Protecting Copyright and Innovation in a Post-Grokster World

On Wednesday, the full Senate Judiciary Committee held hearings on “Protecting Copyright and Innovation in a Post-Grokster World,” with testimony from:

  • The Honorable Mary Beth Peters, U.S. Register of Copyrights, Copyright Office, Washington, D.C.
  • The Honorable Debra Wong Yang , U.S. Attorney for the Central District of California , and Chair of the Attorney General’s Advisory Committee , on Cyber/Intellectual Property Subcommittee , Los Angeles, CA
  • Marty Roe, Lead Singer, Diamond Rio, Nashville, TN
  • Cary Sherman, President, Recording Industry Association of America, Washington, D.C.
  • Gary Shapiro, President and Chief Executive Officer, Consumer Electronics Association, Arlington, VA
  • Mark Lemley, William H. Neukom Professor of Law, Stanford University Law School, and Director, Stanford Program in Law, Science and Technology, Stanford, CA
  • Ali Aydar, Chief Operating Officer, SNOCAP, San Francisco, CA
  • Sam Yagan, President, MetaMachine, Inc. (developer of eDonkey and Overnet), New York, New York

Details about the testimony continue after the jump…

In an opening statement, Senator Cornyn (R-TX) framed the issue in terms of protecting IP assets: “this hearing focuses on the importance of protecting property rights.… Unfortunately, every day, literally millions of dollars in copyrighted works are stolen via online services.” The witnesses discussed more specific and concrete issues affecting copyright law after Grokster.

Before Grokster

Sherman discussed figures concerning the decline of the music industry in terms of both unit shipments and revenue since 1999, noting the correlation with the rise of file sharing, although he did not address a causal link between P2P file sharing and the decline. Yagan discussed figures showing that the number of P2P users continues to increase. This year alone, the average number of P2P users online at any given time has grown by more than 41% to nearly ten million. In the last 5 years, the number of active P2P users has increased fivefold. At its peak, classic Napster had 2 million users simultaneously online, according to Aydar.
Aydar offered three main lessons from the first five years of the P2P era:

  1. Consumers were ready for digital music long before the recording industry was ready or even able to provide it.
  2. It wasn’t about free, it was about having every song or symphony or speech you ever heard, no matter how exotic or obscure, at your fingertips. It was about being able to hear that music however and wherever you wanted: at your computer, in your car, on your stereo, at the beach — an unlimited jukebox to satisfy everyone’s musical tastes that couldn’t be fulfilled through traditional retail channels.
  3. Music has a tremendous meaning in many people’s lives.

Aydar went on to offer one reason for this continued growth in P2P: “While consumers were clearly ready to obtain their music digitally, the recording industry and music publishers were not yet ready to embrace the digital channel. Despite Napster’s best efforts to transition to an authorized business model, the company was forced to file for bankruptcy after nearly two years of litigation. From its ashes sprang hundreds of new P2Ps, designed specifically to skirt the law that was established in the Napster case.… Fans are stuck between the limited selection of today’s authorized services, and the poor user experience offered by the unauthorized P2Ps – adware, spyware, viruses, spoofed files, pornography… not to mention the fact that copyrights are not respected and users risk being sued. ”

Impact of Grokster

While some parties, including the Register of Copyrights and the representatives of the content industries, are pleased that the Grokster decision brought clarity to the question of whether the developers of P2P file sharing software can be held liable for inducing infringement on a massive scale, technology developers fear that the Court’s inducement standard is vague and nebulous and may lead to an unnecessary chill on innovation. ”
The immediate impact of the decision is a renewed interest in licensing content for sharing on P2P networks. Register of Copyrights Marybeth Peters testified, “By articulating some boundaries on the development of products used to infringe copyrights, the Grokster ruling may have helped to frame these negotiations and agreements. Presumably some actors who felt that the prior state of law gave them complete freedom to offer products designed to facilitate infringement – and to do so with impunity – are now having second thoughts in light of the fact that the Court has clarified that there is a basis for holding them accountable for the consequences of what they purvey.”
The main problem faced by P2P services hoping to become legitimate is the need to obtain licenses from numerous copyright owners. Peters said, “If the legitimate music industry continues to be saddled with a time-consuming and transactionally-expensive licensing process, then it can never compete effectively with the “pirates” who can offer a wider variety of music faster and cheaper.” Aydar concurred, “Today, there are literally hundreds of thousands of living copyright owners. Each on-line retailer would have to strike an enormous number of direct deals to match the number of tracks the existing P2Ps provide — a legal, economic, and practical impossibility.”
The market is developing intermediaries to license content. SNOCAP COO Ali Aydar described his company’s service as facilitating this marketplace. SNOCAP provides a way for rightsholders to claim, tag and control their content on P2P networks. Aydar believed that this will enable “a robust market that offers consumers more music through more channels” and notes that SNOCAP can act as a neutral registry for digital content in all media, including video and text.
In contrast, Gary Shapiro (Consumer Electronics Association) and Yagan suggested that the Grokster ruling will affect the ability of technology companies to innovate and result in a chilling effect on technology development in the US. Shapiro testified, “The old adage is that hard cases make bad law, and Grokster was a hard case.” Shapiro worries that the Grokster decision will limit the ways that individuals will be able to transform and use content for personal purposes and that the technology industry will not be able to innovate.

If a single court were now to label as “infringement” consumers’ home recording of content they have paid to view or hear, what will be the status of all the product design, research, development, production, marketing, and distribution activity that went into serving these consumers? Scores of products and services are being created and introduced that change how people buy a house, book travel, do research, complete their education, and even run for office. The technologies have improved access to information, education and entertainment and enhanced peoples’ lives. All digital technologies involve copying to some degree. The law should not impede or restrict these new and beneficial consumer activities or the digital technology products that make them possible. Yet, all of these commonplace activities implicate conduct – reproduction, distribution, derivative works – that an overbroad interpretation of the Grokster case could prohibit. We are at a crossroads in technology. With new technologies allowing every citizen to be a creator, we must accept that our national creativity can no longer be measured by CD sales.

Many technology companies, including eDonkey, whose products can be used for infringement will simply find themselves unable to continue operations in a Post-Grokster world — not necessarily because they would lose under the new Grokster standard, but rather because they literally cannot afford the costs of mounting a legal defense.
A broad inducement standard may chill innovation. Lemly noted that “since the courts have interpreted copyright law not to have any corporate veil, someone who runs or simply works for such a company could lose their house and their family’s retirement fund. The threat of a lawsuit will deter not just innovators developing technologies with illegal uses, but those who develop technologies with both legal and illegal uses and those who don’t yet know how the market will use their technology. The list of such dual-use technologies is long and distinguished: broadband Internet service, the iPod, TiVo, CD burners, and computers themselves, to name just a few.”
In addition to chilling technological innovation in the US, the active inducement standard may send technology development overseas. Yagan noted that seven of the top ten major P2P software companies have chosen to locate outside of the U.S. and that Skype, the “hottest technology company of the moment” was founded outside of the U.S.

Questions remaining after Grokster

Most parties agreed that it is too early for Congress to legislate the inducement standard, but that we need time to see how the standard is applied by the lower courts. Lemly testified, “Whether the Court succeeded in creating a middle ground remains to be seen. Much will depend on how the Court’s open-ended, multi-factor test for improper purpose is interpreted in the lower courts. Much will also depend on how far copyright owners seek to take the new doctrine, and whether they overreach. For this reason, it is premature to propose legislation to correct deficiencies in the new inducement test.”
Lemly suggested that 3 questions need to be answered about the Grokster standard:

  1. What is required to prove “improper purpose?”
  2. What conduct is required?
  3. What state of mind must exist regarding infringement?

Yagan offered a hypothetical to explore the bounds of the active inducement test: “If eDonkey had simply written on its website from day one, ‘eDonkey is a P2P file-sharing client’ would we know for sure that we had avoided ‘affirmatively and actively’ inducing infringement? If so, then these sites will spring up immediately; if not, then the effect of Grokster will go beyond chilling, perhaps to the point of freezing innovation in its tracks.”
Yagan went on to offer a framework for following the developments around P2P. P2P development may follow the trend towards greater anonymity, secrecy and adoption of encryption, or it may be the P2P services that pick up momentum are the “corporate, profit-motivated enterprises, which likely will be forced to comply with contractual terms stipulated by major entertainment rights aggregators such as reverting to centralized indexed searches, implementing various types of filtering, operating closed networks, and offering conventional industry-sanctioned business models like the current centralized paid download stores and tethered subscription models.”

Impact of recent legislation

US Attorney Debra Wong Yang discussed the impact that recent legislation has had on criminal enforcement of copyright law and preventing piracy. The Digital Millenium Copyright Act has enabled prosecuting the intermediaries who remove copyright protection from content before distributing it to warez groups on the internet or on physical media. The Family Entertainment and Copyright Act (FECA) has made it possible for prosecutors to target the pirates at the step of acquiring source material, such as in movie theaters. Last month, Department of Justice prosecutors in San Jose, California used certain FECA provisions for the first time to charge a Missouri man with felony crimes for camcording films in movie theaters and distributing the films on computer networks.

What to do next?

General Goals
Lemly discussed the need to evaluate the public impact of copyright reform. While the copyright industries have the most at stake in reforming copyright laws, the public has an stake, too.

While reducing copyright infringement is an important goal, it cannot and should not be the only goal of public policy. Congress should also be concerned that overzealous enforcement of copyright will create a hostile environment for technological innovation and entrepreneurial business models. It should strive to balance these important interests, providing effective copyright protection but also preserving an environment in which innovation can thrive.
Nor can Congress simply rely on assurances from the copyright industry that they will foster innovation themselves, or target only “bad” and not “good” innovations. The content industry has proven short-sighted, time and again trying to stifle technologies that ultimately proved beneficial not only to society but even to copyright owners. They tried – and fortunately failed – to shut down jukeboxes, radio, cable television, the VCR, and the mp3 player. Perhaps it should not surprise us that publicly traded companies should have a short-run focus, looking at this quarter’s bottom line and not what will benefit society in the long run.

Copyright maximalism is poor public policy, and creating an environment where copyright maximalists create the laws will result in a legal regime that serves copyright owners to the detriment of the general public.
Yagan offered three suggestions for ways to legislate

  1. Clarify the Supreme Court’s ruling in Grokster.
  2. Make sure that the legislation will have the practical consequences you desire. Decentralization and anonymity facility infringement rather than accountability.
  3. Encourage a market solution. Tens of millions of consumers are thirsting for the content created and distributed by the major labels and studios – there will be – there must be – numerous business models that will generate immense profits from these individuals.

Lemly suggested three issues that are the most deserving of legislative attention:

  1. Make it easier for copyright owners to target direct infringers; Use the Copyright Royalty Judges Congress created last year to administer a quick, simple and cheap system for identifying and punishing high-volume illegal file traders.
  2. Make it easier to clear rights in the digital environment.
  3. Insulate technology companies from unreasonable liability.

Compulsory License Reform
Peters testified that Grokster clarified the issue of inducement liability sufficently to supplant the need for new legislation: “The Grokster decision supplants the need for Congress to create inducement liability by statute.” Instead of inducement liability, Peters thikns that Congress should be focusing on making it easier to license works and reform the §115 compulsory license.

Grokster failed to resolve the difficulties of licensing underlying musical works for legal digital redistribution, which is the main hurdle facing innovation in the legitimate digital distribution of music. Section 115 is an antiuqated provision and needs to be reformed. The statutory rate puts an unnecessary ceiling on the royalty rate for privately negotiated licenses and hurts the free market. The one-at-a-time structure for licensing individual musical works makes it difficult, if not impossible, for online music services to acquire the right to make available vast mumbers of already recorded phonorecords. Many onine services bridge the gap between public performance and reproduction/distribution. By having different methods for clearing the public performance right and the mechanical rights, the statutory license is an unnecessary impediment to legitimate, innovative online music services. Reform is needed to make it possible to clear quickly and efficiently the necessary exclusive rights for large numbers of works.

By reforming the law for licensing works, Congress can make it easier for developers to create digital services that can compete with P2P on the open marketplace without having to engage in costly and pointless negotiations with scores of copyright owners.
(Also posted at Legislating IP)

One Comment

  1. Granted killing p2p has been a dream that the riaa and others have had for a long time. However p2p’s death might just bring about their worst nightmare. A solution at which they cannot fight. Welcome to a new golden age of filesharing, it’s ip2p also known as invisible p2p. Currently consisting of a new gnutella network and bittorrent both over the fairly new invisible internet.
    So will piracy run rampant, of course that is part of the price we pay for sticking it to the man, yet probably not much more so than it already is. So what do we really get out of it, privacy, protection from corporate, governmental, organizational abuse and of course hackers, spammers, even other peers.
    It is long past time geeks took back the internet and said strongly you cannot abuse our baby anymore.

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