Landmark P2P ruling back in court

The 9th U.S. Circuit Court of Appeals is reviewing a lower court decision made last spring in which a federal judge ruled that distributing decentralized file-swapping tools such as Grokster and Morpheus was legal, and that their parent companies bore no legal liability for copyright infringement occurring on those networks.

The ruling was a surprise setback for record labels and Hollywood studios, which had previously won rulings forcing Napster and other file-swapping companies to close, and had expected the same result against Grokster and Morpheus parent Streamcast Networks. Those companies, now defending their win in the higher court, say the issue is bigger than their products, or even the file-swapping industry.

"This is not about piracy, but about who can control technological innovation," Streamcast Networks Chief Executive Officer Michael Weiss said. "The entertainment industry has a bad record in determining what technology will rise to the forefront."

The appeals court, like the lower court before it, ultimately will determine whether technology companies are responsible for the illegal activities of people who buy or use their products, an issue that resonates well beyond the peer-to-peer world.

Few would disagree that file-trading networks are used largely for the unauthorized exchange of copyrighted material. Indeed, the record industry's lawsuits against individual computer users who are trading songs online using services such as Kazaa continue unabated, with the latest round filed in early January.

File-swapping advocates say that doesn't necessarily mean the companies that distribute the peer-to-peer software should be held responsible, however. Unlike file-swapping pioneer Napster, which operated a central server that served as a directory service for its network, the new generation of file-swapping companies produce software but do not operate the networks themselves, these advocates say. Moreover, the technology can be used for legal purposes, they say.

In his decision last April, federal Judge Stephen Wilson agreed, comparing file-trading software to the videocassette recorder, another technology once opposed by Hollywood on copyright grounds.

"Defendants distribute and support software, the users of which can and do choose to employ it for both lawful and unlawful ends," Wilson wrote in his April opinion. "Grokster and Streamcast are not significantly different from companies that sell home video recorders or copy machines, both of which can be and are used to infringe copyrights."

The recording industry and Hollywood studios argue that Wilson erred in his analysis, however. They point to earlier decisions in the Napster case, in which judges said that the VCR argument, known as "substantial noninfringing use" defense in legal circles, does not apply if a company knows that its products are being used illegally.

In Napster's case, the recording industry sent 12,000 notices that piracy was taking place on the network, Recording Industry Association of America attorney Matt Oppenheim said. In this current case, the RIAA has collectively sent 8 million notices to Grokster, Streamcast and co-defendant Sharman Networks, the owner of the Kazaa software. Sharman is not part of the appeal, due to legal issues that have separated its case from the other two.

"We believe (Grokster and Streamcast) are operating just like Napster and fall under the Napster ruling that the court handed down three years ago," Motion Picture Association of America attorney David Kendall said. "They do have one thing Napster lacked, and that is a good business model. They are making millions of dollars off of content that is not theirs."