Amicus Curiae Brief — Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.

22 R Cour TE

JAN 2 4 2005

No. 04-480

OFFICE OF THE CLERK

In The

Supreme Court of the Anited States

0

METRO-GOLDWYN-MAYER STUDIOS INC., ET AL.,

Petitioners,

V.

GROKSTER, LTD., ET AL.,

Respondents.

9

On Writ Of Certiorari Io The

United States Court Of Appeals

For The Ninth Circuit

0

BRIEF OF AMICI CURIAE KENNETH J. ARROW,

LAN AYRES, GARY BECKER, WILLIAM M. LANDES,

STEVEN LEVITT, DOUGLAS LICHTMAN,

KEVIN MURPHY, RANDAL PICKER,

ANDREW ROSENFIELD, AND STEVEN SHAVELL

IN SUPPORT OF PETITIONERS

*

Davio A. STRAUSS*

DOUGLAS LICHTMAN

ANDREW ROSENFIELD

1111 East 60th Street

Chicago, IL 60637

(773) 702-9601

*Counsel of Record

for Amici Curiae

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CAL. COLLECT (402) 342-2831

—

TABLE OF CONTENTS

Page

INTEREST OF THE AMICI CURIAE......0-00000000000000 1

SUMMARY OF ARGUMENT. . . . .

1. Indirect liability is routinely imposed in

instances, like the one at issue here, where di-

rect deterrence is unlikely to be effective be-

cause of the high costs associated with

identifying and pursuing individual violators... 3

2. Indirect liability should not be excused simply

because a product is potentially capable of

a. The rule adopted below gives manufac-

turers no incentive to deter infringement

even when deterrence could be accom-

plished at low cost and without any sig-

nificant interference with non-infringing

b. The rule adopted below mistakenly con-

siders non - infringing uses in isolation,

rather than evaluating them in light of

TABLE OF AUTHORITIES

CASES

Graver Tank & Mfg. Co. v. Linde Air

339 U.S. 605 (1950) . . .

Sony Corp. of America v. Universal

Inc., 464 U.S. 417 (1984) .

Products Co.,

City Studios,

Warner-Jenkinson Co., Inc. v. Hilton Davis Chemi-

cal Co., 520 U.S. 17 (1997)

STATUTES

nene.

OTHER AUTHORITIES

Gary Becker, Crime and Punishment:

An Economic

Approach, 76 J. Pol. Econ. 169 (1968)... . ... .. 5

Reinier Kraakman, Gatekeepers: The Anatomy of a

Third-Party Enforcement Strategy,

& Org. 53 (1986). . .. . .

2 J. L. Econ.

Doug Lichtman & Erie Posner, Holding Internet

Service Providers Accountable, in THE LAW AND

ECONOMICS OF CYBERSECURITY (Mark Grady &

Francesco Parisi, eds., Cambridge University

Press, forthcoming 2005)..................

STEVEN SHAVELL, ECONOMIC ANALYSIS OF ACCIDENT

Law 170-75 (Harvard University Press 1987)................ 3

Alan Sykes, Vicarious Liability, in

3 THE NEW

PALGRAVE DICTIONARY OF ECONOMICS AND THE

Law 673 (Peter Newman, ed., 1998)

1

INTEREST OF THE AMICI CURIAE’

Amici are professors and scholars who teach and write

on economic issues and, in particular, on the economics of

innovation, the economics of intellectual property, and the

economics of both deterrence and enforcement. They are

Kenneth J. Arrow, Ian Ayres, Gary Becker, William M.

Landes, Steven Levitt, Douglas Lichtman, Kevin Murphy,

Randal Picker, Andrew Rosenfield, and Steven Shavell. A

summary of the qualifications and affiliations of the

individual amici is provided at the end of this brief. Amici

file solely as individuals and not on behalf of the institu-

tions with which they are affiliated. Amici represent

neither party in this action, and write solely to offer an

economic perspective on the important social issues at

stake in this dispute.

*

SUMMARY OF ARGUMENT

One of the central conclusions of economics is that

competitive markets allocate goods efficiently. But mar-

kets cannot perform this important function in the ab-

sence of clearly defined property rights. This is why the

law recognizes ownership interests in everything from

automobiles and wristwatches to computers and tele-

phones. Who would create and care for these resources in

a world where title was precarious and theft rampant?

The parties have consented to the submission of this brief, and

their letters of consent have been filed with the Clerk of this Court.

This brief was not written in whole or in part by counsel for a party. No

person or entity other than amici made any monetary contribution to

the preparation or submission of this brief. Amici and their counsel

were not compensated in any way.

4

How could these products be bought and sold in markets

without rules preventing unauthorized appropriation and

defining the consequences of o such appropriations?

Federal copyright law en. oraces this basic economic

insight. It recognizes that competitive markets are an

effective means by which to encourage authors, artists,

and publishers to produce and disseminate creative work.

It therefore invests in authors certain exclusive rights to

duplicate, distribute, and otherwise exploit that which

they create, and it empowers courts to defend those rights

by awarding damages and issuing injunctions against

individuals and entities that violate them.’

In this dispute, the Court is being asked to clarify the

conditions under which those conventional remedies

should be supplemented by an additional cause of action:

liability that would hold responsible a firm whose product

or service facilitates copyright infringement. The argu-

ment in favor of this sort of “indirect” liability is that in

certain circumstances it will be the only practical way to

maintain the efficacy of copyright markets. That is, direct

liability is so costly in certain situations that, without

indirect liability, authors would in those settings no longer

have a meaningful right to prevent unauthorized use of

their work. The argument against indirect liability is that,

because the products and services at issue here have both

legal and illegal uses, any legal intervention must be

* This is not to imply that formal markets are the only means by

which to accomplish this goal. The cultural arts obviously long have

benefited from interactions unconnected to express markets, such as

uncompensated philanthropic contributions and the unrewarded efforts

of the starving artist.

3

cautious or else risk inadvertently interfering unreasona-

bly with legitimate activity.

We offer analysis along two dimensions. First, we

summarize the economics of indirect liability, emphasizing

the conditions under which indirect liability is an efficient

mechanism by which to enforce the law. The thrust of this

discussion is to show that the courts below have ignored

many of these considerations, allowing oft-repeated but

imperfect legal formulations to drown out meaningful

analysis of the issues. Second, we consider specifically the

liability rule adopted by both courts below and argue that

it is inefficient for two reasons, but most importantly

because it fails to give manufacturers any incentive to

deter infringement even in instances where deterrence

could be accomplished at low cost and without any signifi-

cant interference with non-infringing uses.

4

the employment relationship, where an employer can be

held liable for torts committed on the job by employees.

But other examples abound. Bars sometimes are held

liable when bartenders serve alcoholic beverages to pa-

trons who later harm others while driving drunk. A motor

vehicle owner can be held to account if a driver to whom

he loans his car ends up causing an accident. Landlords

are sometimes deemed responsible if they take inadequate

precautions against criminal activity that in turn harms

tenants. Even products liability law has this same struc-

ture: a buyer might use a dangerous product in a negligent

manner and cause injury to a third party; if the victim can

show that the accident would not have occurred had the

manufacturer employed better product design, the victim

might be able to recover from the manufacturer instead of

(or in addition to) the buyer.

Conventional economic analysis suggests that an

explicit rule imposing indirect liability is not necessary

when the parties directly responsible for unlawful conduct

can be themselves effectively deterred by legal sanctions.

Thus, if the employees and drunk drivers from the exam-

ples above were easy to identify, inexpensive to sue, and

they had assets sufficient to pay for whatever harm they

might cause, there would be no need to introduce an

additional layer of legal liability. Wrongful conduct would

be adequately addressed by imposing criminal penalties or

assessing monetary damages on the direct actors alone.

1998), Reinier Kraakman, Gatekeepers: The Anatomy of a Third-Party

Enforcement Strategy, 2 J. L. Econ. & Org. 53 (1986). The actual text

used here is modified, with permission, from Doug Lichtman & Eric

Posner, Holding Internet Service Providers Accountable, in THE LAW

AND ECONOMICS OF CYBERSECURITY (Mark Grady & Francesco Parisi,

eds., Cambridge University Press, forthcoming 2005).

Similarly, in instances where the relevant direct actors are

expensive to prosecute but penalties can be raised such

that the low likelihood of prosecution can be offset by high

penalties for the few cases actually brought, again direct

deterrence will work and indirect liability is therefore

unnecessary and likely unwise.

In cases where direct enforcement cannot be effective,

however, indirect liability may be efficient. There are two

basic theories. One theory suggests liability in instances

where there exists an indirectly involved party who is in a

position to deter the bad acts in question at low cost. This

is, for example, one of the main reasons why employers are

responsible for torts committed by their employees. An

employer can control employees. The employer can moni-

tor their behavior, screen them before entrusting them

with dangerous equipment, develop compensation schemes

that encourage them to exercise due care, and otherwise

beneficially influence their on-the-job decisions. The

prospect of indirect liability gives employers an incentive

to make use of those mechanisms and, in that way, to

minimize the expected cost of accidents.

The second theory suggests liability in instances

where there exists an indirectly involved party who

encourages or facilitates the bad act in question without

bearing direct responsibility for the consequences. For

example, even when a retailer can do nothing more to

* This understanding of deterrence is just an application of the

principle that, in instances where the likelihood of detection is low,

deterrence can be achieved by increasing the penalty imposed. See Gary

Becker, Crime and Punishment: An Economic Approach, 76 J. Pol.

Econ. 169 (1968).

6

ensure that the drivers of its delivery vans take appropri-

ate care, it is likely efficient to have the retailer pay at

least some fraction of the costs of any delivery accidents.

The reason is that the retailer is making other decisions

that affect the likelihood of accidents — the retailer sets

delivery prices, for example, and determines the delivery

schedule — and thus liability is necessary as a way of

ensuring that the retailer accounts for the possibility of

accidents when making those decisions. If accidents are

unavoidable, the delivery price will rise and the frequency

of deliveries will fall, which is exactly what should happen

given this unavoidable harm. Note that the purpose of

liability here is not to encourage specific precautions such

as more careful screening of delivery drivers, but instead

to influence how often the harmful activity in question

takes place.

These theories help to identify cases where indirect

liability might be efficient. The actual question of whether

and how liability should be imposed, however, typically

turns on other, often setting-specific, considerations. Thus,

while the telephone company surely has the ability to

deter crank phone calls by more carefully monitoring

calling patterns, it is unlikely that indirect liability would

in this setting be attractive. Such monitoring would raise

serious privacy concerns, and there would be too great a

risk that, in its attempts to address the problem of crank

calls, the telephone company would inadvertently interfere

with substantial legitimate telephone activity. To reject

indirect liability in this situation is to announce that the

costs of crank telephone calls are not sufficiently high as

compared to the costs of using indirect liability to prevent

them. Similarly, the mere fact that an airport provides a

venue from which airlines generate pollution and noise

— Kü— — —

7

does not itself justify imposing liability for that harm. The

reason is that private parties who own property near the

airport themselves make decisions that increase and

decrease the importance of these airport externalities; in a

world where the airport absorbed the costs in full,

neighbors might inefficiently decide to build homes with

thin windows, or to use their properties to raise livestock

or to care for the elderly, uses so sensitive to noise and

pollution that they likely should be disfavored given the

proximity of the airport.

Given these complexities, it is no wonder that the

lower courts have struggled to articulate an efficient

generic baseline rule, let alone deal with special cases and

exceptions. The precise zone for the efficient use of indirect

liability cannot be boiled down into any simple single-

sentence formulation. Indeed, in our judgment, the main

reason this case has reached the Court is because simple

summaries of a complex process have been allowed to

drown out meaningful analysis. Thus the complicated

balances recognized in Sony have been allowed to devolve

into the simplistic conclusion never to use indirect liability

for products merely capable of substantial non-infringing

use; and the very question of whether liability attaches in

the first place has become a distracting debate over the

rather than a careful consideration of whether direct

liability might plausibly be effective, whether the party at

issue could at low cost deter the relevant bad act, and

whether asking the party at issue to account for some of

the consequences of its decisions might help that party to

make more efficient decisions in the first place.

We therefore ask the Court as an initial matter to do

here for copyright law what it recently did for patent law

8

in Warner-Jenkinson: direct attention away from the

various imperfect verbal formulations that are today

regularly echoed in the case law, and instead refocus both

the parties and the lower courts on the fundamental

principles at issue.’ The lower courts might in response

begin to focus on obviously relevant economic factors —

such as whether the indirectly liable party at low cost

could have discouraged the infringing uses, and whether

the complaining copyright holder at low cost could have

pursued the direct infringers rather than litigating on

indirect liability theories — and not dismiss those factors

because they were for one reason or another not salient in

a previous case. Given time, complete and accurate legal

formulations will surely develop. For now, however, the

lower courts seem to be missing the forest for the trees,

and doing so because they are under the mistaken impres-

sion that this Court’s decisions require them to.

In Warner-Jenkinson, this Court explicitly refused to endorse any

of the competing, overly simplistic verbal formulations that at that time

were urged as the proper articulation of patent laws doctrine of

equivalents. See Warner-Jenkinson Co., Inc. v. Hilton Davis Chemical

Co., 520 U.S. 17, 40 (1997) (“In our view, the particular linguistic

framework used is less important than whether the test is probative of

the essential inquiry: Does the accused product or process contain

elements identical or equivalent to each claimed element of the

patented invention?”). See also Graver Tank & Mfg. Co. v. Linde Air

Products Co., 339 U.S. 605, 609 (1950) (Equivalence, in the patent law,

is not the prisoner of a formula and is not an absolute to be considered

in a vacuum.”).

9

2. Indirect liability should not be excused simply

because a product is potentially capable of non-

infringing use.

In this case, both the district court and the Ninth

Circuit adopted a relatively narrow interpretation of this

Court’s decision in Sony Corp. of America v. Universal City

Studios, Ind., 464 U.S. 417 (1984). That narrow reading

applies to technologies that facilitate both infringing and

non-infringing activity. Put simply, it states that the

manufacturer of this sort of technology is immune from

liability as long as the product in question is capable of

substantial non-infringing use. We do not believe that this

is an economically sound rule, nor a logical reading of

Sony. However, because this interpretation has been

adopted twice below and has been praised by at least some

copyright commentators, we thought it important to

specifically comment on it from an economic perspective.

a. The rule adopted below gives manufacturers

no incentive to deter infringement even

when deterrence could be accomplished at

low cost and without any significant inter-

ference with non- uses.

If firms that produce peer-to-peer technology know

that they are completely immune from liability as long as

their technology makes possible some qualifying amount of

non-infringing use, they will have no incentive to attempt

to discourage infringing uses even if the costs of doing so

are very low. This is the most significant defect in the rule

adopted below. By offering blanket immunity the moment

a firm can demonstrate sufficient legitimate use, the rule

completely destroys any incentive for the firm to do better.

10

Other indirect liability rules designed to protect

copyright on the Internet do not have this defect. One

provision of the Digital Millennium Copyright Act, for

example, encourages Internet service providers to block

access to allegedly infringing content by immunizing

service providers from liability for wrongful removals

made in good faith. But the provision restores the incen-

tive to take due care by (among other things) requiring

that service providers notify any party whose webpage is

blocked’ and reestablish access to the material in ap-

groximately ten business days if the implicated copyright

holder has not in that time successfully petitioned a court

for injunctive relief. Another provision of the Digital

Millennium Copyright Act similarly immunizes from

liability Internet intermediaries like eBay,’ but only on the

condition that they act expeditiously to remove infringing

content the moment they are made aware of its existence.”

As these examples suggest, immunity is routinely

paired with obligation. The result is not an onerous

burden, but a balanced rule that gives parties an incen-

tive to respect the law. In this spirit, firms responsible for

promulgating peer-to-peer technology might be expected

to undertake good faith efforts toward identifying and

implementing plausible low-cost mechanisms that might

discourage infringement. Or these firms might in cases of

innocent complicity be made subject only to injunctive

relief rather than cash damages, again as a way of

* 17 US.C. § 512(gX1).

Id at § 512(gX2KA).

Id at § 512(gX2XC).

Id at $$ 512(cX1), (d).

Id. at $§ 512(cX1XAXiii), (dX1Xc) & (dX3).

11

lessening the burden of liability while still leaving incen-

tives intact. These and comparable approaches would

create at least some incentive to respect existing copyright

rights when doing so is economical. The goal would be to

obligate firms that benefit from copyright infringement to

themselves protect copyright in instances where reason-

able modifications to the relevant technology could reduce

the number of infringing acts without substantially

interfering with non-infringing uses.

b. The rule adopted below mistakenly considers

non-infringing uses in isolation, rather than

evaluating them in light of substitute mecha-

nisms already available to accomplish the

same ends.

The Ninth Circuit explicitly celebrated peer-to-peer

technology as a mechanism by which new artists might

willingly introduce their work to the public. To the panel,

this was a substantial non-infringing use of the technology

and thus a reason not to impose liability for the various

infringing uses to which the technology is also put. The

economic flaw in this argument is that it fails to consider

substitute technologies that might allow the same benefi-

cial use but not cause the associated copyright harm.

Consider the Bible. Peer-to-peer technology could in

theory be used to disseminate copies of the Bible. That

* We take no position with respect to the question of whether

reasonable modifications are possible for the technology at issue here.

Our concern is that the lower courts deemed this question irrelevant.

Were the case remanded, the lower courts would have an opportunity to

review evidence along these lines, for example to see whether good faith

efforts were undertaken.

12

would be lawful, as there is no copyright in the Bible;

however, because there are already so many legitimate

ways to acquire a copy of the Bible dozens of websites

post free copies online, religious institutions in every

community offer free copies in print, and so on — the

marginal value of additionally making the Bible available

via peer-to-peer transfer is quite low. To label this a

“substantial” neu- infringing use is to overweight its

beneficial consequences; the right approach is to evaluate

substantiality in light of the next-best legally permissible

approach.

This argument calls into question many of the sup-

posed “substantial non-infringing uses” that are typically

identified by proponents of peer-to-peer technology. For

example, peer-to-peer technology is hard to defend on the

ground that it helps strangers recommend new music one

to another, because the closest substitute a system that

allows strangers to make suggestions one to another but

without actually offering each other copies of the music

files — makes possible almost all of the benefit but with

none of the harm. Similarly, the argument about new

artists using peer-to-peer technology to introduce their

work must be received skeptically, given that free central-

ized websites (like the original mp3.com) can easily be

used as repositories for music that is willingly placed in

the public domain.

These examples all make the same basic economic

point: at a minimum, possible legitimate uses of a technol-

ogy should be evaluated in light of plausible alternative

means by which to accomplish the same ends. The rule

adopted below neglects this comparative analysis, and it

therefore significantly misestimates the substantiality of

any non-infringing uses.

13

* * *

Economic analysis of this dispute reinforces what

common sense also suggests: the case was resolved prema-

turely, before key questions were asked and key facts

considered. Can copyright rights be sufficiently enforced

through direct liability such that indirect liability is

unnecessary online? Did the accused firms in good faith

consider improving their technologies in ways that would

reduce infringement but not significantly interfere with

non-infringing use? Are there non-infringing uses of this

technology that still appear substantial even when this

technology is compared to currently available substitute

mechanisms? These are central questions from an eco-

nomic perspective. The courts below failed to ask any of

them.

¢

CONCLUSION

The judgment of the court of appeals should be va-

cated and the case remanded for further consideration.

Respectfully submitted,

Davip A. STRAUSS*

DOUGLAS LICHTMAN

ANDREW ROSENFIELD

1111 East 60th Street

Chicago, IL 60637

(773) 702-9601

*Counsel of Record for Amici Curiae

App. 1

APPENDIX: AFFILIATIONS OF THE AMICI

Kenneth J. Arrow

Joan Kenney Professor of Economics, Emeritus

Stanford University

Nobel Memorial Prize in Economic Sciences, 1972

Ian Ayres

William K. Townsend Professor of Law

Yale Law School

Gary Becker

University Professor, Department of Economics

Professor, Graduate School of Business

The University of Chicago

Nobel Memorial Prize in Economic Sciences, 1992

William M. Landes

Clifton R. Musser Professor of Law and Economics

The University of Chicago

Steven Levitt

Alvin H. Baum Professor of Economics

The University of Chicago

2003 John Bates Clark Medal

Douglas Lichtman

Professor of Law, The University of Chicago

Editor, The Journal of Law & Economics

Kevin Murphy

George J. Stigler Professor of Economics

The University of Chicago

1999 John Bates Clark Medal

Randal Picker

Leffmann Professor of Commercial Law

The University of Chicago

Andrew Rosenfield

President & CEO, Leaf Group LLC

Senior Lecturer in Law, The University of Chicago

App. 2

Steven Shavell

Samuel R. Rosenthal Professor of Law and Economics

Harvard Law School