MGM V. Grokster: Actively Encourage is the Test

By Richard Menta 6/29/05

I had to wait a day or two to absorb what the recent Supreme Court decision in the MGM/Grokster trial really means. I am afraid I still haven't come to a firm conclusion. There is part of me that feels it will spell doom not only for P2P, but it will also have broader negative implications on technological innovation. My other part feels it will just all go overseas and thrive as a foreign import.

What I do know is that with two wins in their pocket, the P2P companies had American VCs standing in the corner with fat investment money in their pockets. A third win and they win the cash to build their businesses without threat of further litigation (though Congress still had the option to rewrite law). Instead, they were dealt a setback and the money went poof.

Richard Menta

The Supreme's left the Betamax decision intact, but they added a caveat. If it can be proved that these companies actively encourage copyright infringement in the course of their business then the media industries can sue them.

Exactly what constitutes 'actively encourage' is something a lower court will decide. As the high court did not clarify the bounds of this definition themselves no one yet knows how much encouragement is enough to trigger liability. It will probably take a decade of case law to build those trigger points, which means the media industries can effectively use lawsuits to bully on all but the most flimsy of accusations.

I'm not the biggest fan of Grokster mind you. If you want to cripple your machine with spyware and adware Grokster is the application that will do it. It was the major label's resistance to work with these companies initially that drove them to financing their endeavors in dubious ways. This is not an excuse, just a fact. Napster, Grokster, KaZaa, and the others were always looking to build profitable enterprises. Their goals were never to run altruistic services, they all wanted to sell music. Until iTunes came along in 2003 the music industry shunned outsiders. Rather than just fold their companies the outsiders just went ahead with their plans anyway. It took years to get to the Supreme Court and along the way the file sharing services not only got to stay in business, they won in the second and third highest courts in the land.

The biggest problem I have with both sides is that they speak and fight in absolutes, no shades of gray. I guess gray signifies weakness and possible culpability in court. In reality all we have is gray, both dark and light, and today's copyright law is woefully unprepared to address it.

I read CNET's Charles Cooper's essay on the ruling. He calls file sharing theft pure and simple. No gray there. Personally, I don't agree it is all that pure and simple, because by his standards radio constitutes theft (we don't pay to listen to AM/FM and have been able to record, save, and share broadcast music since reel-to-reel was invented). True, radio does offer critical exposure to music and is the record industry's number one marketing tool, but back in 2000 the band Radiohead proved that file sharing had the same promotional powers. Powers that sell records, not hinder their sale.

Raymond Blijd's essay was more interesting, but more dour. What rang for my ears was this passage in his article:

The industry will sue the innovation breeding grounds of Modders and p2p sites dry, steal their ideas and cheat them out of recognition and compensation.

According to Raymond this ruling has raised the barrier of entry to a level beyond the reach of a garage innovator like Shawn Fanning or even of a small entrepreneurial company. Only big boys who can afford to hire big lawyers can afford to play.

But it is the small guy who invented these innovations in the first place and it was the record industry's dismissal of them in the 90's that created this conflict. The industry blew its big opportunity back in 1998 when the likes of and eMusic offered to build the download market for them. The music industry spurned them, arrogantly deciding that because they control the content that gave them control of Internet distribution by default. A year later Napster appeared and it was too late. It turned out that the industry did not control the content as much as they thought and the world's greatest grass roots effort was born.

File sharing is still grass roots and the innovators will still innovate, though they will go further underground. What about people like KaZaa founder Niklas Zennström? As Blijd astutely points out without KaZaa there is no Skype.

In many ways the biggest loser in this case could turn out to be the record industry. Just remember that if the movie industry had won the Betamax case (which was a close 5 to 4 decision) there would be no video rental stores today. Video rentals and sales make up more than half of the movie industry's revenue today while simultaneously allowing the traditional box office to set records the last 10 out of 11 years. The VCR had no negative effect on the box office, it just created a new more profitable business. It is easy to see how critical that case was in promoting Hollywood's bottom line. Fair use can be profitable too.

In the end, though, I think I am more in tune with Andrew Orlowski's hilarious essay on the subject, which offers in the end a clear definition of the problem:

Let's recap: we have a compensation crisis, not a copyright crisis on our hands. If the artists represented by the Recording Industry Ass. of America were being compensated, there would be no Grokster case. Computer networks allow the dissemination of culture on an unimaginably wide scale; the only aspect that's missing is a compensation framework.

More answers will come about once the lower court decides initial parameters for the 'Actively Encourage' test. Until then keep this in mind.

Several years back the courts ruled that MP3 players were not illegal products. At that time there were no industry sanctioned paid services so pretty much all music files distributed online could be defined by a court as illegal. If today's court ruling existed back then and if it could be proved that the player manufacturers like Rio targeted file traders (which they all do) then these players might have failed the Actively Encourage test. Rio could have lost the case.

If that happened the iPod would never have come into existence.

As for myself, I am going to keep on reading and digesting. I like to pontificate as well as the next guy and as someone who has followed this since the late 90's I certainly have some insights. But right now we need this to play out a bit to see what the true short term fallout will be. This includes how well artists can use the technology to change their own situation from indentured servitude to successful independent entrepreneurs.


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Other MP3 stories:
Interview With StreamCast on Grokster Ruling
Grokster v MGM: The End or the Beginning?