It was the best of times, it was the blurst of times?!

C. Montgomery Burns

Earlier today, on the Wall Street Journal's Grokster Roundtable I stated that, "I do think this may turn out to be a significant victory for technology providers in general."

Darknet author JD Lasica, who is guest-blogging here yesterday and today, has asked me to clarify what I meant (Grokster: Theory and Practice). Well, it's been a busy day, so I couldn't answer him right away. I will do so now.

Despite claims to the contrary, neither side achieved total victory in Grokster nor did either side lose. Though the case will continue in the district court, it isn't the specific fate of Grokster and StreamCast that really matters. What matters is how this decision will effect copyright law and innovation policy generally. What will the practical impact be?

Things could have been better for innovation. A lot better, in fact. But, more importantly, they could easily have been far worse.

Basically, I think that the Supreme Court did what it felt it had to do, find against Grokster and StreamCast. However, they were unable to resolve the fundamental and underlying issues involved in applying Sony v. Universal, aka "Betamax", in the internet era and so didn't decide that aspect of the case.

Copyright guru William Patry says that the court punted (The Court Punts). I prefer to think that the Court kicked the can down the road instead. Unable to reach agreement on what is actually a fairly bad set of facts for innovation promoters, the Court has basically said to come back in a few years and we'll take another look. Since time is on the side of P2P and internet innovation, this is actually a victory for technology providers.

But more on that in a bit.

The Could Have Been Better

Let's get the bad news out of the way first.

The Court has clearly revived the "active inducement" standard for secondary liability. Note I say "revived," not "created". The active inducement test has pretty much been part of copyright law for some time. It may have been hiding in the background, or being confused with its siblings, contributory and vicarious infringement, but there it was. It even got a mention in Sony, among other places. Basically, the Court has taken it out of the background and shadows and placed it front and center.

The problem is, they could have done a much better job. "Active inducement" is a pretty good test, and one that I'm not opposed to for secondary liability. However, the Court seems to have set a fairly low and confusing bar for finding the "active" part of the inducement.

There has already been much commentary on this point. See, among others, Larry Solum, Footnote 12 in Grokster; Randy Picker, The Lurking Design Issue in Grokster; and, Ed Felten, Legality of Design Decisions, and Footnote 12 in Grokster.

Without too much detail, the Court seems to be using some sort of "taint by association" with Napster. See, Eric Goldman, Grokster Supreme Court Ruling. After all, Grokster and StreamCast actually advertised to the customers of known bad actor Napster. Based on this, all sorts of otherwise legal actions (using advertising for revenue, lack of filters) took on a sinister cast, according to the Court.

This is pretty unconvincing evidence, actually. It veers pretty darn close to turning active inducement into imputed inducement. And, if courts are allowed to run with this sort of reasoning, could be very dangerous to innovation. But I don't think it will necessarily go that far. It will likely go farther than it should, but I don't think innovation is doomed.

Remember the complex procedural posture of this case. The Supreme Court was reviewing a motion for summary judgement, but they didn't directly challenge that judgement, they used a different theory of liability then was argued. All they've basically said is that the evidence in the record is enough to beat a summary judgement on an active inducement theory that hadn't been fully briefed in the district court or court of appeals. The Supreme Court remanded, vacating the earlier judgements, but not providing an awful lot of guidance for them. That's okay.

In essence, all of the analysis of the Supreme Courts on the active inducement test is pretty darn fact specific. However, as noted, the active inducement facts were never actually argued or briefed in the lower court. The Supreme Court was basically cobbling together facts briefed for a standard contributory and vicarious liability argument, not the active inducement standard that the Supreme Court ruled on.

So, basically, we have a theory of infringement that is vary fact-specific (seemingly limited to the facts in Grokster), facts which were never properly developed in the first place, and only so far as to say that these facts beat summary judgement. What the Supreme Court said on the evidence for active inducement may act as persuasive authority but is pretty close to surplusage and dicta.

The case goes back down to the district court. The court is going to have to decide on three theories of secondary liability: contributory, vicarious and active inducement (after this new active inducement claim is properly briefed, of course).

The Supreme Court gave absolutely no guidance on vicarious liability and there is a very clear split on straight-up contributory infringement under Sony. It's not clear to me that the district court can't rule the same way on the vicarious infringement. A gutsy court could even find the same way on contributory infringement, following Justice Breyer's concurrence. However, there will be no summary judgement for Grokster and StreamCast on the issue of active inducement.

A gutsy court might send the issue of active inducement and, possibly, contributory infringement to trial. On the other hand, the district court could give summary judgement to MGM on the basis of active inducement and completely ignore contributory and vicarious infringement (hey, it worked for the Supreme Court). Here's the thing,though. A smart district court would base the active inducement on other, presumably more damaging evidence, then the Supreme Court used. There is nothing that says the district court has to use the reasoning the Supreme Court did in denying summary judgement to Grokster and StreamCast. The Supreme Court was never looking at a properly briefed active inducement motion for summary judgement in the first place. Result: the Supreme Court's ruling is followed, but the ruling is narrow in recognition of the cases' strange procedural posture.

If MGM wins summary judgement, they can't do much about it. It is not like they could appeal a ruling in their favor. They could possibly appeal a decision to send the case to trial, but the burden for overturning such a ruling would be fairly high. Furthermore, if they lost that appeal and the case went to the Supreme Court again, they'd never take it.

Of course, as I said above, it isn't the specific fate of Grokster and StreamCast that is important, it is the effect this ruling will have on other cases and for innovation in general.

More Uncertainty or Less?

There has been a lot of talk about increased uncertainty for innovators, which would increase the cost of innovation, and even suppress a substantial amount. See, among others, Fred von Lohmann, Fear Mongering. Von Lohmann is right, a great deal of uncertainty does remains and it may have even increased in certain ways.

On the other hand, it may also have decreased. Grokster, the case, will continue. Depending on how the district court handles the issues in Grokster and how other courts interpret the Supreme Court's guidance here, will make all the difference in the world. As I noted above, they'll be likely to extend liability farther than a strict active inducement standard, but I don't think they'll go too far. The Court was very clear that this was "active inducement," not "imputed inducement." They pointed very clearly to patent law. And, although patent law doesn't solve all problems, it is generally better than the test the Supreme Court created for the purposes of the Grokster ruling. Furthermore, many of the facts the Court cited can easily be limited to Grokster and, once again, they were never properly briefed under a theory of active inducement in the first place. Result: it will be the lower courts that will craft the copyright active inducement standard and they are free to narrow it as compared to the expansive example the Supreme Court provided. Conclusion: give money to EFF to convince judges to use a narrow active inducement test.

The case also acts, somewhat, as a roadmap. For bad actors, of course. See, Douglas Lichtman, Hollow Victory in Grokster. Although I have to agree with C.E. Petit that bad actors frequently are careless when it comes to smoking guns, if you look hard enough (Balanced… or Evasive?). But it will also serve as a roadmap for good actors. See, Fred von Lohmann, Supreme Court Sows Uncertainty.

Is it a perfect roadmap? No, there remain plenty of unseen pitfalls. However, it is better than no roadmap at all. I will also note that this roadmap will be much more useful to large, established corporations (that can afford expensive lawyers to help avoid liability, as well as have deep pockets to scare off some lawsuits) than smaller upstarts (that are cutting edge and lack anti-lawsuit resources). This is highly unfortunate. Highly unfortuate.

But consider whether the uncertainty today is that much worse than the uncertainty that prevailed yesterday. After all, there is also some good news. The fact that the MPAA and RIAA have won a 9-0 decision in the Supreme Court means it will be pretty hard for them to convince Congress they need the even worse INDUCE Act, or any similar legislation (even such things as the Broadcast Flag). Having the INDUCE Act and the Broadcast Flag off the table reduces uncertainty a great deal more, I think, than this relatively limited ruling by the Supreme Court.

Also consider what might have happened if the Supreme Court had ruled in favor of Grokster and StreamCast. I think it highly likely that this issue would quickly jump to the front of the queue for both judiciary committees. Hollywood might not have gotten a full-blown INDUCE Act, but they might have gotten some "compromise" that worked for major corporations such as Microsoft and Apple, but not for smaller inventors. Sometimes it is better to lose a little, than to win.

This isn't a great "active inducement" test, and too much uncertainty reigns, but it could have been much, much worse.

Time Is On Our Side

This is the key to understanding the importance of the case, I think.

The Court didn't address Sony directly. There were three in favor of a narrow reading of Sony's safe harbor that would exclude Grokster and StreamCast. Three in favor of a broad reading of Sony's safe harbor that would include Grokster and StreamCast already. And three who were apparently unconvinced of the merits of either side. A perfect three-way split.

Let's look at the two concurrences. What was most apparent to me, is that Justice Ginsburg's concurrence completely ignored discussing the issue of what "capable" means in Sony. The standard view, and the one fully endorsed by Justice Breyer's concurrence is that "capable" refers to the future ability of a technology to be used for non-infringing purposes, although its present use is primarily infringing.

While Justice Ginsburg ignores the future potential for peer-to-peer, Justice Breyer revels in it. Lior Strahilevitz argues that Grokster may have erased the future potential from Sony (Is Grokster Erasing “Capable” from Sony?). I disagree, "capable" has always been rooted in reality. I could use a gun to hammer nails, but that does not mean that a gun is "capable" of being a hammer in the sense that "capable" is used in Sony.

Capable is something more that "could potentially be used for." It is an admonition to remember that how technology is used changes over time and that, frequently, illicit uses may dominate in the early years of a technology's development. After all, it is often easier to establish illicit markets than legitimate ones. iTunes, anyone?

Extensive quotation from Justice Breyer's concurrence follows:

Here the record reveals a significant future market for noninfringing uses of Grokster-type peer-to-peer software. Such software permits the exchange of any sort of digital file -- whether that file does, or does not, contain copyrighted material. As more and more uncopyrighted information is stored in swappable form, it seems a likely inference that lawful peer-to-peer sharing will become increasingly prevalent. [citations omitted]

And that is just what is happening. Such legitimate noninfringing uses are coming to include the swapping of: research information (the initial purpose of many peer-to-peer networks); public domain films (e.g., those owned by the Prelinger Archive); historical recordings and digital educational materials (e.g., those stored on the Internet Archive); digital photos (OurPictures, for example, is starting a P2P photo-swapping service); "shareware" and "freeware" (e.g., Linux and certain Windows software); secure licensed music and movie files (Intent MediaWorks, for example, protects licensed content sent across P2P networks); news broadcasts past and present (the BBC Creative Archive lets users "rip, mix and share the BBC"); user-created audio and video files (including "podcasts" that may be distributed through P2P software); and all manner of free "open content" works collected by Creative Commons (one can search for Creative Commons material on StreamCast). [citations omitted] I can find nothing in the record that suggests that this course of events will not continue to flow naturally as a consequence of the character of the software taken together with the foreseeable development of the Internet and of information technology.

There may be other now-unforeseen noninfringing uses that develop for peer-to-peer software, just as the home-video rental industry (unmentioned in Sony) developed for the VCR. But the foreseeable development of such uses, when taken together with an estimated 10% noninfringing material, is sufficient to meet Sony's standard. And while Sony considered the record following a trial, there are no facts asserted by MGM in its summary judgment filings that lead me to believe the outcome after a trial here could be any different. The lower courts reached the same conclusion.

Here's the thing. So have I. I believe that P2P technologies have all sorts of wonderful non-infringing uses. I believe that P2P technologies will increasingly be used for these non-infringing uses and become embedded in our work and play. We'll all be making phone calls via P2P, playing games, watching TV, sharing our varied creations. I believe that five years from now the idea of living without P2P will be about as attractive as the idea of living without the internet today.

And five years is a pretty good timeframe, because it will realistically be five years, at least, before the Supreme Court decides to take another crack at Sony. By then the industry will have matured. Microsoft and Apple themselves will be deeply involved in distributing lots and lots of perfectly legal content via P2P. The content industries will have to have made further adjustments of their business plans, further legitimizing the industry. The industry itself will have more credibility and respect, and perhaps more importantly, a heck of a lot more jobs will be on the line.

When that happens, the Court will no more be interested in ruling against these technologies then they would be in taking VCR's out of people's bedrooms, or eliminating entire swaths of US industry. More importantly, Justice Breyer's concurrence will have been vindicated.

So,