File-sharing sites lose at Supreme Court

Bob Sullivan Technology correspondent • Profile • E-mail

The free ride for Internet music and movie downloaders may be over. On Monday, the Supreme Court ruled companies that make software which enable free music and movie trading can be held liable for users' illegal activities — if encouraging theft was their intent.

In a unanimous ruling against file swapping services Grokster Ltd. and Streamcast Inc., the court rejected warnings from consumer groups that expanding liability might stunt the growth of new technologies such as Apple's iPod. It was a huge victory for the entertainment industry, which blames illegal file sharing for billions of dollars in lost revenue.

The decision reverses a lower court ruling that the software makers couldn't be sued for user activity over which they had no direct control. The justices said there was enough evidence of unlawful intent for the case to go to trial.

File-sharing services are responsible for illegal activity they encourage, Justice David Souter said.

“We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by the clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties,” Souter wrote for the court.

FREE VIDEO Ruling's impact Former Grokster CEO Wayne Rosso talks to CNBC about the Supreme Court decision CNBC

The entertainment industry claims that as much as 90 percent of songs and movies downloaded on the file-sharing networks is done so illegally. Monday’s ruling gives the industry an alternative to the more costly and cumbersome route of going after millions of alleged file-swappers individually.

Hundreds of lawsuits could be filed against similar file-sharing services, former Grokster CEO Wayne Ross told CNBC on Monday. Rosso, now CEO of for-pay service Matchbox, said his firm will announce new licensing deals with the recording industry this week. A slew of other announcements from for-pay file swapping services were expected in response to the ruling.

Two lower courts previously sided with Grokster without holding a trial. They each based their decisions on the 1984 Supreme Court ruling that Sony Corp. could not be sued over consumers who used its VCRs to make illegal copies of movies.

The lower courts reasoned that, like VCRs, the file-sharing software can be used for “substantial” legal purposes, such as giving away free songs or free software. They also said the file-sharing services were not legally responsible because they did not maintain central servers pointing users to copyright material.

But in Monday’s ruling, Souter said lower courts could find the file-sharing services responsible by examining how the software was marketed and whether companies took easily available steps to cut down on illegal use.

Film and music industry supporters cheered the decision as a victory for copyright holders.

"I think the court hit the nail on the head here in focusing on Grokster's wrongful intent," said intellectual property lawyer Christopher S. Ruhland, who until recently represented Disney. "If you intentionally help someone else steal, you ought to be held responsible for that. The message this ruling sends is if your business plan is to make money through copyright infringement, you better change your business plan."

But defenders of file-swapping software said the ruling would immediately stifle innovation.

"This is a very dangerous decision for technology and innovation, and it's probably a big victory for lawyers," said Ed Black, president of the Computer and Communication Industry Association.

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