Top court to hear landmark P2P case Tuesday

Ken Fuhrman's Colorado-based start-up company is a television junkie's dream, making powerful home media servers to hold digitized versions of television shows, movies and music.

But Fuhrman is worried. On Tuesday morning, the Supreme Court will hear arguments on whether file-swapping software companies Grokster and StreamCast Networks should be held responsible for the widespread copyright infringement on their networks, and he's afraid his company, Interact-TV, could be affected too.

Like many other technology entrepreneurs, he owes his business to a 20-year-old court ruling that said the Sony Betamax VCR was legal to sell, even though it could make copies of television shows. Tuesday's file-swapping case is the first time in 20 years that the Supreme Court has revisited that landmark ruling in a substantial way.

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What's new:
On Tuesday, the Supreme Court will hear arguments on whether file-swapping software companies Grokster and StreamCast should be held responsible for the copyright infringement on their networks.

Bottom line:
Tech companies are worried, while Hollywood is pushing for revisions on how copyright law affects products. All court watchers agree that the outcome could set new ground rules for two of the most dynamic industries in the United States.

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If not for Betamax, "we wouldn't have done the products we're doing now," Fuhrman said. "Trying to repeal or modify those rules would strangle innovation on the digital media front."

Furman isn't alone in his anxiety. From the smallest start-up to the executive offices of Intel, the technology world sees Tuesday's Supreme Court review of file swapping as potentially one of the most critical moments in the industry's history. At stake is nothing less than the future of innovation, executives say.

The record companies and Hollywood studios that have brought the case don't exactly disagree--but they say it's artists' ability to earn a living by their work, and therefore artistic innovation itself, that's at stake. Uncontrolled file swapping has led to piracy of music and movies on an unprecedented scale, and must be controlled if copyright-based industries are to survive, they say.

Virtually all court watchers agree that the outcome could set new ground rules for two of the most dynamic industries in the United States.

"This is the most important copyright case to come in front of the Supreme Court, from the perspective of its effect on the economy, since the Sony (VCR) case," said Annette Hurst, a San Francisco copyright attorney with Howard Rice Nemerovski Canady Falk & Rabkin.

The case itself focuses on just two file-swapping companies, Grokster and StreamCast. Hollywood studios and record labels say they, like other Napster successors, have built their business by encouraging millions of people to use their software to trade files illegally online.

Unlike Napster, each company distributes software that lets computer users search for and download files from one another's hard drives without any data going through a central company-controlled point

first. The studios and labels say that the peer-to-peer networks created by Grokster's and StreamCast's software could survive and thrive even if the companies were shut down.

In April 2003, this led a Los Angeles federal court judge to say that unlike Napster, Grokster and StreamCast were not legally liable for piracy performed using their software.

"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," Judge Stephen Wilson wrote in that decision. A 9th Circuit Court of Appeals agreed in a ruling last August, and the Supreme Court agreed to hear the entertainment companies' appeal this year.

"The guy who lives across the street from me was a professional songwriter, but he's selling insurance now...It's that bad."

--Rick Carnes, songwriter

The appeal has brought dozens of organizations out of the woodwork, arguing all sides of the case. The U.S. Solicitor General's office is supporting the entertainment companies, as are groups ranging from the Christian Coalition to the National Baseball League.

The file-swapping companies are backed by big consumer electronics companies, venture capitalists and the American Civil Liberties Union, while consumer groups argue that protecting peer-to-peer networks is a free speech issue.

Who's hurt, and does it matter?
A host of studies have come out during the past year trying to gauge the real effect of file-swapping networks, where millions of copyrighted songs, movies and games are traded freely every month. Some say they hurt the music business; some say there is little if any measurable impact.

Rick Carnes, a Nashville, Tenn.-based songwriter who has penned tunes for Garth Brooks and others, says he doesn't need the studies to see that peer-to-peer swapping has been a problem. The professional songwriting business has been devastated in the last few years, as income from record sales has dropped substantially, he says. Music publishers who once kept songwriters on staff have consolidated and laid off staff, and individual writers have seen their income plummet.

"The guy who lives across the street from me was a professional songwriter, but he's selling insurance now," Carnes said. "It's that bad."

These points, along with the record industry's contention that the music market in the United States has lost more than 12 percent of its value since 1999, aren't academic. The Supreme Court has historically been loath to protect industries solely against the consequences of technology change, but it has tried to strike a balance between encouraging technological advance and protecting copyright holders.

Since the Sony Betamax decision in 1984, the court has done that

by saying that technologies with "substantial noninfringing use" are legal, even if they are used in some cases for copyright piracy. That's protected the VCR, MP3 players and even personal computers from being taken off shelves.

Record labels and Hollywood studios say they don't want to overturn that test, but they do want to clarify it. Any company whose products are "predominately" used for copyright infringement--as they say the Grokster and Morpheus file-trading software is--should be held liable for that activity, they say.

That's a terrifying idea to much of the technology industry. Forcing manufacturers to evaluate how their products would be used before release, under threat of legal liability, would prevent much technological progress from happening at all, they say.

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"Such predications are impossible in the real world, especially since the uses to which products are put routinely change over time," semiconductor giant Intel wrote in a brief filed with the court. "Innovators such as Intel would grow timid (and) would have no choice but to withhold from the market socially and economically useful products."

The two sides will face each other in the Supreme Court halls on Tuesday morning, for a brief oral-argument period. Court watchers will listen carefully to the tone and content of the justices' questioning, but a final decision isn't expected until mid-June.

Even that isn't likely to settle the legal issues, however. The court has only the power to rule on what Congress has passed, and the losing side is likely to return to Capital Hill to seek legislation. In the end, the final lines of the Supreme Court's Betamax decision in 1984 may predict the future of file swapping two decades later.

"It may well be that Congress will take a fresh look at this technology, just as it so often has examined other innovations in the past," the court wrote then. "But it is not our job to apply laws that have not yet been written."