United States: It’s a "Flea World" After All: Should the Grokster Inducement Test for Secondary Copyright Infringement Liability Be Limited to Technological Cases?

By James D. Nguyen and Debra D. Nye ¹

In 2005, the Supreme Court threw itself into the copyright battles over peer-to-peer file-sharing technology, when it rendered its landmark decision in Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 125 S.Ct. 2764 (2005). While the motion picture studios and record companies have also brought litigation directly against consumers who use peer-to-peer software to illegally download entertainment content, the Grokster case focused on holding the providers of P2P software secondarily liable for the massive online infringement committed by users. After all, it’s far easier to stop the flood of piracy by closing the pipeline for illegally copying.

Historically, copyright jurisprudence has recognized two main theories of secondary liability: (1) contributory infringement, which occurs when a party knows that others are infringing and materially contributes to the infringing activity; and (2) vicarious liability, imposed when a party in a position to control the infringing activity, regardless of whether or not they have actual knowledge of it, receives a direct financial benefit from the infringement, while declining to exercise the right to stop or limit the infringement.² In Grokster, the Supreme Court broke some new ground by recognizing a third theory for secondary copyright liability: inducement, which occurs when a party takes affirmative steps to foster copyright infringement by others.

Copyright owners welcomed the inducement theory as an additional weapon in their arsenal against infringers. But what the Supreme Court has given, a recent district court decision from New Jersey now appears to limit. In Arista Records Inc. v. Flea World, Inc., D.N.J. No. 03-2670, 2006 WL 842883 (D.N.J. March 31, 2006), the district court’s recent summary judgment decision implies that the Grokster inducement doctrine can only be invoked in cases involving distribution of a technological copying device, but not against businesses that promote infringement by others in non-technological ways.

The Flea World case arose in the context of a swap meet. The scene is quite appropriate, because a swap meet was also the setting for the Ninth Circuit’s landmark decision in Fonovisa, Inc. v. Cherry Auction, Inc.³., which addressed whether swap meet operators had contributory or vicarious liability for infringing sales of counterfeit music recordings by vendors housed in the swap meet. Proving that "the more things change, the more the stay the same," the recent Flea World case likewise involved major record labels pursuing flea market owners for secondary liability because their vendors were selling thousands of counterfeit CDs.

In Flea World, the record labels did not raise the newly-minted "inducement" theory; instead, it was the defendants who attempted to invoke Grokster in an effort to escape liability. They tried to read Grokster’s principles into the "knowledge" and "material" contribution elements of contributory liability. In a March 31 decision, Judge Jerome Simandle rejected that effort to extend Grokster, and rightfully so. But a critical part of his reasoning was that the Grokster test only applies to cases of infringement facilitated by technological devices (such as P2P software applications or video cassette recorders), and not situations (like a swap meet) where the acts fostering infringement are part of an ongoing business not involving distribution of a technological device. If left unclarified or uncorrected, this precedent will yield a most undesirable result: limiting the scope of Grokster’s inducement test and the rights of copyright owners.

To place the recent Flea World decision in context, it’s helpful to take a trip back in time. The first stop is the Orwellian year of 1984. That was when the Supreme Court delivered its famed decision concerning the "Sony Betamax" video cassette recorder – Sony Corp. v. Universal City Studios, 464 U.S. 417 (1984). The Sony case raised a pivotal question for our technologically-advancing world: should the distributor of a technological device that can be used to copy protected works (in both infringing and non-infringing manners) be secondarily liable for any acts of infringement committed by users of the device? Focusing on contributory liability, the Supreme Court found that mere knowledge that a device could be used to infringe or of actual infringing uses is not enough to subject the technology distributor to liability, as long as the device is capable of "substantial non-infringing uses." Since then, the Sony test has achieved almost mythical fame – though some critics find the "substantial non-infringing uses" test vague and difficult to apply.

Fast-forward to 1996, when the 9^th Circuit in Fonovisa v. Cherry Auction addressed secondary liability for copyright infringement in the non-technology context of swap meets. In Fonovisa, operators of a swap meet knew that independent vendors on their premises were selling and purchasing counterfeit music recordings. The plaintiff in Fonovisa owned rights to numerous Latin/Hispanic music recordings that were being pirated and sold by swap meet vendors. Rather than going after the individual vendors, the copyright owner sued the swap meet operator, alleging both vicarious and contributory infringement. Reversing a grant of summary judgment to defendants, the Ninth Circuit found there were viable causes of action on both secondary liability theories. Significantly, the evidence showed the operators of the flea market knew of the infringing activity of its vendors and benefited from it. Fonovisa has been widely cited as a leading decision on the issue of secondary liability.

Almost a decade later, the Supreme Court’s Grokster decision expanded the landscape for secondary copyright infringement liability by recognizing the "inducement" test. The basic facts from Grokster are well-known. The defendants distributed the free "Grokster" and "Morpheus" software products that allowed peer-to-peer file sharing by users via the Internet. The most popular use of the software is to share copyrighted works, such as music and video files. It was undisputed that millions of files had been illegally downloaded by users of the technology, but the software providers argued (among other things) that the software had were substantial noninfringing uses. The district court granted defendants’ motion for summary judgment on the issue of secondary liability and the 9^th Circuit affirmed, but the U.S. Supreme Court reversed and remanded for further determination.

While the entertainment industry plaintiffs argued the existing theories of vicarious and contributory liability, the Supreme Court did not focus on either. Borrowing from patent law, it instead recognized "inducement" as another form of secondary liability.⁴ The Court 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, is liable for the resulting acts of infringement by third parties."⁵ In its decision, the Supreme Court said nothing about the inducement test affecting the requirements for proving other secondary liability theories – such as contributory infringement.

Further, in setting forth the inducement test, the Supreme Court was mindful of the need to avoid discouraging development of new technologies which might have both lawful and unlawful potential. The Court further clarified what does not constitute inducement. For example, mere knowledge of potential infringing or of actual infringing uses is insufficient to show inducement; there must be evidence of purposeful, culpable conduct. The Court was very clear in noting that it was striking a balance between the ability of copyright owners to enforce their intellectual property rights and the need to encourage technological innovation.

Without doubt, Grokster was decided in the context of a highly-sophisticated technological environment: peer-to-peer file-sharing. But the Supreme Court did not expressly limit its holding in Grokster to instances of infringement facilitated by technology. Nevertheless, that is how the district court in the Flea World case appears to see it.

In Flea World, members of the Recording Industry Association of America (copyrights owners for approximately 90% of sound recordings in the U.S.) sought to impose vicarious and contributory liability on operators of the Columbus Farmers Market in New Jersey, one of the largest flea markets on the east coast. Columbus Farmers Market has a long history of vendors selling counterfeit compact discs and cassette tapes, resulting in numerous raids by local police and demand letters from the RIAA. Notably, the music industry plaintiffs did not assert an "inducement" claim. In its March 31 decision on cross-motions for summary judgment, the district court granted summary judgment to the record companies on both vicarious and contributory infringement (at least as to the corporate defendants).

The facts were similar to those in Fonovisa. In exchange for a fee, the flea market operators provided various services to vendors, including providing booth space, tables, parking, utilities, on-site food, restrooms, maintenance and sanitation and advertisement for the flea market. The operators retained the power to ban any vendor who violates their rules. However,, unlike in Fonovisa, the flea market operators claim to have taken active efforts to stop infringing activity. They paid for private security and local police presence at the market to watch for pirated goods; they also established rules, posted signs and handed out fliers to vendors alerting them that selling counterfeit items was prohibited.

To defend against the contributory infringement claim, the flea market defendants tried an interesting tactic: they sough to extend the Grokster inducement principles to both the "knowledge" and "material contribution" elements of contributory copyright infringement. The New Jersey court rejected this creative reading of Grokster.

On the knowledge element, the record companies argued that they only need to show that the defendants knew or should have known of the infringing activity (i.e., had actual or constructive knowledge). In contrast, the defendants insisted there must be proof that they had either actual knowledge of specific infringement or that they turned a blind eye to infringing activity. In addition, they cited Grokster’s statement that "mere knowledge of potential or actual infringing uses would not be enough" to subject a distributor of a product or device to liability. In short, the defendants sought to extend the Grokster intent elements for inducement -- which require more proof than the test for contributory infringement – into the contributory arena as a means to avoid liability.

The New Jersey district court disagreed. It found that constructive knowledge of infringement is enough to prove contributory liability. It further rejected the defendants’ attempt to read Grokster into the knowledge element for contributory infringement. Judge Simandle held that Grokster was clearly distinguishable because unlike the flea market operators, the defendants in Grokster had no control over an end-user’s use of the peer-to-peer file-sharing software once it was released into commerce. By contrast, the flea market operators "are not distributors of a device or product that has non-infringing uses like in Grokster and Sony." They instead run an "ongoing business in which they exert substantial and continuous control" over their vendors at all times, specifically during the times that the infringement was occurring. The district court further concluded: "The fact that the corporate Defendants have such a high degree of control over the vendors and what merchandise the vendors sell at the Market, as well as where and when they sell it, clearly distinguishes this case from Grokster."⁶

Likewise, the district court rejected the defendants’ effort to read Grokster into the "material contribution" element of contributory infringement. The flea market operators argued that under Grokster, they can only be liable for contributory infringement if they "promote" or take "affirmative steps . . . to foster infringement." They further argued that their flea market was capable of non-infringing, as well as infringing, uses – apparently analogizing their flea market to a technological device such as VCRs and P2P file-sharing software applications. Judge Simandle again disagreed, finding no need to prove the elements of "promoting" or "affirmative steps" to foster infringement. He concluded: "The holding in Sony or Grokster cannot be applied here to avoid contributory infringement liability because Defendants’ business is not analogous to a device put into the stream of commerce." To further support his reasoning, Judge Simandle cited dicta from the Supreme Court’s Sony decision that supports imposing contributory liability where there is an "ongoing relationship" with the direct infringer.

Finally, in rejecting the defendants’ own summary judgment motion based on Grokster, the district court determined that applying the Grokster "doctrine to [Flea World] makes little sense and [given] the absence of authority suggesting that such application is appropriate, this Court declines to do so."

The Flea World decision does not directly state that Grokster is only available in cases involving technologies for copying. However, by the manner in which it distinguishes Grokster from the "ongoing," non-technological business of a swap meet, the Flea World opinion strongly implies that Grokster should be limited to such technological cases.

To be fair, the Supreme Court’s Grokster decision left many unanswered questions regarding the inducement test – including how and in what situations the new inducement test should be applied. However, nothing in the Supreme Court’s opinion expressly limited the inducement test to cases involving copying technologies which can be used to infringe. In theory, the Grokster test should be available to pursue any defendant who promotes or takes active steps to foster copyright infringement by others. Yet, the Flea World court distinguished Grokster from cases involving "on-going" businesses which do not involve distribution of technology capable of being used to infringe.

Perhaps the problem was caused by two areas of confusion. First, the different secondary liability theories are often confused for each other and seen to overlap. The Sony "Betamax" case raised both contributory and vicarious liability theories, but the Supreme Court’s decision really analyzed only contributory infringement. Likewise, the Grokster case involved both theories; while the Supreme Court again discussed those theories, it sidestepped them both to endorse the new "inducement" theory. So maybe it should come as no surprise that copyright secondary liability doctrines (much like the defense of fair use) result in a quagmire.

Second, the problem may have been compounded by how the issue was raised in Flea World. The plaintiffs did not plead inducement as a separate cause of action. Instead, the defendants tried to read certain language from Grokster into the elements for contributory infringement as a defensive means to escape liability. That of course does not make sense because contributory and inducement liability are separate (though related) theories, and the Grokster decision only dealt inducement. This too may have confused the issue.

In the future, copyright owners and courts should ask the question more directly and more simply: is an inducement claim available to copyright owners against defendants who "induce" infringement by others in non-technology cases? In theory, such liability is indeed possible. For example, if the swap meet operators in Flea World encouraged vendors to sell counterfeit recordings because it makes the swap meet popular or posted advertisements encouraging consumers to shop at the swap meet to find counterfeit recordings at cheap prices, that would be affirmative conduct "inducing" infringement. There is no reason the inducement theory should not be available to copyright owners in such circumstances, even though no copying technology is implicated.

Otherwise, if the inducement test is limited to cases involving copying technologies, copyright owners will lose the additional enforcement theory given to them by Grokster. The inducement theory should be construed as making available to copyright owners an additional theory of liability – in all contexts, technological or not. Otherwise, what the Supreme Court gave, other courts can limit or take away.

The ultimate decision in Flea World -- finding the swap meet operators secondarily liable – appears correct. But hopefully, future court decisions can set the legal record straight and give Grokster’s inducement test the broader scope it deserves.

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