Entertainment Industry Loses Important File-Sharing Battle
By ANNA WILDE MATHEWS and NICK WINGFIELD
Staff Reporters of THE WALL STREET JOURNAL
A federal court dealt a major blow to the entertainment industry's fight against Internet file-sharing software, allowing two companies to keep distributing such software even though it enables users to illicitly copy and trade music and movies.
The Friday ruling likely will force the industry to intensify its legal pursuit of individuals who distribute copyrighted works through online swapping networks.
The decision came in a case brought by major record labels, movie studios and music publishers against Grokster Ltd. and StreamCast Networks Inc., which provide software programs called Grokster and Morpheus that let users trade music and movie files between their computers. Rather than shut down the file-sharing software, as the industry had hoped, U.S. District Court Judge Stephen V. Wilson in Los Angeles ruled that Grokster and StreamCast are not breaking copyright laws by making their software available.
That is largely because the companies are not operating centralized services that would allow them to monitor the activities -- and copyright infringements -- of their users. The companies didn't have "actual knowledge of infringement at a time when they can use that knowledge to stop the particular infringement," he wrote. Sharman Networks Ltd., which offers the similar file-sharing program Kazaa, joined the case later than Grokster and StreamCast and wasn't covered in the ruling.
Previously, courts had ruled against the companies that facilitate online swapping of copyrighted works, including Napster Inc., which shut down in the summer of 2001 after a federal court in San Francisco ordered it to remove pirated music from its service. But Judge Wilson noted that Napster's service operated by hosting a "central list" of the files available on each user's computer, while Grokster and StreamCast simply provide software that allows users to connect directly to one another. The companies distribute the software free, making money by selling advertising on their Web sites and through some retail sales of content.
Last year, the number of music compact discs sold in the U.S. shrank by 8.8%, according to figures from Nielsen SoundScan. Record companies largely attributed the fall to sales lost to file-swappers and CD burning. A December survey by Ipsos-Reid found that 19% of Americans 12 and older reported that they had downloaded an audio file from a file-sharing network. More than half of people 12 to 17 years old said they had done so. The movie industry fears that its products will become as widely traded as songs as broadband Internet access grows.
Entertainment companies said they will appeal Friday's ruling. But if it stands, the decision will squarely focus the companies' legal efforts on the individual users who are large-scale online distributors of music and films -- a direction in which record labels already have been moving. Even as they downplayed the decision's importance, the industry emphasized the ruling's view that individual file-sharers' activities are illegal.
Peer-to-peer users' actions "are illegal, and the court recognized this," said Zach Horowitz, president and chief operating officer of Vivendi Universal SA's Universal Music Group, the biggest music company. File-sharing software providers "may have won a temporary legal victory, but they will ultimately lose the long-term battle because of the dangers and deficiencies inherent in their systems," he added in a statement.
Jack Valenti, chief executive of the Motion Picture Association of America, said Friday's ruling reaffirmed that copying works is "stealing." "We have an excellent chance of obliterating this decision on appeal," he said.
The peer-to-peer software firms said the ruling exonerated them, however. It also lent them a new legitimacy that may help draw investments, advertising and other support that has been slow to come while their legal future was in jeopardy. "For the last month or so everyone assumed we would lose this suit," said Wayne Rosso, president of Grokster.
"I've been posing this question publicly -- what are you going to do when we win? I hear it's a sad day in Mudville." "It's a great win," said Tom Bratkovich, acting CEO of StreamCast Networks. "File-sharing software on the Internet is something the courts are going to stand by."
Entertainment companies already have begun warning universities and major companies that they could be liable for employees' and students' activities on their computer systems. Pursuing individual copyright infringers is a cumbersome process, however, in part because it is very difficult to identify who the abusers are without a subpoena. The industry has made some progress on that point. So far a federal judge in Washington, D.C., has backed record labels' argument that Internet-service providers, such as Verizon Communications Inc., must identify customers when copyright owners find evidence that they are breaking the law. Verizon is expected to appeal those rulings soon.
The recording companies also have sued four university students around the U.S. for allegedly operating campus-wide file-sharing networks -- a move that recording executives believe led several other similar campus operations to shut down.
Eventually, lawmakers may jump into the fray. Democratic Rep. Howard Berman of California said the ruling appeared "fundamentally unfair." "I don't think it should stand," he said. "Either through the judicial process or congressional action, there needs to be a response."
The ruling also adds to the pressure on music companies to roll out cheaper, better online services. Record labels have been authorizing more of these, including a new one set to be unveiled Monday by Apple Computer Inc. Several big movie studios are distributing films online through Movielink LLC. Entertainment companies are also ramping up technological attacks aimed at making the peer-to-peer networks less functional.
It isn't clear what will be the focus of the music and movie companies' appeal to the Ninth Circuit Court of Appeals. But in addition to challenging Judge Wilson's distinction between Napster and the services in the current case, the companies likely will target his reliance on a landmark 1984 Supreme Court case involving the Sony Betamax. That early videocassette recorder was found to have "substantial noninfringing uses" despite its helpfulness to individuals making unauthorized copies of movies.
The entertainment companies are likely to point out that file-sharing software is much more potent than the VCR, because it allows users to quickly make multiple high-quality copies and, more significantly, distribute them broadly via the Internet. |
