Following the lead of a lower-court decision last year, the 9th U.S. Circuit Court of Appeals in Los Angeles said on Thursday that peer-to-peer software developers were not liable for any copyright infringement committed by people using their products, as long as they had no direct ability to stop the acts. (Download the decision.)
The ruling means that companies that write and distribute peer-to-peer software can't be shut down because of the actions of their customers. It did not say file-trading itself is legal, and lower courts in the United States have said individual computer users are breaking the law when they trade copyrighted files without permission. But the ruling does lift the cloud of potential liability from defendants Grokster and StreamCast Networks, as well as from many of their rivals.
"The (record labels and movie studios) urge a re-examination of the law in the light of what they believe to be proper public policy," the court wrote. "Doubtless, taking that step would satisfy the copyright owners' immediate economic aims. However, it would also alter general copyright law in profound ways with unknown ultimate consequences outside the present context."
The decision marks a substantial--if not entirely unexpected--setback for the big record labels and movie studios, which have tried hard to win legal rulings that would clamp down on anarchic peer-to-peer networks such as Kazaa or eDonkey.
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Motion Picture Association of America CEO Jack Valenti said his group is reviewing its options and could appeal. He stressed that the court had not made the file trading of copyrighted works itself legal.
"Today's decision should not be viewed as a green light for companies or individuals seeking to build businesses that prey on copyright holders' intellectual property," Valenti said in a statement. "Businesses that ignore their responsibilities as corporate citizens profoundly undermine innovation in both the creative and technological arenas."
A Recording Industry Association of America (RIAA) executive echoed Valenti's comments.
"Irrespective of what any court says, a debate has crystallized: it's legitimate versus illegitimate," said RIAA Chief Executive Officer Mitch Bainwol in a statement. "It's whether or not digital music will be enjoyed in a fashion that supports the creative process or one that robs it of its future. That's the online future of music."
Copyright holders have been more successful in the past, forcing companies such as Napster, Audiogalaxy and Scour to shut down their file-trading networks.
But those companies had distributed software using an earlier model of file sharing, in which searches and indexing of available files all took place using a central server operated by the software company. That meant that all the millions of search requests that took place on the original Napster network involved small bits of data flowing through computers operated by the company itself--and that was enough to make the company liable for the copyright infringement, judges said in that case.
By contrast, most modern file-trading networks involve vast, decentralized webs of PCs that talk only to each other--and not to any central computer.
When someone using StreamCast's Morpheus software searches for a file, the search request goes to another personal computer and ripples out through the network, like a rumor being whispered from one person to the next. When the correct file is found, a direct connection is made between the computers at the beginning and end of that chain--but StreamCast itself is never involved.
That decentralized system means that StreamCast has no direct knowledge of individual file transfers and has no direct ability to stop transfers, the court said. As a result, it cannot be held liable for the infringement any more than Xerox can be held responsible for people using a photocopy machine to copy pages of a book.
Like photocopiers, the file-trading networks could be used for many legal, noninfringing activities, the judges noted. They cited rock band Wilco's use of the networks to distribute its work after it had lost a record contract. This fact helped establish the software itself as legal, even if the vast majority of its use turned out to be for illegal activities, the court said.
Attorneys for the copyright holders had argued that the file-trading companies could be ordered to change the way their software worked in order to exert some control over their users' illegal behavior.
The court dismissed this argument, however. Only companies that had already been found liable for infringement could be ordered to block that infringement, it said.
Attorneys for the file-sharing companies welcomed the decision, saying it would apply to other technologies that have been targeted by copyright holders, such as ReplayTV.
"This is a big win for innovators generally--not just peer-to-peer," said Fred von Lohmann, an attorney for the Electronic Frontier Foundation who represented StreamCast in the appeal. "The court (said) you have no general duty to design only software that entertainment companies approve."
An attorney for Kazaa parent Sharman Networks, which is facing a parallel lawsuit in Los Angeles federal court, said he would immediately ask the record labels and movie studios to dismiss that case, or ask the lower court to rule immediately against the entertainment companies.
Like the lower court, the Ninth Circuit implied that any ability to hold software developers liable for copyright infringement might have to come from Congress rather than from the courts. Indeed, the RIAA is already pursuing that goal, with a bill sponsored by Sen. Orrin Hatch, a Republican from Utah, that would put legal responsibility for copyright infringement back on the peer-to-peer developers.
But the Appeals Court closed its decision with words that some technology lawyers are interpreting as a cautionary note to Congress, as it debates that bill.
"The introduction of new technology is always disruptive to old markets and particularly to those copyright owners whose works are sold through well-established distribution mechanisms," the court wrote. "Yet history has shown that time and market forces often provide equilibrium in balancing interests, whether the new technology be a player piano, a copier, a tape recorder, a video recorder, a personal computer, a karaoke machine or an MP3 player. Thus, it is prudent for courts to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent present magnitude."
