bittorrent

BITTORRENT
On a rainy summer evening in July 2005, Bram Cohen looked out the front window of his house in Bellevue, Washington, and recalled the last scene in The Matrix where the hero played by Keanu Reeves saw a torrential rain of numbers. Even though he was finally taking a break from writing software code, the algorithms kept coming in bright flashes of inspiration. Cohen had always enjoyed programming—he had first started coding while he was still a child—but updating BitTorrent, a wildly popular application that more than 30 million people around the world had downloaded since its debut in February 2002,1 was also a huge responsibility. Cohen, 30, had cobbled BitTorrent together in his spare time to facilitate the high-speed transfer of large data files over the Internet. The software allowed anyone with a broadband connection to harness the concept of massively parallel computing and thereby significantly accelerate the transfer speeds of digital content, including software, console-based video games, music, high-resolution photography, and digitized video.
Cohen, who had started writing software code on his father's Timex-Sinclair computer when he was just five years old, had not entered the business to become a billionaire like Microsoft's Bill Gates, Oracle's Larry Ellison, or Apple Computer's Steve Jobs, but instead to create transformational software. Cohen explained: "Why'd I write BitTorrent? Because I had a good idea for a better way to distribute content. I didn't know what kind of content it was best for at that point." Even though the music labels and movie studios had successfully sued MP3.com, the original Napster, and Grokster for copyright infringement, many coders thought that the digital distribution of music still held promise. Legitimate online digital music sites were proliferating: Apple Computer had sold more than 28 million iPods since the introduction of its bulky five-gigabyte prototype in 2001, and its iTunes store had already sold more than 600 million songs.2 RealNetwork's Rhapsody service had 1.3 million paying subscribers.3 MusicNet had brought six new pay-services to market in 2005, including Yahoo's Music Unlimited. It was scheduled to launch at least 30 new services in 2006.4 Legitimate music downloads were projected to reach $2.4 billion by 2010, up from $380 million in 20045 and $900 million in 2005.6 By some industry estimates, this new revenue would represent 25% of the music industry's worldwide income by 2010.7 Clearly, the market for digital content was hot.
Meanwhile, the Hollywood studios were actively trying to figure out how to make movie downloads a viable business. Apple was still months away from releasing its video iPod, and the purveyors of digital video still faced two technological hurdles: bandwidth and data hosting costs. One of the biggest obstacles to monetizing Web-distributed movies was the cost of sending huge digital files in a steady stream to hundreds if not thousands of users who often requested a copy at the same instant. File sizes for full-length feature films, which could easily reach four to eight gigabytes, were simply too massive for most broadband connections to handle. Few outside the military knew how to accelerate transfer speeds so consumers could download giant files without having to leave their computers running all night.
Cohen had come up with the answer: a software program that identified every person seeking a specific piece of digital content then teamed their hard drives and broadband connections to transfer the file in simultaneous packets instead of the traditional I.V. drip of digital data. Cohen, who attributed his ability to see patterns others missed to Asperger's,8 had designed a program that enabled peers logged onto the Internet to effectively upload files while still downloading. Because computer data is digital, that is, a series of zeros and ones, it did not have to arrive in a straight line from a single source, one number after another. Nor did it have to be issued from a central repository as with a traditional book library. As long as the overriding software assembling the data kept track of what was still required, the missing cavalcade of numbers could come from any direction or, more dramatically, back and forth from every direction at once.
This was the key to BitTorrent. All of the users seeking the same piece of content online could use BitTorrent to send and receive the appropriate missing strands of data simultaneously. As a result, data could be aggregated from hundreds if not thousands of users. BitTorrent was scalable and it turned traditional Internet physics on its head. With BitTorrent, the more individual users downloading a piece of content, the faster the file could be transferred. Instead of clogging up the system, increased demand made it more efficient. The mechanics of achieving this were complicated, however, and Cohen's own unique insights into programming languages and the architecture of the entire Internet were critical. As Cohen explained:
The really hard part was creating reliability. BitTorrent utilizes resources from peers, and peers don't even know what their potential throughput is. Peers also tend to "go away" and never come back. Sometimes they garble data and are just extremely poor quality resources. So the problem that had to be solved was, "How do you take this extremely poor quality resource and kind of bang it into something good?"
To encourage other programmers to use and refine the BitTorrent code, Cohen had created BitTorrent in the spirit of the "open source" movement and granted a free license to anyone who wanted to improve the program or even distribute it. The only payments Cohen initially received were optional donations from its users9 and proceeds from the $20 blue-and-black T-shirts he sold from his house in Bellevue.
Making money from this inspired approach to file sharing was not necessarily assured. Cohen had seen first hand just how volatile the software industry could be while working at dot-com start-ups from 1999-2002 and on file-sharing technology at Valve Software from 2003-2004. As Cohen pointed out: "It wasn't so much the fact that BitTorrent was open source that made it potentially difficult to monetize. The fact that it's software makes it difficult to monetize. When you're in high-tech, there's a period where you have an opportunity to build a tremendous business very fast, but a huge business can also disappear very quickly, so your chances of success are inherently quite volatile."
Ashwin Navin, who first met Cohen in mid-2004, was instrumental in helping realize the potential to fully monetize what Cohen expected would be the next generation protocol for moving data around the Web. "On a fundamental level, BitTorrent is a publication tool. It has been very useful for people such as programmers who had the ability to figure out how to use it." In early 2005, several major software companies, such as Sun Microsystems, were already using BitTorrent to transfer large software files among developers. Linux upgrades, such as Fedora, were also distributed via BitTorrent so that the millions of users attempting to simultaneously download the latest software updates did not overload the host computer server.10 "But," Navin went on to explain, "We wanted to extend its reach to include a range of publishers from the largest media companies to the most amateur creators of video and other content."
Despite its potential, BitTorrent had a serious shortcoming: A large percentage of BitTorrent's early adopters used the software to rapidly trade illegal versions of copyrighted movies and music. On December 15, 2004, the Motion Picture Association of America (MPAA) had brought lawsuits against some of BitTorrent's heaviest users who had contributed to the industry's estimated $860 million in losses in that year alone.11
Still, several film industry executives recognized how potentially valuable BitTorrent could be as a distribution medium and responded positively to Navin's overtures to meet to discuss plans for a legitimate online marketplace for fast digital downloads. In the summer of 2005, Navin retained well- regarded entertainment lawyer Fred Davis (son of legendary A&R executive and J. Records founder Clive Davis) to broker introductions with the studios and major record labels to try to secure licenses to sell albums and movies. Davis commented, "When I call up and say, 'Let's meet—they [BitTorrent] want to be legitimate,' we are welcomed at the front door of every company."12
Cohen's and Navin's hearts were certainly in the right place, but would the major studios and record labels continue to stand by while BitTorrent distributed its software "client" to millions of additional users throughout the world who often used it to download pirated movies and music for free? Given how aggressively the music and film industries had attacked companies that facilitated copyright infringement and, in the case of Napster its venture capital firm Hummer Winblad, Cohen and Navin knew that their fledgling company, BitTorrent Inc., and perhaps even its funders, could be entangled in litigation by conglomerates with cadres of attorneys and very deep pockets. As Cohen pointed out, "VCs were very afraid of being sued—they are in the business of taking tremendous financial risk, but they are not in the business of taking tremendous legal risks." The legal issues were a concern from the very beginning. Cohen explained, "It would be ridiculous to be working in a space that is notorious for having all kinds of legal problems all over the place and not worry about that."
Cohen reached out to family and friends to find people who knew about legal issues and were willing to chat for free over a drink or cup of coffee. Cohen pointed out that they "may or may not have been lawyers." As Navin recalled, this was a matter of necessity, rather than a cavalier approach. "We historically never invested in a lot of legal advice, because we didn't have the luxury of paying for high-priced lawyers in the very early days," he said. "Instead we read the market, we looked at judicial precedent, and we made judgment calls about what kinds of products would be acceptable from a legal standpoint."
Digital Distribution of Music13
The march of technology had been a mixed blessing for the music industry. The advent of cable television, videocassette recorders, compact discs and, later, music DVDs had generated alternative revenue streams for major record labels, distributors, musicians, songwriters, and publishing companies.14 However, piracy had simultaneously eroded the profit potential of these same media.
Roughly 940 million music CDs were sold in 2000.15 By 2005, the increasing popularity and ubiquity of CD-ROM drives, coupled with the growing storage space capacity of each successive generation of hard drives, had eroded the music industry's established business model. Only 598.9 million music CDs were sold in 2005;15 by some estimates, music industry revenue would drop from $14 billion in 2001 to $11 billion in 2010.17 Music retailers were also suffering. The venerable Tower Records filed for bankruptcy in early 2004,18 and Tower, Musicland, Sam Goody, Music Warehouse, and Blockbuster Music had closed hundreds of record stores in the United States.19
Digital Piracy
The compact disc was first introduced by Dutch technology firm Philips in 1979 and was first sold in the United States in 1983.20 The discs initially had no copy protection to lock down the digital music files encoded on each disc. Such protection may have seemed unnecessary because the uncompressed "pure" AIFF (Audio Interchange File Format) 44.1 kHz files were enormous—some as big as 40-50 megabytes. The largest consumer hard drives available at the time were still well under 100 megabytes, far less capacity than most USB or "keychain" drives available in 2005. Over time, however, hard drive capacities increased by several orders of magnitude—120 gigabytes was considered standard by 2005. This level of storage capacity enabled anyone using software freely available on the Web to extract the digital files from any music CD relatively quickly before passing the album on to a friend or selling it at one of the used record stores that had begun popping up in the early nineties.
Ironically, the record industry had initially viewed digital audio tape (DAT) as the main threat to the highly-lucrative CD format. Smaller than a normal cassette but entirely shielded in protective plastic, DAT machines could copy a CD without any loss of fidelity. Digital audio cassettes could also play up to two hours of music compared with the maximum of 80-minutes of music available on compact discs. The Recording Industry Association of America (RIAA), the major record labels' trade organization, had tried unsuccessfully in 1989 to prevent the sale of DAT players in the United States, but it later reached an accommodation with Sony and other DAT hardware manufacturers. The RIAA agreed to support the 1992 Audio Home Recording Act, which required all DAT decks to record on cassettes that could not then be duplicated en masse.21 The Act also mandated that DAT manufacturers pay a royalty on each blank digital audio tape sold to help compensate music publishers for the piracy that DAT recorders would no doubt engender.22 As it turned out, the technology never caught on with consumers. "Portable" DAT recorders were bulky and cumbersome, and shelf units were priced outside the range of most consumers.
What proved a far greater threat to the record industry was the inherently lower-fidelity MP3 compression technology. (MP3 stood for Motion Picture Experts Group, Audio Layer 3.) The MP3 algorithm made it possible to dramatically shrink the data files required to store encoded audio files. When encoded at the ideal bit rate of 128 to 320 kilobytes, the conversion process could compress the massive digital audio files stored on compact discs to a fraction of their original size while still retaining a close approximation of "CD quality" sound. Such compression levels were achieved by eliminating the digital audio frequencies outside human hearing range and any overlapping sound waves.23 MP3 files could be created in just minutes through a process called "ripping." Once computer owners converted the contents of a CD into the MP3 format, the new file then resided on a computer's hard drive and could be played, duplicated and, most importantly, e-mailed as an attachment to anyone online. MP3s quietly gained steam and eventually became the format that defined an era. Americans rediscovered their love of music and marveled how they could have any song at their fingertips in minutes. Meanwhile newer record industry offerings, such as 5.1 DVD- Audio and Sony's surround sound "Super Audio CD" (SACD), said to mirror the sonic quality of studio master tapes, languished on the shelves of high-end electronics boutiques.
When the MP3 format was first developed, file-sharing over the Internet was hamstrung by the slow speeds of dial-up Internet connections, poor consumer interfaces, the limited availability of popular songs,24 and the absence of portable MP3 players. Over time, however, a range of new technologies coalesced to accelerate the mass appeal and adoption of the MP3 format. These included faster Internet connections; free, consumer-friendly MP3 software, such as WinAmp and iTunes (first introduced in January 2001);25 CD burners that could just as easily "author" or duplicate standard CDs for use in boomboxes and car stereos; computer software that could transfer downloaded MP3 files to CD-standard AIFF discs; and finally an explosion of portable MP3 devices that mirrored the functionality of Sony's Walkman but did not skip or flutter in the way that portable CD and traditional cassette players often did.
The Music Industry Strikes Back
In response to what it viewed as digital theft on an unprecedented scale, the music industry pursued two strategies. One was to develop a backward-compatible standard for encrypting audio files on future CD releases. The other was to sue the Internet companies that posed the largest financial threats to the major labels.
Digital security technology A consortium of more than 100 technology firms and media industry executives formed the Security Digital Music Initiative (SDMI) and sought to create a protocol for technologies and software that could reduce the incidence of copyright infringements in digital files. These guidelines called for (1) digital watermarks that would be embedded into digital music and have to be present to play that music in SDMI-compliant players, and (2) digital rights management (DRM) software that would provide online retailers with an electronic lock and key. This DRM software could also be used to limit the number of times a CD could be copied or the number of devices that could play copies of an MP3 file. Of course, none of these security measures was expected to be foolproof.26 The Security Digital Music Initiative aimed "to take away the incentive to search out illegally pirated music."27
By the end of 1999, the major record labels, consumers, and portable player manufacturers had failed to agree on a technological standard to prevent or at least limit digital piracy. Several leading record companies had made some initial efforts to incorporate encryption into their newest compact disc releases, but consumers complained vehemently and often returned the discs for refunds the minute they realized they could not be read by computer CD-ROM drives or "ripped" into portable devices. Still, three major record companies—EMI Recorded Music, Universal Music International and Sony BMG Music Entertainment—said they were experimenting with and investing in so-called copy-control technology.28
Litigation As the music industry sought consensus for a standard, it opened a second front in its attempt to limit its losses from piracy. It sued.
RIAA v. Diamond Multimedia In 1997, Diamond Multimedia introduced the "Rio," a stylish $200 Walkman-like device that could play up to two hours of MP3-encoded music. Because the Rio could play music with far less sonic degradation than a cassette recording of a CD, it was seen as the first direct threat of an MP3-related technology to the music industry.
The RIAA sued Diamond in October 1998 to halt the release of the Rio. The RIAA argued that the Rio would contribute to copyright infringement by making it possible for users to play illegally downloaded CDs. (See Exhibit 1 for a brief summary of copyright law.) The Rio did, however, also have legitimate, non-infringing uses such as the ability to play music by new artists who permitted users to download their music from the Internet. To the extent that users converted copyrighted music from store-bought CDs to MP3 files for their own personal use, Diamond asserted that this activity constituted fair use under Section 107 of the U.S. Copyright Act of 1976 (see Exhibit 2).29 The U.S. Court of Appeals for the Ninth Circuit denied the RIAA's request for an injunction barring Rio sales, holding that converting the digital content of a CD to other formats for personal use was protected by the doctrine of fair use.30
UMG Recordings v. MP3.com The major record labels' next priority was to stop the rapid proliferation of websites and services offering what they deemed illicit MP3 music files.31 Their first target was the most successful of such sites, MP3.com. MP3.com had a massive inventory of songs stored on its computer servers, which it had encoded from more than 80,000 CDs.32 Subscribers could access files from any computer, provided they could demonstrate they owned the album in question.
MP3.com did not ask for the record industry's blessing before launching its service, and the RIAA responded by suing MP3.com in federal court. The U.S. District Court for the Southern District of New York ruled in May 2000 that MP3.com had directly infringed the music companies' copyrights. MP3.com had relied heavily on the 1984 U.S. Supreme Court decision Sony Corp. of America v. Universal City Studios Inc.33 in which the Court exonerated Sony from liability related to copyright infringement by users of its Betamax videocassette recorder. In that case, the Supreme Court held that Sony was not liable for contributory copyright infringement because the Betamax and, by extension, JVC's lower-fidelity "VHS" standard, was capable of "substantial non-infringing uses," such as recording programs for later viewing or "time shifting."34 (Excerpts from the Sony case are set forth in Exhibit 3.) The court rejected MP3.com's innovative argument that its service was permissible "space-shifting" protected by the fair use section of the U.S. Copyright Act:
Specifically, in order to first access such a recording, a subscriber to MP3.com must either "prove" that he already owns the CD version of the recording by inserting his copy of the commercial CD into his computer CD-ROM drive for a few seconds ("the 'Beam-It' Service") or must purchase the CD from one of defendant's cooperating online retailers ("The Instant Listening Service"). Thereafter, however, the subscriber can access, via the Internet from a computer anywhere in the world, the copy of the plaintiffs' recording made by defendant. Thus, although defendant seeks to portray its service as the "functional equivalent" of storing its subscribers' CDs, in actuality it is "re-playing for the subscribers converted versions of the recordings it copied, without authorization, from plaintiffs' copyrighted CDs."35
On May 5, 2000, the day after the ruling was announced, MP3.corn's stock price plummeted from a 52-week high of $63.31 to $10.38 per share. MP3.com scrambled to settle with the five major record labels, eventually paying more than $100 million and agreeing to generous licensing terms in the labels' favor. In 2001, MP3.com was bought by media conglomerate Vivendi for $372 million.35 In January 2002, MP3.com filed a $175 million suit against the Palo Alto law firm of Cooley Godward, one of the largest legal malpractice cases ever filed in California, claiming that the firm was responsible for MP3.corn's flawed business model.37 While the RIAA infringement case was pending, MP3.com had invoked attorney-client privilege to shield Cooley God ward's advice on copyright infringement from discovery. As a result, MP3.com could not assert the defense that it had acted in reliance on counsel.38 Given the evidence that MP3.com's executives knew that the unauthorized copying of CDs was presumptively unlawful, this left the court with "virtually no escape from a finding that defendants willfully infringed plaintiffs' copyrights."39
Napster40
The day after the MP3.com ruling was announced, the music industry scored another victory. On the opposite coast, Judge Marilyn Patel of the U.S. District Court for the Northern District of California rejected a motion by the wildly-successful peer-to-peer service Napster to dismiss lawsuits alleging that Napster was liable for both contributory and vicarious copyright infringement. Shawn Fanning, a 17-year-old Northeastern University student hoping to major in computer science,41 had created a software "client" that combined the functionality of Microsoft Windows with the advanced searching/filtering capabilities of traditional search engines.42 Incorporated in May 1999,43 Napster became an immediate and addictive success. After downloading its software, Napster users could search Napster's master index of available songs by artist name or song title then acquire digital music files directly from other registered users with a few mouse-clicks. Although Napster did offer uncopyrighted material, most of the music available through the service was copyrighted by one of the major music companies.
People who never would have considered shoplifting a CD from a store appeared to have few qualms about downloading music files without paying for them. After all, the Internet was considered a new frontier, "The Wild West"; many rationalized that "everyone was doing it." Plus, unlike shoplifting, file-sharing was regarded as a civil copyright violation, remediable by fines or compensatory damages following a civil trial, rather than police action, judicial prosecution, and the possibility of a criminal record.
Discussions between the Recording Industry Association of America and Napster did not start on a high note and went downhill from there. The following exchange at a CNN chatroom between an RIAA representative and Napster interim CEO Eileen Richardson was typical:
RIAA: While there are many legitimate uses of MP3s, don't you feel that your service will be primarily used by music pirates?
Eileen Richardson: We are about enabling amateur and unknown artists to share their music on this new medium. Our job is not to stop pirating; that is your job.44
Some Napster insiders believed that Richardson's "feisty" style raised the level of rancor between the two groups unnecessarily; others believed that the RIAA was never interested in resolving the impasse through compromise.45
Negotiations between Napster and the RIAA soon broke down. On December 7, 1999, the RIAA filed a civil action in the U.S. District Court for the Northern District of California against Napster,46 seeking damages and other relief.47 A group of songwriters filed suit a few days later, alleging further copyright violations. For the next several months, still more claims were filed, notably by rap star Dr. Dre and hard rock icons Metallica on April 13, 2000,48 who both had vociferously taken fans to task for "stealing" their music. "It's about controlling what you own," Metallica drummer Lars Ulrich told talk show host Charlie Rose in June of 2000.49 "We clearly own songs, we own the master recording to those, and we want to be the ones to control the use of those on the Internet. It's not really about the money. Part of what we're trying to do here is make people understand what they are doing is illegal [and] I'm not even going [to] get into the moral issue." Still, the prevailing impression at the time among Napster users was that most musicians were "already millionaires" and that file-sharing did not materially impact their incomes or careers.
At this point in mid-2000, the music companies were not eager to sue individual users, who were, after all, potential record buyers. Napster was another matter. Its software enabled millions of users to search, access, and download dozens and dozens of copyrighted songs in a matter of minutes using computers at home, on campus, or even at work. According to the music industry, this ease of access contributed to the erosion of personal responsibility and in some cases a giddy sense of entitlement. "Information wants to be free!" became a popular rallying cry of those who defended the ability to access any piece of digital content—copyrighted or not—without paying.50 It also eroded the album concept, which had presented songs as part of a larger whole to maximize the emotional impact of each succeeding track. Increasingly, file-sharing enthusiasts wanted "only the hits," and balked at having to pay the cost of an entire CD (often $13 or more) to acquire the one or two "good" songs on each album. With Napster, music fans were able to acquire music a la carte and create their own "best-of" mixes.
Copyright Infringement Claims
The music industry alleged that Napster had vicariously infringed on musicians' copyrights and had contributed to the direct infringements by its 70 million users.51 This was not a "victimless crime"—many musicians, especially those who were no longer in the public eye, often relied on royalties from "back catalog" album sales to provide for their retirement.
In defense, Napster cited the Sony Betamax case and contended that its service was protected by the fair use provision of the Copyright Act. In Sony, the Supreme Court had borrowed the "staple article suitable for substantial non-infringing uses" provision from patent law and ruled that "the sale of copying equipment, like the sale of other articles of commerce, does not contribute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial non-infringing uses."
In late March 2000, Napster courted several venture capital firms to keep itself afloat during this difficult interval, including Hummer Winblad, which specialized in software start-ups.52 On May 5, 2000, Judge Patel rejected Napster's motion for summary dismissal of the music industry's suit. Less than three weeks later, Hummer Winblad announced that it would invest $13 million in Napster and place two of its five partners in leadership positions at the company: John Hummer was installed on Napster's board of directors, and Hank Barry replaced Eileen Richardson as CEO. Barry, an attorney by training who had once worked at the renowned Silicon Valley law firm of Wilson, Sonsini, Goodrich, and Rosati, had joined Hummer in October 1999. With his music industry ties, copyright expertise,53 and experience advising new companies, Barry seemed a logical choice to head Napster, Inc.
Barry's arrival led to immediate and dramatic changes at the company. Talks with the RIAA were re-opened, and David Boies, who had led the Justice Department team that had defeated Microsoft in its high-profile antitrust case against the software giant, was hired to lead Napster's legal team. Milton Olin, a former executive at A&M Records, was brought in as COO, and Keith Bernstein, a music executive from Universal Music Group's digital division, was added to the executive team. Napster appeared ready to make a deal with the music industry and morph into a legitimate digital music distribution service.
On October 31, 2000, Napster announced its settlement with Bertelsmann AG, one of the five major record labels party to the original RIAA suit. Bertelsmann agreed to withdraw from the lawsuit and to lend Napster $85 million in exchange for convertible debt. This seemed like an odd "settlement" to many in the music industry: funds would be flowing from Bertelsmann to Napster. But Thomas Middelhoff, then Bertelsmann's CEO, believed that Napster could someday evolve into a successful distribution channel. He planned to accelerate Napster's transition to legitimacy by making Bertelsmann's vast catalogue of copyrighted music available for paid download.54 At the time Middelhoff was still riding high after having parlayed an early, $50 million investment in America Online into an astonishing $7 billion return for Bertelsmann.55 Nevertheless, several top executives at Bertelsmann's storied music division vigorously opposed the Napster deal and subsequently resigned in protest.56 After a number of his big-ticket investments, including Napster, failed, Middlehoff was forced out of Bertelsmann in 2002.57 The other major record labels were reluctant to follow Bertelsmann's lead, despite the outreach of Napster and Bertelsmann and the appeal of connecting with Napster's user base of 70 million music fans. By some estimates, the music industry had collectively lost $17 billion since Napster came online.58 The other labels hoped to recoup a significant portion of that figure through legal action.
Judge Patel issued a preliminary injunction from the bench on July 26, 2000, ordering Napster to delete copyrighted songs from its master index.59 On February 12, 2001, the U.S. Court of Appeals for the Ninth Circuit affirmed, after finding Napster liable for both contributory and vicarious infringement. The Ninth Circuit ruled that "a preliminary injunction against Napster is not only warranted, but required."60 (See Exhibit 4 for excerpts from the Ninth Circuit's unanimous opinion.) The Ninth Circuit did, however, stop short of ordering that Napster be shut down. Instead, it instructed the trial court judge to narrow the scope of the preliminary injunction to make it clear that Napster had no obligation to remove titles from its music directory until the owner of the copyrights provided a list of the infringing songs. Those lists would be provided soon enough, however. After Napster failed to install a filtering system adequate to prevent the ongoing transfer of infringing files, the District Court ordered Napster to disable its file transferring service in March of 2001. That order was upheld by the Ninth Circuit in March of 2002.61 Less than three months later, Napster filed for bankruptcy.62 On September 3, 2002, the bankruptcy court blocked a proposed fire sale of Napster to Bertelsmann and ordered Napster to liquidate its assets.63
As of 2005, both Hummer Winblad and Bertelsmann were still embroiled in copyright litigation arising out of their investments in Napster.64 The record companies, songwriters, and musicians had sued Bertelsmann, Hummer Winblad, and Hummer Winblad's senior partners John Hummer and Hank Barry to recover the millions of dollars attributable to the tidal wave of illicit file-sharing Napster had enabled.65 They alleged that Bertelsmann and Hummer "exercised essentially full operational control over Napster during periods in which Napster remained a conduit for infringing activity,"65 making them liable for copyright infringement along with Napster itself.67 After initially ruling that these allegations would, if proven, give rise to liability for contributory and vicarious liability under the Copyright Act, Judge Marilyn Patel of the U.S. District Court for the Northern District of California denied both companies' motion for summary judgment on June 1, 2005.68 Although Winblad's counterclaim alleging that the record labels were engaged in unfair trade practices and monopolistic conduct had survived a motion to dismiss, it was unlikely to insulate Hummer or Bertelsmann from the massive exposure they faced if the copyright case went to trial.
Cohen was not surprised by the decision in the Napster case: "The truth of the matter is, if you're perceived as a bad actor by the powers that be, you're going to find yourself in a heap of legal trouble, and if you're not, you won't," he said. "The Napster decision was kind of a 'Well, duh!' since basically these people were saying: 'Nyah-nyah! We're a bunch of crooks! We're sticking it to The Man! And because of legal loophole XYZ, they can't hit us!' And obviously that was not going to work. That never works. It's ridiculous."
Grokster
While the Ninth Circuit's ruling in the Napster case effectively ended the downloading party for a generation who had developed a taste for illicit file-sharing, many simply migrated to lower-profile offerings, such as Morpheus, Limewire, KaZaA, and Grokster. Indeed, nearly 20 million people signed on to Morpheus in its first four months and used it to trade music and other data files.69 Newer peer-to-peer software applications, such as KaZaA and Grokster, eschewed Napster's central server architecture and enabled true peer-to-peer file sharing without a third computer acting as a bridge or hub. Grokster allowed its users to search the hard drives of other users directly to find music files without routing through a central file index. As a result, even if firms like Grokster "closed their doors and deactivated all computers within their control, users of their products could continue sharing files with little or no interruption."70
Grokster took its name from the science-fiction term "grok," which meant "to understand intuitively" or "to communicate sympathetically," and the then-ubiquitous suffix, "-ster," which had become synonymous with illicit file sharing. Unlike Napster, which did not have an opportunity to monetize its subscriber base before being forced into bankruptcy, Grokster sold online advertising from the outset. Grokster showed ads to its captive audience of users while they waited for requested songs to download. The advertising generated a clear revenue stream that theoretically could be scaled up with the number of users.
Emboldened by the victory in the Napster case, the RIAA and the record labels it represented aggressively pursued other purveyors of file sharing software. On October 2, 2001, a consortium of major film studios, record labels, and a certified class of 27,000 music publishers and songwriters71 filed suit in federal court against a Dutch company called FastTrack and three top file-sharing services—MusicCity, KaZaA, and Grokster—that used its file-swapping technology.72 The complaint alleged that these companies were in business to "encourage, enable, and profit" from the copyright- infringing activities of people who used their products.73
At trial, Grokster's attorneys used the Sony case as the foundation of their client's defense. They argued that Grokster—like the Sony Betamax—had substantial non-infringing uses. Moreover, because Grokster did not maintain a central server and did not track which files were being swapped, they argued that Grokster was not responsible for the misuse of its software.74 The recording industry countered, however, that there were now legal ways to pay for downloaded music. The copyright holders also pointed out that Grokster's advertiser-supported business model depended on the scalability of millions of users who were undoubtedly drawn to its ability to illicitly download copyrighted content.75
Perhaps in an effort to show the public that it meant business, the RIAA initiated the first wave of hundreds of lawsuits against individual file swappers using peer-to-peer networks on September 8, 2003.75 The number of lawsuits filed against private individuals soon reached tens of thousands.77 The record companies offered to settle with the most egregious offenders upon payment of $3,500, a deal that many startled downloaders accepted.
In 2005, the U.S. Court of Appeals for the Seventh Circuit upheld a $22,500 penalty of statutory damages against Cecilia Gonzalez, one of the defendants who had refused to settle.78 Gonzalez had reportedly downloaded more than 1,370 copyrighted songs via the KaZaA network and kept them on her computer. She claimed she was just sampling music to see what she wanted to buy later. Although she did own CDs containing some of the songs, she conceded that she had never owned legitimate copies of at least 30 of the songs in question.79 Rejecting Gonzalez's fair-use defense, the U.S. District Court in Chicago imposed a fee of $750 for each of the 30 songs she had downloaded illegally. The appeals court affirmed.80 In a stem opinion, Judge Frank Easterbrook likened Gonzalez's actions to shoplifting, saying her defense was "no more relevant than a thief's contention that he had shoplifted 'only 30' compact discs, planning to listen to them at home and pay later for any he liked."81
While the record companies were busy suing their former customers, the U.S. District Court for the Central District of California surprised many when it ruled in 2003 that Grokster was not liable for contributory or vicarious copyright infringement.82 The U.S. Court of Appeals for the Ninth Circuit affirmed on August 19,2004.83
Although there was no question that Grokster's users had indeed infringed the music companies' copyrights, the Ninth Circuit concluded that Grokster lacked the requisite knowledge for a finding of contributory infringement. The court reasoned that if a product is not capable of substantial or commercially significant non-infringing uses, then the copyright owner need only show that the defendant had "constructive knowledge" that others were using its product to directly infringe the copyright holders' rights. On the other hand, if a product is capable of substantial or commercially significant non-infringing uses, then, according to the Ninth Circuit, the copyright owner must demonstrate that the defendant had "reasonable knowledge" of the specific infringing files and failed to act on that knowledge to prevent the infringement. Because Grokster had no central index and did not track the files being transferred by its users, the Ninth Circuit concluded that it did not have this requisite knowledge. The Ninth Circuit also reasoned that Grokster, unlike Napster, did not provide the "site and facilities" for infringement and had not otherwise materially contributed to the direct infringement. There were no infringing messages or file indices on Grokster's computers, and Grokster did not have the ability to suspend user accounts the way Napster did.
The Ninth Circuit also concluded that the record companies had failed to show the three elements necessary for vicarious infringement. All parties agreed that the elements of direct infringement and direct financial benefit, via advertising revenue, were present, but the Ninth Circuit found that Grokster did not have the right and ability to supervise its users. Unlike Napster, Grokster did not operate and design an "integrated service" that it monitored and controlled. Even though Grokster reserved the right to terminate access, its lack of a registration and login process meant it had no ability to actually terminate access to file-sharing functions. The Ninth Circuit rejected the record companies' claim that Grokster should not be able to escape vicarious liability by turning a "blind eye" to the infringement of its users, holding that there was no separate "blind eye" theory of vicarious liability that existed independently of the traditional elements of liability.
The Ninth Circuit explained the public policy considerations that informed its decision: "The introduction of new technology is always destructive to old markets, and particularly to those copyright owners whose works are sold through well-established distribution mechanisms. Yet, history has shown that time and market forces often provide equilibrium in balancing interests, whether the new technology be a player piano ... a tape recorder ... a personal computer ... or an MP3 player."
In a unanimous decision announced on June 27, 2005, the U.S. Supreme Court reversed the Ninth Circuit, and held that "one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties."84 A statistician hired by the copyright holders had concluded that nearly 90% of the files available for download on Grokster were copyrighted works. Given that more than 100 million copies of Grokster's software had been downloaded and that billions of copyrighted files were being shared by Grokster's users each month, the Court characterized the probable scope of copyright infringement as "staggering."
The Supreme Court found the record "replete" with evidence that, from the moment it began to distribute its free software, Grokster clearly voiced the objective that recipients use it to download copyrighted works. Indeed, Grokster took active steps to encourage infringement. When Grokster launched its system, it had inserted digital codes into its web site so anyone doing keyword searches for "Napster" or "free file sharing" would be directed to the Grokster site, where they could download its software. Grokster also sent its users a newsletter promoting its ability to provide particular, popular copyrighted materials. Although Grokster appeared to have sent its users e-mails warning them about infringing content after it received a threatening notice from the copyright holders, it never blocked anyone from continuing to use its software to share copyrighted files. Even Grokster's name, the Court found, was "an apparent derivative of Napster." Ultimately, the Court concluded that Grokster's efforts were designed to attract former Napster users who had lost the mechanism for copying and distributing what were overwhelmingly infringing files, indicating "a principal, if not exclusive, intent... to bring about infringement."
The Supreme Court faulted the Ninth Circuit for limiting secondary liability for products with substantial non-infringing uses to those distributors with specific knowledge of the infringement at the time at which they contributed to the infringement. It explained that Sony did not displace other theories of secondary liability, including liability for inducing infringement by others. To resolve the case, the Supreme Court looked not to Sony but to earlier patent cases in which persons who actively and knowingly induced direct infringement by others were found secondarily liable for patent infringement.
The Court recognized the tension between "the respective values of supporting creative pursuits through copyright protection and promoting innovation and new communication technologies by limiting the incidence of liability for copyright infringement."85 It also acknowledged that "the more artistic protection is favored, the more technological innovation may be discouraged," but characterized the administration of copyright law as an "exercise in managing that trade-off." To prevent its ruling from unduly interfering with ordinary commerce or discouraging new technologies with lawful and unlawful potential, the Court indicated that "mere knowledge of infringing potential or of actual infringing uses would not be enough ... to subject the distributor to liability. Nor would ordinary acts incident to product distribution, such as offering customers technical support or product updates, support liability in themselves." The Court went on to explain, "The inducement rule, instead, premises liability on purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate commerce or discourage innovation having a lawful promise."86
Grokster's management admitted defeat, settled the outstanding infringement lawsuit for $50 million, and shut down its service. "It's pretty clear who won," commented Wayne Rosso, head of Grokster, Ltd. "We always knew that this free trading of all this copyright material couldn't go on."87
Google: Book Search and Image Search
Although the Grokster case provided a decisive victory for the entertainment industry and for musicians who "could not compete with free," the scope of copyrights in cyberspace continued to make headlines. In December of 2004, Google had announced its plan to digitize the entire holdings of five of the western world's major libraries (Harvard, Stanford, University of Michigan, Oxford, and the New York Public Library) to help fuel Google Book Search, a searchable electronic card catalog (http://books.google.com).88 Although Google touted the plan's benefit to the public,89 there were many who believed the project constituted copyright infringement on a massive scale. Google's attempt to avoid a lawsuit, by agreeing to exclude any copyrighted work from Google Book Search upon receipt of an "opt-out" notice from the appropriate copyright holder, failed when a number of publishers rejected this plan.90 Google had hoped it would be able to create an iTunes for books, but that paradigm was risky for the book industry: Although iTunes was initially viewed as a boon to the music industry, the record labels soon chafed at iTunes's static pricing model and control over music promotions and file access.
In the summer of 2005, the Authors Guild as well as publishers McGraw-Hill, Pearson, Penguin, Simon & Schuster, and John Wiley & Sons threatened to sue Google to enjoin it from going forward with the project.91 In its defense, Google claimed that the fair use exception allowed it to create and use its digital card catalog, citing the Ninth Circuit's decision in Kelly v. Arriba Soft.92 In that case, the Ninth Circuit held that an Internet search engine had engaged in fair use when it displayed "thumbnails," small, low-resolution images of copyrighted photographs. Once the thumbnails were created, the program deleted the full-sized originals from the server. Although users could enlarge the thumbnails, the files lost their clarity when enlarged. The Ninth Circuit concluded that the search engine's use of the underlying images was transformative93 and protected fair use—it converted "artistic works intended to inform and to engage the viewer in an esthetic experience" into improved access to information on the Internet.
Google launched its own image search function in 2004. In response to queries for various keywords, Google's browser would display the results in a grid of thumbnail images. Retrieved images included nude photographs of "natural" models copyrighted by the men's magazine "Perfect 10." Perfect 10 generated revenue by (1) selling magazines on newsstands and via subscription, (2) selling subscriptions to its Web-based material, and (3) licensing the distribution of reduced-size but still copyrighted images for download and display on cell phones.
By clicking on the thumbnail image on Google, users opened a window on the bottom of Google's browser screen that displayed a full-size image of the underlying web page where the Perfect 10 image was stored. This was framed within a Google-generated web page in a process called "framing" or "in-line linking."94 The image shown within Google's own frame was delivered through an automated link to the original web page on which the original image was found. After sending a series of infringement notices to Google, Perfect 10 filed suit on November 19, 2004.95 The action alleged that Google's display of thumbnail images and the search engine's "framing" of underlying web pages constituted direct, contributory, and vicarious infringement of more than 3,000 of its photographs. Perfect 10 also sought to enjoin A9.com, a Google-based search engine owned by Amazon.com that returned search results generated by Google in response to user queries. Perfect 10 sold its own "thumbnail" versions of its model photos to consumers to use as "wallpaper" on cellphone screens. When these same images showed up on Google's images page, users who might have been paying cellphone wallpaper customers could simply right-click and save the appropriately-sized photographs to their computers for free. Google argued it had the same right to show Perfect 10's images in search results that media outlets have when it comes to displaying copyrighted images in news stories.96
In the spring of 2005, Google, Inc. launched Google Video, a service that enabled users to post streaming video and, if they so chose, to offer it for sale. Google Video also let users search for the content of television programs, the next step in the company's efforts to make a broad range of information available from a growing number of sources, ranging from text and still shots to television programs.97
BitTorrent Seeks Venture Capital
David Chao, co-founder and managing general partner of DCM (Doll Capital Management), a Menlo Park, California-based venture capital firm, had seen the business plans of several companies that were making headlines in 2005 and beginning to create new Internet opportunities. Companies, such as MySpace, Friendster, and Facebook, had business models based on aggregating millions and millions of teenagers, a highly sought-after demographic that advertisers were having a hard time reaching through traditional channels. DCM had all ready invested in Mop.com, the equivalent of Myspace in the Chinese market, and Chao watched with keen interest when MySpace was snapped up by Rupert Murdoch's News Corp. in 2005 for $580 million.98
A veteran of the first Internet bubble, Chao wanted to avoid a "me-too" approach to investing and was looking instead for a game-changing opportunity that no one else had spotted. A Stanford MBA (Class of 1993) and former McKinsey consultant in the firm's San Francisco technology practice, Chao hoped to get DCM in on the ground floor of a business that could potentially define a new market, rather than simply back a second or third iteration of an existing technology. He thought that he had found his opportunity in BitTorrent:
When I was at McKinsey, I did a video-on-demand study for a major Regional Bell Operating Company and discovered that one of the biggest deterrents to delivering video over the Internet is the network costs, that is, the expense associated with having to host and repeatedly send huge amounts of data to thousands of individual users. So, in the spring of 2004, when I saw BitTorrent and its ability to move such big files across the Internet so quickly, it just blew my mind. I looked at what they were doing and I said to myself "Oh my gosh, this is huge!" The communities they had were growing like wildfire and Bram was already doing fine, making about a hundred thousand dollars a year on user donations and T-shirts he was selling out of his house. Around the end of 2004,1 blasted out an e-mail to everybody at DCM and said: "This is the next big thing! We've got to go hunt these guys down!"
Chao viewed BitTorrent as having an important competitive advantage. "There are 40 million people using the software so they naturally get a lot of traffic to begin with but when these users want to upgrade they'll have to come to the BitTorrent site, which they can leverage. The brand is very strong. If you go outside the U.S., yes, there are other BitTorrent clients available but when we go into business development meetings with some of the major portals abroad, they don't want to work with the small BitTorrents; they want to work with the original guys. So being the 'real deal' actually has a lot of goodwill and value in it."
In March 2005, Cohen and Navin had begun setting up pitch meetings with venture firms on Sand Hill Road in Menlo Park, California. After talking to a few firms, one of DCM's principals who had worked with Navin at Goldman Sachs was able to broker an introduction. Chao recalled, "Bram and Ashwin were already talking to other VCs but Bram told us when they came in that many of the other VCs didn't get what they were trying to do." Navin echoed that sentiment: "All the other VCs we talked to wanted to see us, and they were excited about seeing us, but they really hadn't experienced the software so they had no clue what we were about. I don't know if that's a generational thing, but that's kind of where it started." The other VCs also asked questions that suggested they thought that BitTorrent was like Napster and Grokster, that it was a vertical application. DCM's principals were the first venture capitalists who had actually used the software. They recognized that BitTorrent was a foundational technology that could replace "http://" for moving large files across the Internet.
Chao, for his part, was also impressed with what he saw in the two young entrepreneurs. "Bram was clearly the genius behind the operation, and Ashwin was the business mind," he explained. Cohen dressed like an absent-minded college student who had fallen back asleep and was subsequently late to class. "If you meet Bram, well, then you can see that he's a relatively free spirit. He'll go to speak at a conference without his shoes on while Ashwin looks, well, let's just say they both looked very unconventional. Together they filled the same, time-honored paradigm of several previous entrepreneurial teams, Bill Gates and Nathan Myrvold, Larry Ellison and Robert Miner, and Steve Jobs and Steve Wozniak, with Ashwin acting as master-salesman Jobs and Bram being the genius idea-man Wozniak."
Although not himself an attorney, Chao had taken a course on business law at Stanford and was well-versed in the legal challenges inherent in introducing any software platform that would enable computer users to share copyrighted digital content over the Internet. "The first thing we talked about was the legal strategy," Chao recalled. Chao was encouraged to learn that when Cohen spoke publicly he always made a point to ask people: "Please do not use BitTorrent for illegal activity, that's not my intent. My intent is to create a platform that makes moving large files faster and less stressful on the networks." The second thing they talked about was, "How do you go after the content guys— the studios and the RIAA?" They agreed that it was very important to make it clear to the content providers they had always wanted to be legitimate. As Navin explained, "It's not as if we changed our stripes and suddenly started courting the entertainment industry. We were legitimate from the get-go." BitTorrent was also careful not to do anything that would make it difficult for content providers to enforce their copyrights. Navin elaborated: "So we, in fact, had a framework in mind to make our tools even more copyright-friendly going forward. We let them know that our future direction was consistent with our past in providing great technology that democratizes the publication and distribution of content." Indeed, unlike more nefarious P2P applications, BitTorrent never hid its users' IP addresses.
Still, the legal issues surrounding BitTorrent were no small affair. Chao knew Hummer Winblad principals John Hummer and Hank Barry and had seen what had happened to that firm as a result of its ill-timed investment in Napster. Chao was keen to avoid a similar outcome.
Exhibit 1 Summary of Copyright Law
The U.S. Copyright Act of 1976 gave copyright holders the exclusive right to control the reproduction, modification, distribution, public performance, derivative use, and public display of their works. Meritorious infringement claims could be brought based on three separate theories:
Direct copyright infringement occurred when a person directly violated any of the copyright holder's exclusive rights. For example, bootleg cassette and CD manufacturers that sold "pirated" cassettes and compact discs containing copyrighted music without obtaining permission for such a sale directly infringed the copyright holder's right to reproduce his or her work.
Contributory copyright infringement occurred when a person knowingly contributed to the directly infringing conduct. For example, an electronic bulletin board service was found liable for contributory infringement when it encouraged subscribers to upload images from Playboy magazine so other bulletin board subscribers could download them for free.99
Vicarious copyright infringement occurred when a person had the right and ability to control the direct infringer's actions and reaped financial benefits from those actions. For example, courts had held that swap-meet organizers met the threshold of vicariously infringement if they knowingly created and administered a market in which bootleg music was bought and sold and had accepted a flat fee for admission.100 The swap meet owner was liable even though it did not receive any of the proceeds from the illegal sales.

Exhibit 2 Section 107: Fair Use
Limitations on Exclusive Rights: Fair Use
The fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include —
(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market for or value of the copyrighted work. The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.
Exhibit 3 Excerpts from Majority Opinion of United States Supreme Court in Sony Corporation v. Universal City Studios, Inc. (January 17,1984)
I
The two respondents in this action, Universal City Studios, Inc. and Walt Disney Productions, produce and hold the copyrights on a substantial number of motion pictures and other audiovisual works.
II
Article I, Section 8, of the Constitution provides:
"The Congress shall have Power ... To Promote the Progress of Science and useful Arts, by
securing for limited Times to Authors and Inventors the exclusive Right to their respective
Writings and Discoveries."
The monopoly privileges that Congress may authorize are neither unlimited nor primarily designed to provide a special private benefit. Rather, the limited grant is a means by which an important public purpose may be achieved. It is intended to motivate the creative activity of authors and inventors by the provision of a special reward, and to allow the public access to the products of their genius after the limited period of exclusive control has expired.
From its beginning, the law of copyright has developed in response to significant changes in technology. Indeed, it was the invention of a new form of copying equipment—the printing press— that gave rise to the original need for copyright protection.
The judiciary's reluctance to expand the protections afforded by the copyright without explicit legislative guidance is a recurring theme. Sound policy, as well as history, supports our consistent deference to Congress when major technological innovations alter the market for copyrighted materials. Congress has the constitutional authority and the institutional ability to accommodate fully the varied permutations of competing interests that are inevitably implicated by such new technology.
The two respondents in this case do not seek relief against the Betamax users who have allegedly infringed their copyrights. Moreover, this is not a class action on behalf of all copyright owners who license their works for television broadcast, and respondents have no right to invoke whatever rights other copyright holders may have to bring infringement actions based on Betamax copying of their works. As was made clear by their own evidence, the copying of the respondents' programs represents a small portion of the total use of VTR's. It is, however, the taping of respondents' own copyrighted programs that provides them with standing to charge Sony with contributory infringement. To prevail, they have the burden of proving that users of the Betamax have infringed their copyrights and that Sony should be held responsible for that infringement.
Ill
The Copyright Act does not expressly render anyone liable for infringement committed by another. The absence of such express language in the copyright statute does not preclude the imposition of liability for copyright infringements on certain parties who have not themselves engaged in the infringing activity. For vicarious liability is imposed in virtually all areas of the law, and the concept of contributory infringement is merely a species of the broader problem of identifying the circumstances in which it is just to hold one individual accountable for the actions of another.
If vicarious liability is to be imposed on Sony in this case, it must rest on the fact that it has sold equipment with constructive knowledge of the fact that its customers may use that equipment to make unauthorized copies of copyrighted material. There is no precedent in the law of copyright for the imposition of vicarious liability on such a theory. The closest analogy is provided by the patent law cases to which it is appropriate to refer because of the historic kinship between patent law and copyright law.
In the Patent Act both the concept of infringement and the concept of contributory infringement are expressly defined by statute. The Act expressly provides that the sale of a "staple article or commodity of commerce suitable for substantial non-infringing use" is not contributory infringement.
Unless a commodity "has no use except through practice of the patented method," the patentee has no right to claim that its distribution constitutes contributory infringement.
We recognize there are substantial differences between the patent and copyright laws. But in both areas the contributory infringement doctrine is grounded on the recognition that adequate protection of a monopoly may require the courts to look beyond actual duplication of a device or publication to the products or activities that make such duplication possible. The staple article of commerce doctrine must strike a balance between a copyright holder's legitimate demand for effective—not merely symbolic—protection of the statutory monopoly, and the rights of others freely to engage in substantially unrelated areas of commerce. Accordingly, the sale of copying equipment, like the sale of other articles of commerce, does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial non- infringing uses.
IV
The question is thus whether the Betamax is capable of commercially significant non-infringing uses. . . . [In] order to resolve this case we need not give precise content to the question of how much use is commercially significant. For one potential use of the Betamax plainly satisfies this standard, however it is understood: private, noncommercial time-shifting in the home. It does so both (A) because respondents have no right to prevent other copyright holders from authorizing it for their programs, and (B) because the District Court's factual findings reveal that even the unauthorized home time-shifting of respondents' programs is legitimate fair use.
A. Authorized Time-Shifting
Each of the respondents owns a large inventory of valuable copyrights, but in the total spectrum of television programming their combined market share is small. The exact percentage is not specified, but it is well below 10%. If they were to prevail, the outcome of this litigation would have a significant impact on both the producers and the viewers of the remaining 90% of the programming in the Nation. No doubt, many other producers share respondents' concern about the possible consequences of unrestricted copying. Nevertheless the findings of the District Court make it clear that time-shifting may enlarge the total viewing audience and that many producers are willing to allow private time-shifting to continue, at least for an experimental time period.
Of course, the fact that other copyright holders may welcome the practice of time-shifting does not mean that respondents should be deemed to have granted a license to copy their programs. Third- party conduct would be wholly irrelevant in an action for direct infringement of respondents' copyrights. But in an action for contributory infringement against the seller of copying equipment, the copyright holder may not prevail unless the relief that he seeks affects only his programs, or unless he speaks for virtually all copyright holders with an interest in the outcome. In this case, the record makes it perfectly clear that there are many important producers of national and local television programs who find nothing objectionable about the enlargement in the size of the television audience that results from the practice of time-shifting for private home use. The seller of the equipment that expands those producers' audiences cannot be a contributory infringer if, as is true in this case, it has had no direct involvement with any infringing activity.
B. Unauthorized Time-Shifting
[Respondents failed to demonstrate that time-shifting would cause any likelihood of non- minimal harm to the potential market for, or the value of, their copyrighted works. The Betamax is, therefore, capable of substantial non-infringing uses. Sony's sale of such equipment to the general public does not constitute contributory infringement of respondents' copyrights.
V
One may search the Copyright Act in vain for any sign that the elected representatives of the millions of people who watch television every day have made it unlawful to copy a program for later viewing at home, or have enacted a flat prohibition against the sale of machines that make such copying possible.
It may well be that Congress will take a fresh look at this new technology, just as it so often has examined other innovations in the past. But it is not our job to apply laws that have not yet been written. Applying the copyright statute, as it now reads, to the facts as they have been developed in this case, the judgment of the Court of Appeals must be reversed.
It is so ordered.
Exhibit 4 Excerpts from the Unanimous Opinion of the U.S. Court of Appeals for the Ninth Circuit
in A&M Records v. Napster, Inc. (February 12, 2001).
Ill
Plaintiffs claim Napster users are engaged in the wholesale reproduction and distribution of copyrighted works, all constituting direct infringement. Secondary liability for copyright infringement does not exist in the absence of direct infringement by a third party.
A. Infringement
We agree that plaintiffs have shown that Napster users infringe at least two of the copyright holders' exclusive rights: the rights of reproduction and distribution. Napster users who upload file names to the search index for others to copy violate plaintiffs' distribution rights. Napster users who download files containing copyrighted music violate plaintiffs' reproduction rights.
B. Fair Use
Napster contends that its users do not directly infringe plaintiffs' copyrights because the users are engaged in fair use of the material.
1. Purpose and Character of the Use
This factor focuses on whether the new work merely replaces the object of the original creation or instead adds a further purpose or different character. The district court first concluded that downloading MP3 files does not transform the copyrighted work. This conclusion is supportable. This "purpose and character" element also requires the district court to determine whether the allegedly infringing use is commercial or noncommercial. A commercial use weighs against a finding of fair use but is not conclusive on the issue. Direct economic benefit is not required to demonstrate a commercial use.
2. The Nature of the Use
The district court determined that plaintiffs' "copyrighted musical compositions and sound recordings are creative in nature ... which cuts against a finding of fair use under the second factor."
3. The Portion Used
"While 'wholesale copying does not preclude fair use per se,' copying an entire work 'militates against a finding of fair use.'" The district court determined that Napster users engage in "wholesale copying" of copyrighted work because file transfer necessarily "involves copying the entirety of the copyrighted work." We agree.
4. Effect of Use on Market
"Fair use, when properly applied, is limited to copying by others which does not materially impair the marketability of the work which is copied." Addressing this factor, the district court concluded that Napster harms the market in "at least" two ways: it reduces audio CD sales among college students and it "raises barriers to plaintiffs' entry into the market for the digital downloading of music." We, therefore, conclude that the district court made sound findings related to Napster's deleterious effect on the present and future digital download market. Moreover, lack of harm to an established market cannot deprive the copyright holder of the right to develop alternative markets for the works. We next address Napster's identified uses of sampling and space-shifting.
5. Identified Uses
Napster maintains that its identified uses of sampling and space-shifting were wrongly excluded as fair uses by the district court.
a. Sampling
Napster contends that its users download MP3 files to "sample" the music in order to decide whether to purchase the recording. The record supports the district court's preliminary determinations that: (1) the more music that sampling users download, the less likely they are to eventually purchase the recordings on audio CD; and (2) even if the audio CD market is not harmed, Napster has adverse effects on the developing digital download market.
b. Space-Shifting
Napster also maintains that space-shifting is a fair use. Space-shifting occurs when a Napster user downloads MP3 music files in order to listen to music he already owns on audio CD. Napster asserts that we have already held that space-shifting of musical compositions and sound recordings is a fair use. Napster refers to R1AA v. Diamond Multimedia Systems, Inc.,101 in which we held that Rio, a portable MP3 player, "merely makes copies in order to render portable, or 'space-shift,' those files that already reside on a user's hard drive. Such copying is a paradigmatic noncommercial personal use." See also generally Sony (holding that "time-shifting," where a video tape recorder owner records a television show for later viewing, is a fair use).
We conclude that the district court did not err when it refused to apply the "shifting" analyses of Sony and Diamond. Both Diamond and Sony are inapposite because the methods of shifting in these cases did not also simultaneously involve distribution of the copyrighted material to the general public; the time or space-shifting of copyrighted material exposed the material only to the original user. In Diamond, for example, the copyrighted music was transferred from the user's computer hard drive to the user's portable MP3 player. So too Sony, where "the majority of VCR purchasers did not distribute taped television broadcasts, but merely enjoyed them at home." Conversely, it is obvious that once a user lists a copy of music he already owns on the Napster system in order to access the music from another location, the song becomes "available to millions of other individuals," not just the original CD owner.
c. Other Uses
Permissive reproduction by either independent or established artists is the final fair use claim made by Napster. The district court noted that plaintiffs did not seek to enjoin this and any other non-infringing use of the Napster system, including: chat rooms, message boards and Napster's New Artist Program. We find no error in the district court's determination that plaintiffs will likely succeed in establishing that Napster users do not have a fair use defense. Accordingly, we next address whether Napster is secondarily liable for the direct infringement under two doctrines of copyright law: contributory copyright infringement and vicarious copyright infringement.
IV
Traditionally, "one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a 'contributory' infringer."
It is apparent from the record that Napster has knowledge, both actual and constructive, of direct infringement. Napster claims that it is nevertheless protected from contributory liability by the teaching of Sony Corp. v. Universal City Studios. We disagree.
The Court in Sony declined to impute the requisite level of knowledge where the defendants made and sold equipment capable of both infringing and "substantial non-infringing uses." Regardless of the number of Napster's infringing versus non-infringing uses, the evidentiary record here supported the district court's finding that plaintiffs would likely prevail in establishing that Napster knew or had reason to know of its users' infringement of plaintiffs' copyrights.
Under the facts as found by the district court, Napster materially contributes to the infringing activity. Relying on Fonovisa, the district court concluded that "without the support services defendant provides, Napster users could not find and download the music they want with the ease of which defendant boasts." We affirm the district court's conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the contributory copyright infringement claim.
V
We turn to the question whether Napster engages in vicarious copyright infringement. Vicarious copyright liability is an "outgrowth" of respondeat superior. In the context of copyright law, vicarious liability extends beyond an employer/employee relationship to cases in which a defendant "has the right and ability to supervise the infringing activity and also has a direct financial interest in such activities." We note that Sony's "staple article of commerce" analysis has no application to Napster's potential liability for vicarious copyright infringement.
A. Financial Benefit
Financial benefit exists where the availability of infringing material "acts as a 'draw' for customers." Ample evidence supports the district court's finding that Napster's future revenue is directly dependent upon "increases in user-base."
B. Supervision
The ability to block infringers' access to a particular environment for any reason whatsoever is evidence of the right and ability to supervise. Here, plaintiffs have demonstrated that Napster retains the right to control access to its system. Napster has an express reservation of rights policy, stating on its website that it expressly reserves the "right to refuse service and terminate accounts in [its] discretion, including, but not limited to, if Napster believes that user conduct violates applicable law or for any reason in Napster's sole discretion, with or without cause."
To escape imposition of vicarious liability, the reserved right to police must be exercised to its fullest extent. The district court correctly determined that Napster had the right and ability to police its system and failed to exercise that right to prevent the exchange of copyrighted material. . . . Napster . . . has the ability to locate infringing material listed on its search indices, and the right to terminate users' access to the system. The file name indices, therefore, are within the "premises" that Napster has the ability to police.
Our review of the record requires us to accept the district court's conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the vicarious copyright infringement claim. Napster's failure to police the system's "premises," combined with a showing that Napster financially benefits from the continuing availability of infringing files on its system, leads to the imposition of vicarious liability.