simultaneous 
    users, according to the online media measurement group BigChampagne. About 
    90% of the files available there are copyrighted music and movies, 
    according to an entertainment industry analysis.
    Because of all the people who are drawn to file-sharing networks­attracted 
    in large part by the opportunity to get copyrighted works free­the services 
    are able to make millions of dollars by selling advertising. They bundle 
    adware with their desktop file-sharing software. The adware automatically 
    launches whenever the file-sharing software is launched. The services 
    currently share none of their ad revenues with the copyright holders.
    To be sure, the services do offer some files that are authorized for 
    distribution. I found a PDF file of Shakespeare's sonnets on Kazaa, for 
    instance, and Shakespeare's works are in the public domain. Some bands make 
    their concert recordings available to these services, as do some 
    lesser-known artists hoping to be discovered.
    But authorized files aren't what give these businesses their commercial 
    punch. We have some empirical evidence on that question. Starting in 
    mid-March 2001, the courts ordered Napster to begin filtering copyrighted 
    files out of its system. Napster's volume of simultaneous users fell from 
    more than two million before the filtering began to 400,000 shortly before 
    Napster euthanized itself. The number of files available fell 95% during 
    that stretch, according to documents that surfaced during Napster's 
    Though some file-sharing companies have offered to pay copyright holders a 
    slice of their revenues in exchange for peace, such proposals are laughable 
    from the entertainment industry's perspective. The services' earnings are 
    trivially low compared with what the industries stand to lose in sales. 
    Since the services have paid nothing for the content that sustains their 
    businesses, they have no incentive to price it at anything resembling what 
    its creators think it's worth. If I steal a $50,000 Mercedes, I'm happy to 
    fence it for $100, because the $100 is pure profit to me. (Not to sound 
    Faced with this predicament, the movie and music industries sued Kazaa, 
    Morpheus, and Grokster in Los Angeles federal court in October 2001, 
    alleging facilitation of copyright infringement.
    But litigation is futile!, many readers will protest. If you shut one 
    service down, others will spring up! They'll just set up offshore in 
    countries that don't honor our copyright laws!
    "We have no illusion of ever getting rid of piracy entirely," responds 
    David Kendall, the studios' lead counsel in the litigation, which is known 
    as MGM v. Grokster. (You may remember him as President Clinton's lawyer 
    during the impeachment proceedings.) The goal, Kendall explains, is to shut 
    down the commercial services, which are more user-friendly than the 
    complicated noncommercial methods employed by techies. Even if the 
    for-profits move offshore, Kendall notes, their advertisers are mainly U.S. 
    companies, and the studios can attach the services' advertising revenue. 
    "We're just trying to make file sharing harder for users than legitimate 
    alternatives," he says, referring to the licensed online music services 
    that are now proliferating and improving.
    But the Grokster litigation has been a fiasco so far. The problem stems 
    from the Napster precedent. Though the music industry won, the appeals 
    court's reasoning was narrow, leaving the industry little legal ammo with 
    which to wage follow-up battles.
    Napster had asserted the Betamax case as its shield. Since Napster was 
    capable of noninfringing uses, it was protected under Betamax even if its 
    actual use was overwhelmingly for infringement, its lawyers argued. The 
    appeals court agreed that was a correct reading of Betamax, but found that 
    Betamax simply didn't apply. The reason: Napster was a service, with an 
    ongoing relationship with its users, whereas the VCR was a product that 
    Sony put into the stream of commerce and then had nothing more to do with. 
    While Sony could not patrol what its end users did, Napster could. Napster 
    kept indexes of all the file names its users were trading on centralized 
    servers on its premises. It could see what users were trading. For that 
    reason, the court decided, Napster could be ordered to filter out 
    copyrighted files.
    For software developers, however, the Napster ruling was a speed bump. Fred 
    von Lohmann, an attorney with the Electronic Frontier Foundation in San 
    Francisco, posted advice to developers on the EFF site suggesting ways to 
    engineer around the Napster ruling. "Better to sell stand-alone software 
    products than ongoing services," he recommended. "Can you plausibly deny 
    knowing what your end users are up to?" he urged them to ask themselves. 
    "Disaggregate functions," he exhorted. "If each activity is handled by a 
    different product and vendor ... each entity may have a better legal 
    defense to a charge of infringement. A disaggregated model ... may limit 
    what a court can order you to do to stop infringing activity by your users."
    Even before the EFF issued these "lessons and guidelines," at least one 
    service already fit the bill. By late 2000, Swedish developer Niklas 
    Zennstroem had co-developed a "disaggregated" file-trading network called 
    FasTrack. The indexes that enabled FasTrack's users to find one another's 
    files were not stored on Zennstroem's own servers, the way Napster's had 
    been. Instead they were strewn across the network, temporarily stored on 
    thousands of users' own PCs. (The software automatically determines which 
    users' computers are suitable for this purpose and reassigns the indexing 
    function to new computers as users go on- and offline.) Zennstroem then 
    co-founded Kazaa BV, a Dutch company, and set up a website from which users 
    could download the Kazaa Media Desktop, which would enable them to navigate 
    the FasTrack network. Kazaa also licensed aspects of its FasTrack source 
    code to other services, including Morpheus and Grokster. These licensees, 
    in turn, developed their own distinctive desktop applications for tooling 
    around the FasTrack network. Grokster pays Kazaa 60% of its revenues for 
    its license.
    All of these licensees could plausibly maintain that they were not 
    services, like Napster, but rather mere "providers of software tools." 
    Those tools simply enabled customers to explore the preexisting FasTrack 
    network, which the licensees had not created, and which they did not control.
    Moreover, even Kazaa itself might be able to advance much the same defense. 
    Though Kazaa started the network, it had subsequently become simply one of 
    many providers of software tools for traversing it. The network was 
    "self-organizing" and would persist, it was said, even if Kazaa and all its 
    licensees were to disappear from the scene.
    Then, one fateful day in late February 2002, Kazaa froze Morpheus's users 
    out of the FasTrack network. Lawyers' eyebrows were raised. The FasTrack 
    network was apparently more centralized than had been thought. They sought 
    to scrutinize the FasTrack software and see whether there was a man behind 
    the curtain somewhere who could turn the whole thing on and off like a spigot.
    Good luck. Three months after being sued in Los Angeles by the 
    entertainment industry, Zennstroem sold the Kazaa name and most of its 
    assets to a British woman named Nikki Hemming, who financed her purchase 
    with a loan from Zennstroem. She then started two companies. One, called 
    Sharman Networks, is organized under the laws of the Pacific island nation 
    of Vanuatu and appears to have no employees. The other is an Australian 
    company called LEF Interactive (for liberte, egalite, fraternite), which 
    supplies the staff for Sharman.
    The movie studios then sued Sharman and LEF, each of which claimed it was 
    beyond the jurisdiction of the U.S. court. Hemming's companies lost those 
    arguments in January 2003. But it turned out that neither of them had the 
    FasTrack source code anyway. Though Zennstroem had sold most of Kazaa's 
    assets, he kept the source code, which now belongs to his new Swedish 
    company, Joltid. Sharman licenses the FasTrack code, in exchange for 20% of 
    its revenues, from Joltid. Joltid has operations in Estonia and the Channel 
    Islands off the English coast, and that's whose legal authorities the 
    entertainment industry lawyers are dealing with now to try to get their 
    hands on the FasTrack source code.
    Even if the studios find the source code, their problems won't be solved. 
    Regardless of how tightly controlled aspects of the FasTrack network might 
    turn out to be, there is at least one file-sharing network out there that 
    is uncompromisingly self-organizing and decentralized. The Gnutella 
    network, whose key software is open source, was created as a noncommercial 
    labor of love. It requires minimal maintenance, which is provided by 
    Though Gnutella's creation was noncommercial, several for-profit 
    outfits­don't call them services, remember!­now sell proprietary, 
    advertising-supported software that enables users to navigate the Gnutella 
    network. These include LimeWire, BearShare, and­ever since it got kicked 
    off FasTrack­Morpheus. Although the Gnutella network is currently an order 
    of magnitude less popular than FasTrack, it might be able to absorb the 
    FasTrack audience if FasTrack were ever driven under.
    To be sure, even the Gnutella-based file-sharing companies retain some 
    traits of services. Morpheus, for instance, periodically contacts the 
    servers of its owner, StreamCast Networks, to fine-tune the software. "But 
    it has no ability to control what people search for ... and no ability to 
    know what they have downloaded," emphasizes the EFF's von Lohmann, who now 
    represents StreamCast in the litigation. That's the crucial question, he 
    Von Lohmann may be right about that. After all, lots of products are sold 
    under customer-service contracts whereby manufacturers maintain some 
    relationship with their customers. Some hardware products like TiVo are 
    even sold on a subscription basis. The whole product-service distinction is 
    getting murkier by the minute. Why should legality or illegality hinge on 
    such an ethereal distinction?
    The Napster court had ruled that Napster, because it kept its indexes on 
    premises, could filter out copyrighted works without fundamentally altering 
    its "current architecture." That's precisely what neither the FasTrack nor 
    the Gnutella-based systems can do, von Lohmann argues, because of their 
    On April 25, 2003, U.S. District Judge Stephen Wilson ruled that von 
    Lohmann was right. Morpheus and Grokster were protected from liability by 
    the Sony Betamax ruling, as interpreted by the Napster court, he decided. 
    (The legality of Kazaa itself has not yet been ruled upon.) Nevertheless, 
    Judge Wilson agreed with the many judges before him who had already ruled 
    that users of file-sharing services do engage in copyright infringement 
    when they upload or download copyrighted files. His ruling produced the 
    anomalous situation we see today, in which users of file-sharing services 
    can be sued, yet commercial operators can't be. It's as if individual 
    cocaine addicts could be prosecuted, while the Cali cartel was beyond 
    reproach. (Again, not to sound judgmental.)
    The entertainment industry has appealed Judge Wilson's ruling, and the U.S. 
    Court of Appeals in San Francisco will likely hear the case this winter.
    Two months after Judge Wilson's ruling, the entertainment industry got 
    better news from a federal appeals court in Chicago. In affirming the 
    shutdown of a different file-sharing service called Aimster, Judge Richard 
    Posner interpreted the Betamax formula very differently. His approach would 
    allow courts to bar services and products that are overwhelmingly used for 
    infringement, even if they are also capable of noninfringing uses. If the 
    appeals court in San Francisco upholds Judge Wilson's Grokster ruling, 
    there will be an arguable conflict among the federal appeals courts, and 
    the stage might be set for the U.S. Supreme Court to take the case and 
    revisit the Betamax precedent.
    Many people today have come think of the betamax case as a parable of 
    Hollywood shortsightedness. They claim that the studios, unduly fearful of 
    new technologies, tried to strangle the VCR in its cradle, nearly 
    asphyxiating the home-video market that proved so lucrative later on. 
    Moral: If the entertainment industry simply embraces the new file-sharing 
    technology, it will end up making more money than ever before.
    That picture is distorted. If the Betamax ruling had come out the other 
    way, VCRs would never have been stamped out. Rather, a system of royalties 
    would have been imposed, either by statute or negotiation or court order, 
    with a portion of the manufacturers' revenues going into a pool for 
    artists. That is how copyright holders are compensated for "private" 
    copying in some 42 countries today, including 12 of the 15 European Union 
    In fact, we have covered so much cultural ground since 1984 that it is 
    startling to recall what was really at stake in the Betamax case. The case 
    was not filed over the studios' concern that someone might use a VCR to 
    distribute copyrighted works to other people­which is what file sharing is 
    all about. Trying to distribute movies with an analog VCR would have been 
    clumsy, slow, and expensive. Strange as it sounds, the studios were 
    complaining then about only two activities: the building of home libraries 
    of movies taped from free television, and "time-shifting"­taping a TV show 
    so that you could view it once, at a more convenient time, and then erase 
    it. The court's 5-4 majority ultimately decided that "time shifting" 
    required no compensation of artists at all, in part because it "merely 
    enables a viewer to see such a work which he had [already] been invited to 
    witness in its entirety free of charge.... The time shifter no more steals 
    the program by watching it once than does the live viewer."
    Incredibly, this cautious holding is the one that is now thought to 
    immunize commercial file-sharing services from liability, though their 
    primary use is to enable millions of people to obtain free copies of 
    copyrighted works from total strangers, most of whom have never paid to 
    acquire those works either.
    Why did the studios ever think they might be entitled to compensation for 
    consumers' personal use of their works within the home? Try looking at it 
    this way. What entices people into stores to buy VCRs is, in part, the 
    prospect of taping copyrighted shows. If so, why should equipment 
    manufacturers hoard all the profits, rather than sharing them with the 
    copyright holders?
    As crazy as that view may seem to Americans today, four of the nine 
    justices agreed with it in 1984. That view, again, still prevails in most 
    of Western Europe today.
    The notion that copyright holders might be entitled to any degree of 
    control over the technologies that purvey their works now seems quite 
    foreign to American ears­and certainly unnecessary in the VCR context. But 
    it is the conspicuously missing ingredient in discussions of file sharing. 
    The value of today's commercial P2P technologies stems almost entirely from 
    copyrighted works, yet copyright holders have lost any say in how those 
    technologies can be used.
    Is it fair, I asked Grokster attorney Michael Page, that Grokster is making 
    money by advertising to crowds who are drawn almost exclusively by the 
    prospect of obtaining copyrighted works­yet copyright holders see none of 
    those revenues?
    "The short answer is, that's just not the way the law works," he accurately 
    responds. "Is it fair that so much of the income of broadband providers 
    comes from people copying files?" He is referring to the fact that 
    broadband providers like Verizon and SBC have, with varying degrees of 
    blatancy, used the attractions of file sharing as a means of selling their 
    services. "Download all the music you like," urged one notorious SBC ad for 
    DSL service. "Sure beats going to the record store."
    "Fair or unfair, it's legal," says Page.
    For the moment, he's right.
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