The Ninth Circuit Court of Appeals affirmed that P2P has substantial noninfringing uses and that Grokster and Morpheus are not contributorily or vicariously liable for copyright violations ocurring by users of their software. Metro-Goldwyn-Mayer v. Grokster (Aug. 19, 2004).
P2P is capable of non-infringing use:
One striking example provided by the Software Distributors is the popular band Wilco, whose record company had declined to release one of its albums on the basis that it had no commercial potential. Wilco repurchased the work from the record company and made the album available for free downloading, both from its own website and through the software user networks. The result sparked widespread interest and, as a result, Wilco received another recording contract. Other recording artists have debuted their works through the user networks. Indeed, the record indicates that thousands of other musical groups have authorized free distribution of their music through the internet. In addition to music, the software has been used to share thousands of public domain literary works made available through Project Gutenberg as well as historic public domain films released by the Prelinger Archive. In short, from the evidence presented, the district court quite correctly concluded that the software was capable of substantial noninfringing uses and, therefore, that the Sony-Betamax doctrine applied.
the Copyright Owners argue that the evidence establishes that the vast majority of the software use is for copyright infringement. This argument misapprehends the Sony standard as construed in Napster I, which emphasized that in order for limitations imposed by Sony to apply, a product need only be capable of substantial noninfringing uses...In this case, the Software Distributors have not only shown that their products are capable of substantial noninfringing uses, 10 but that the uses have commercial viability. Thus, applying Napster I, Napster II, and Sony-Betamax to the record, the district court correctly concluded that the Software Distributors had established that their products were capable of substantial or commercially significant noninfringing uses. Therefore, the district correctly reasoned, the Software Distributors could not be held liable for constructive knowledge of infringement, and the Copyright Owners were required to show that the Software Distributors had reasonable knowledge of specific infringement to satisfy the threshold knowledge requirement.
The court relies on the difference in software design to contrast Grokster and Streamcast with Napster. P2P applications may use one of three possible approaches for indexing files: a centralized index server; a completely decentralized system, where each node provides an index of its own files; and finally a supernode system, which uses certain nodes in the network to create an index of the files served by computers in a part of the network. Napster maintained a centralized indexing server of files available on the network and required a username and password to log onto that central server. Grokster (which uses the FastTrack network) uses a supernode system. Streamcast (based on the Gnutella network) uses a completely decentralized system. Neither Streamcast nor Grokster maintain control over the indexing files.
In the context of this case, the software design is of great import. As we have discussed, the software at issue in Napster I and Napster II employed a centralized set of servers that maintained an index of available files. In contrast, under both StreamCast’s decentralized, Gnutella-type network and Grokster’s quasi-decentralized, supernode, KaZaa-type network, no central index is maintained. Indeed, at present, neither StreamCast nor Grokster maintains control over index files. As the district court observed, even if the Software Distributors “closed their doors and deactivated all computers within their control, users of their products could continue sharing files with little or no interruption.” Grokster I, 259 F. Supp. 2d at 1041.  Therefore, we agree with the district court that the Software Distributors were entitled to partial summary judgment on the element of knowledge.
As indicated by the record, the Software Distributors do not provide the “site and facilities” for infringement, and do not otherwise materially contribute to direct infringement. Infringing messages or file indices do not reside on defendants’ computers, nor do defendants have the ability to suspend user accounts.
Finally, the court notes that the institutional competence to regulate new technologies which impact the copyright regime falls in Congress, not in the courts:
Further, as we have observed, we live in a quicksilver technological environment with courts ill-suited to fix the flow of internet innovation. AT&T Corp. v. City of Portland, 216 F.3d 871, 876 (9th Cir. 1999). The introduction of new technology is always disruptive to old markets, and particularly to those copyright owners whose works are sold through wellestablished 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 copier, a tape recorder, a video recorder, a personal computer, a karaoke machine, or an MP3 player. Thus, it is prudent for courts to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent present magnitude.Proponents of the IICA may see this as a call to action for why new legislation is necessary as soon as possible. Opponents of the IICA may see a reason for a slow and deliberate process to determine whether new legislation is necessary and what form of that legislation will provide the most equitable balancing of interests between copyright owners and technological innovators.
Indeed, the Supreme Court has admonished us to leave such matters to Congress. In Sony-Betamax, the Court spoke quite clearly about the role of Congress in applying copyright law to new technologies. As the Supreme Court stated in that case, “The direction of Art. I is that Congress shall have the power to promote the progress of science and the useful arts. When, as here, the Constitution is permissive, the sign of how far Congress has chosen to go can come only from Congress.” 464 U.S. at 456 (quoting Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 530 (1972)).
Update (Aug. 20):
Links, we've got links:
Ernest Miller has the definitive comprehensive roundup as well as some typically sharp analysis: Grokster Wins Big in 9th Circuit
Fred von Lohmann (who argued the case before the Ninth Circuit) has More on MGM v. Grokster Ruling
Howard Bashman links to the press coverage: "File-Sharing Sites Found Not Liable for Infringement"
Scrivener's Error: [Expletive Deleted] Headline Writers!: "where does this leave us? It does not, contrary to headlines that I have already seen, mean that "file-sharing software is legal." It means that the plaintiff record companies didn't (not necessarily couldn't—just didn't) establish intent in the same way as was done in Napster."
Derek Slater: Grokster Leftovers
IP News Blog: The EFF wins Grokster; A good day with possible consequences?: "In the grand scheme of things, doesn't this just promote further efforts by Orrin Hatch and others to ban P2P through federal legislation?"
I posted a very similar entry at the Induce Act blog which goes on to discuss some potential effects on the IICA legislation.
News.com: Judges rule file-sharing software legal
Update (8/22): Kevin Heller posted the MGM v. Grokster opinion as hypertext