The legal rulings against Napster signaled its virtual demise, but the sharing of copyrighted material over the Internet adapted and continued. Other companies developed services that did not rely on centralized servers to facilitate the file-sharing. Grokster, StreamCast, and other companies distributed free software that allowed users to connect directly with one another. Since the software was free, the companies made money through sales of advertisements included with the software.
Companies in the music industry and the motion picture industry sued to stop these new file-sharing services. The plaintiffs alleged that copyright infringement accounted for 90 percent of the activity on these peer-to-peer networks. Evidence in Grokster showed that the companies marketed themselves to former Napster users and that they did not offer any way to filter copyrighted material that passed through their software.
When the Grokster case was filed in the latter part of 2001, the controlling law was found in the 1984 ruling in Sony Corp. of America v. Universal City Studios, Inc., more commonly called the Betamax case. In Betamax, the entertainment industry sued Sony for selling videocassette recorders (VCRs), because they could be used to record copyrighted movies. The Supreme Court held that Sony was not liable for damages of contributory copyright infringement. It ruled that where a product may be used for “substantial” or “commercially significant noninfringinguses” it was not liable for infringement. This was true even where VCR owners used the product in a manner that constituted copyright infringement, because the VCRs could be used for other noninfringing purposes.
The Grokster litigation reflected the everchanging face of technology, and the laws’ attempts to keep up with those changes. Initially, a federal district court judge in California ruled against the music and movie industries, and declined to distinguish between Betamax and Grokster. Moreover, Judge Stephen Wilson distinguished the Ninth Circuit decision in the Napster case. Wilson found that Napster was different because it actually provided a network for the infringement to take place; these defendants did not. On appeal, the Ninth Circuit agreed, ruling that Grokster and the other defendants did not have actual knowledge of copyright infringement, nor the right or ability to supervise its users.
The Ninth Circuit opinion in Grokster conflicted with a ruling from the Seventh Circuit Court of Appeals. In the case of In re Aimster Copyright Litigation, the Seventh Circuit held that Aimster, which provided services similar to Grokster and Stream-Cast, was liable for violation of copyright laws.
The plaintiffs in Grokster filed a writ of certiorari to the Supreme Court, and the case was accepted for review. The court’s unanimous decision settled the conflict between the Seventh and Ninth Circuit rulings. On June 27, 2005, in Metro-Goldwyn-Mayer Studios Inc. v. Grokster Ltd., the U.S. Supreme Court ruled that companies providing peer-to-peer Internet file-sharing programs could be held liable for the copyright infringement by the users of their service. The opinion, written by Justice David Souter held that the Ninth Circuit had misread the Betamax decision. The high court determined that most of the evidence in the case indicated the defendants’ purpose was to facilitate a way for users to share files illegally.
The Supreme Court returned the case to the federal district court for final resolution. Rather than continue with the litigation, the parties came to an agreement, which was announced on November 7, 2005. Grokster agreed to immediately discontinue its former business operations, and agreed to have a judgment and a permanent injunction entered against it in favor of the plaintiffs. The Grokster website in December 2005 included the following announcement: “There are legal services for downloading music and movies. This service is not one of them. Grokster hopes to have a safe and legal service available soon.” The nearly-bare website also included some information and links about copyright laws.