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.
Video: Ruling's impact 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.
The new standard: Intent
Experts immediately focused in on the court's point of distinction — intent. Previously, courts had ruled around more technical issues, such as where the music or movie files were stored. In the case of Napster, which shut down in 2001 after losing a series of legal challenges, courts held that the company was liable because it stored copyright materials on centralized computer servers. The original Grokster summary judgment favored that firm because music and movie files were stored on local users' computers, out of Grokster's direct control.
"I like (intent) as a basis for the ruling," said Edward Samuels, author of The Illustrated Story of Copyright. "Instead of depending on the technology, which the courts are not experts in, this ruling depends on something, intent, which the courts are very familiar with."
By focusing on intent, the court also honed in on the issue of ill-gotten gains from illegal activity, Samuels said.
"Usually, the question of intent means, 'I intend to make money from this,' " Samuels said. "So the question is, 'Who's profiting from this activity?' And doesn't it make sense that those people should pay the copyright owners?"
Critics fear innovation 'freeze'
Intent is a vague standard, file-swapping software supporters said, and it will force software designers to imagine every possible future use of their technology.
"This is a very difficult roadmap to follow," said Richard Taranto, a lawyer for Grokster. "The court has said to the Intels of the world, 'We have a multifactor standard that you can't in advance be terribly sure how it will apply to you.' The immediate impact for the industry and technology innovation will ... be a chilling one."
At a press conference arranged by the Electronic Frontier Foundation, experts called the decision Orwellian, saying that the courts have given the music industry the right to sue software makers based on private thoughts and conversations.
"I am very concerned that this new liability theory of intent will freeze the introduction of new technologies," said Michael Petricone, vice president of technology policy for the Consumer Electronics Association.
The ruling's impact on the BitTorrent file-swapping format was not immediately clear. In the years since the Grokster case was first filed, BitTorrent has become the file-sharing software of choice for many on the Internet. BitTorrent creator Bram Cohen has repeatedly said publicly that he did not design his format to encourage illegal activity. In December, when Hollywood movie studios sued a number of Web sites for promoting illegal use of BitTorrent, they made a point of saying they were not targeting the technology itself.
The Supreme Court decision does not mean the immediate end of Grokster. Instead, the Supreme Court reversed an earlier judgment for Grokster, and ordered a lower court to proceed with a trial, at which intent will be the central issue. But the ruling will likely scuttle the service "for all practical purposes," said Rosso, the former Grokster CEO, on CNBC. He also said he believed the ruling will encouraging venture capital to pay more attention to for-pay swapping services.
The case is Metro-Goldwyn-Mayer Studios v. Grokster, 04-480.
The Associated Press contributed to this report.