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

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IN THE

Supreme Court of the United States

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

Petitioners.

(GROKSTER, LTD.. ET AL

Respondents

On Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

BRIEF OF THE

NATIONAL VENTURE CAPITAL ASSOCIATION

AS AMICUS CURIAE IN SUPPORT OF RESPONDENTS

MICHAEL K. KELLOGG

Counsel of Record

MARK L. EVANS

DAVID L. SCHWARZ

KELLOGG, HUBER, HANSEN.

TODD, EVANS & FIGEL.

P.intsal.

1615 M Street, N.W.

Suite 100

Washington, D.C. 20036

(202) 326-7900

Counsel for Amicus Curiae

March 1, 2005

TABLE OF CONTENTS

Page

TABLES OF ALTE IIOGT CO cc~sisvecnisitaiahasinsitencsibieindti os ii

INTEREST OF THE AMICUS CURIABE 0o000......ccccccccceeceeeee l

I. SONY ESTABLISHED A _ BRIGHT-LINE

RULE THAT PERMITS CAPITAL INVEST-

MENT AGAINST A BACKDROP OF LEGAL

CERO SUETUE & corssudicovithivisecteneicantsitibitiaiiansiidadiusiebaiia’ 6

Il. REPLACING THE SONY RULE WITH ANY

OF THE PROPOSED STANDARDS WOULD

DETER INVESTMENT AND INNOVATION ......18

A. The “Predominance” Standard Articulated

by the United States Is Impracticable ............ 18

B. Economic Efficiency and Product Modifi-

cation Standards Are Similarly Flawed.......... 24

CONUS AION cxcsnsisccinesicenerniaitiosiinsiinticeiniatneiidinulidanecaiaade’ 30

TABLE OF AUTHORITIES

CASES

Aimster Copyright Litig., In re, 334 F.3d 643

(7th Cir. 2003), cert. denied, 540 U.S. 1107

Cable/Home Communication Corp. v. Network

Productions, Inc., 902 F.2d 829 (11th Cir. 1990)..10, 16

Dawson Chem. Co. v. Rohm & Haas Co., 448 US.

a i] 9

Hilton v. South Carolina Pub. Rys. Comm'n,

SED aE Tr CUED cscncocesdarhatpniiianseckbasiibibasisdiindinetionationte 13

Matthew Bender & Co. v. West Publ’g Co., 158 F.3d

fg I ORIEERS EE R 's Ce 18

Napster, Inc. Copyright Litig., In re, Nos. C-MDL-

00-1369-MHP & C-04-1166-MHP, 2005 WL

273178 (N.D. Cal. Feb. 03, 2005).....................:000eceeeees 17

Recording Indus. Ass'n of Am. v. Diamond Multi-

media Sys., Inc., 180 F.3d 1072 (9th Cir. 1999).......... 22

Sega Enters. Ltd. v. MAPHIA, 948 F. Supp. 923

a SE I cis cocetiirtlidelnsannde-siriuites vemiatidibpesdiiiamedbintunatees 16

Sony Corp. of Am. v. Universal City Studios, Inc.,

I es Ce ED vbivecetnnccnsiorcsepitiicceddagentbibtennien passim

UMG_ Recordings, Inc. v. Bertelsmann AG,

222 F.R.D. 408 (N.D. Cal. 2004) .................:ccceeeeeeeenenes 17

iii

STATUTES AND RULES

Digital Millenium Copyright Act, Pub. L. No. 105-

304, 112 Stat. 2860 (1998)...................cccccceeeeeeees 13, 17

Rf ESERIES ES ater Pd a ee eee eT l

LEGISLATIVE MATERIALS

Home Recording of Copyrighted Works: Hearings

Before the Subcomm. on Courts, Civil Liberties,

and the Administration of Justice of the House

Comm. on the Judiciary, 97th Cong., 2d Sess.

(1982), excerpt available at http://cryptome.

ESS a De EON 12

Testimony of Michael D. Eisner, Chairman &

CEO, The Walt Disney Company, Before the

Committee on Commerce, Science, and Trans-

portation, United States Senate (Feb. 28,

2002), available at http://commerce.senate.gov/

hearings/022802eisner.pdf.......................cccceeeseeeeeeeeeeees 29

OTHER AUTHORITIES

Apple Press Release, iTunes Music Store

Downloads Top a Quarter Billion Songs (Jan.

ET Se Se CaN ae! nee 14

Brooks Boliek, Mouse Grouse: Dis Boss Lays Into

Computer Biz, The Reporter.com, Mar. 1, 2002,

available at http://www .larta.org/pl/News

Articles/O2Marc01_HR_Eisner.htm .......................... 23

Ted Bridis, Music Group Files 261 Copyright

Lawsuits Against Internet Users, Assoc. Press

Newswires (Sept. 9, 2003)...............ccceeeeeeeeeeeeneennnnnenenes 15

Andrew Chin, Antitrust Analysis in Software

Product Markets: A First Principles Approach,

26 Mace, 35, O Tedd: 8 OD cesesinctcadeane 28

Nicolas Christin, Andreas S. Weigend & John

Chuang, Content Availability, Pollution and

Poisoning in File Sharing Peer-to-Peer Net-

works (2005), available at http://p2pecon.

berkeley .edu/pub/CWC-ECO5.pdf...........-ccesssssessesseeeee 15

Comm. Daily (Nov. 10, 1988)..................ccccceccesseeeeenenenennenes 12

Consumer Electronics Association, Video Source

Components, available at http://www.ce.org/

publications/books_references/digital_america/

home_theater/video_source_components.asp ............. 12

Einer Elhauge, Defining Better Monopolization

Standards, 56 Stan. L. Rev. 253 (2003) ................ 24-25

Matthew Fagin, Frank Pasquale & Kim Weather-

all, Beyond Napster: Using Antitrust Law to

Advance and Enhance Online Music Distribu-

tion, 8 B.U. J. Sci. & Tech. L. 451 (2002).................... 17

William W. Fisher III, Promises to Keep: Technol-

ogy, Law, and the Future of Entertainment

a 25

Brian Garrity, Victory Eludes Legal Fight Over

File Swapping, Billboard, Apr. 13, 2002, at 86........... 20

Global Insight, Venture Impact 2004: Venture

Capital Benefits to the U.S. Economy (2004) .............+. 1

2 Paul Goldstein, Copyright (2d ed. 1996) ...........-...-000» 19

Google News Release, Google Achieves Search

Milestone With Immediate Access To More

Than 6 Billion Items (Feb. 17, 2004) ...........00000000000c000- ll

Carla Hall, Buchwald Award Set at $900,000; Both

Sides Claim Victory in ‘Coming to America’

Dispute, Wash. Post, Mar. 16, 1992, at B1................. 21

Assaf Hamdani, Who's Liable for Cyberwrongs?,

87 Cornell L. Rev. 901 (2002) .............ccccccccccccocceceseceess 17

Jon Healey, MP3.com Sues Former Copyright

Counsel, L.A. Times, Jan. 19, 2002, at C2.................. 17

Mary Holden, /ntellectual-Property Disputes Flare

on the Electronic Frontier, Chi. Daily L. Bull.,

Rage. Ge, Baws GD 2 .crveuitintesitiiaenciniontaeiii ts 1l

Jim Hu, Music Group Sues Over MP3 Device, CNet

News.com (Oct. 9, 1998), available at

http://news.com.com/Music+group+sues+over+

MP3+device/2 100-1023_3-216534.html ...................... 12

International Federation of the Phonographic

Industry, JFPI:05 Digital Music Report (Jan.

2005), available at http://www.ifpi.org/site-

content/library/digital-music-report-2005.pdf ............ 15

Louis Kaplow, The Patent-Antitrust Intersection: A

Reappraisal, 97 Harv. L. Rev. 1813 (1984)...............-. 25

Jonathan Krim, High-Tech Tension Over Illegal

Uses, Wash. Post, Feb. 22, 2005, at E1, avail-

able at http://www.

dyn/articles/A42401-2005Feb21.html?sub=AR ......... .23

William M. Landes & Richard A. Posner, The

Economic Structure of Intellectual Property

PERE PRs eas eee Eg IP oy eit sens .20

Mark A. Lemley & R. Anthony Reese, Reducing

Digital Copyright Infringement Without Re-

stricting Innovation, 56 Stan. L. Rev. 1345

0 17, 20

Joseph P. Liu, The DMCA and the Regulation of

Scientific Research, 18 Berkeley Tech. L.J. 501

R. Kinsey Lowe, 2004: The Bottom Line, L.A.

Thana, Gam. DB, SBBB, G6 TES ccescececcsscccsseccvcscessessesasessescees 14

Michael S. Mensik & Jeffrey C. Groulx, From the

Lightweight “Rio” Flows Heavyweight Battle,

Nat'l L.J., Dec. 14, 1996, at BS................2...2222222200000000 ll

Joel Mokyr, The Lever of Riches: Technologi-al

Creativity and Economic Progress (1990) .............-.-.--+ 6

Music Industry Sues 83-Year-Old Dead Woman,

Assoc. Press, (Feb. 4, 2005), available at

http://www.boston.com/news/odd/articles/2005/

02/04/music_industry_sues_83_year_old_dead_

Felix Oberholzer & Koleman Strumpf, The Effect of

File Sharing on Record Sales: An Empirical

Analysis (Mar. 2004), available at http://www.

unc.edu/~cigar/papers/F ileSharing_March2004.

| EE ee 11

Recording Industry Sues Fayetteville Woman,

Assoc. Press State & Local Wire (May 5, 2004).......... 15

RIAA, Issues: Frequently Asked Questions —

Downloading and Uploading, available at

http://www.riaa.com/issues/music/downup_faq.

vii

RIAA Press Release, Record Industry Announces

Mid-Year 2004 Shipment Numbers (Oct. 20,

SUE cocineccicashttiasenicnininapsndicamstatinileiiieits tiniest tl caaditiais

Dennis Sellers, Jobs: iTunes Is New, Free Jukebox

Software (Jan. 9, 2001), available at

http://www.macworld.com/news/200 1/01/09/

NT, RES laws ST. 22

Ithiel de Sola Pool, Technologies of Freedom: On ~-

Free Speech in an Electronic Age (Harvard

PRR Si rE a s

John Philip Sousa, The Menace of Mechanical Mu-

sic, originally published in Appleton’s Maga-

zine, Vol. 8 (1906), pp. 278-284, reprinted at

http://www27.brinkster.com/phonozoic/menace.

RS eee airs NES DE FAT ET ll

Clive Thompson, The BitTorrent Effect, Wired

magazine, Jan. 2005, available at http://www.

wired.com/wired/archive/13.01/bittorrent.html............ 9

Robert Welkos, 2 Producers of ‘Batman’ Sue War-

po — era 5 it L.A. Times, Mar. 27, 1992,

OB TE cccenscccsnsesnsrcinncasvecnnstilltesiniiimintiidhiantiinsmsitmadiieaiian teil

Rick Whiting, The Sector That Produces Most of

Today's Software Probably Will Look Dramati-

cally Different in Just a Few Years —- Industry

in Flux, InformationWeek (Dec. 6, 2004), avail-

able at http://www.informationweek.com/show

Article jhtm!?articleID=5480019 ..000...........cccccccceeeeees .29

INTEREST OF THE AMICUS CURIAE '

Amicus The National Venture Capital Association

(“NVCA”) represents the interests of more than 450 ven-

ture capital firms in the United States, which together

account for more than 85% of venture funding. As the

only national trade group for the venture community, the

NVCA’s mission is to foster public awareness of the vital

role that venture funding plays in driving the United

States economy and to advocate public policies that stimu-

late entrepreneurship and innovation.

While the importance of venture capital firms and the

companies they fund to the United States economy is dif-

ficult to quantify, recent studies estimate that, in 2003,

venture-backed businesses were responsible for more than

10.1 million American jobs and accounted for more than

$1.8 trillion of the United States Gross Domestic Product

(“GDP”). See Global Insight, Venture Impact 2004: Ven-

ture Capital Benefits to the U.S. Economy 1 (2004). Such

economic mainstays as Intel, ederal Express, Home- De-

pot, Genentech, Google, and Starbucks were incubated

with venture funding. Each year, venture firms invest

more than $18 billion in start-up companies across the

country, which accounts for an estimated 72% of all ven-

ture investment worldwide. A decidedly American phe-

nomenon, venture capital funds and the companies they

back provide a key differentiator nS American

economic growth.

The NVCA’s members collectively invest $15 billion

each year, with a particular emphasis on emerging com-

panies in the information technology, communications,

and life sciences industries. In addition to providing early

funding to young businesses unable to secure capital from

' Pursuant to Supreme Court Rule 37.6, counsel for amicus repre-

sents that they authored this brief and that no entity other than

amicus, its counsel, or its members made a monetary contribution to

its preparation or submission. All parties have consented to the filing

of this amicus brief, and letters reflecting their blanket consent for the

filing of amicus briefs in this case are on file with the Clerk.

more traditional sources, NVCA’s member firms take an

active role in guiding nascent businesses through their

start-up phases. They work hand-in-hand with the entre-

preneurs and management, lending their experience and

expertise while developing long-term partnerships.

NVCA’s member firms accordingly have a unique per-

spective on the hurdles that nascent businesses confront

and the background conditions that promote or stifle

growth and innovation. NVCA’s member firms are deeply

concerned that any erosion of the bright-line protection

provided by this Court in Sony Corporation of America v.

Universal City Studios, Inc., 464 U.S. 417, 442 (1984), for

products that are “capable of substantial noninfringing

uses” would have a chilling effect on innovation and prod-

uct design by developers of multiple-use technologies and

services. NVCA’s members are particularly concerned

that the new standards for contributory infringement

proposed by petitioners and the United States would be

virtually impossible for venture capital firms to accommo-

date in making their initial investment decisions, when

the potential commercial applications of a promising con-

cept are still far in the future. Such malleable standards

— vague in their formulation and unpredictable in their

application — would invite courts to second-guess design

decisions and expose venture firms to potentially ruinous

litigation.

INTRODUCTION AND SUMMARY OF ARGUMENT

Any technology or service that makes it possible to copy

or distribute information can be used for copyright in-

fringement. The list of such technologies — which today

includes computers, the Internet, and e-mail, as well as

CD burners, iPods, and peer-to-peer file sharing — is ex-

tensive, as is the range of their legitimate uses. Modern

life would be impossible to envision without such “dual

use” technologies. Indeed, these “technologies of freedom”

— which allow the rapid spread of information free of de-

centralized control — are critical to our modern democ-

— =

Ce Frew -.

— <—e-

racy, as well as to our productivity and economic well-

being.

Freedom, however, is sometimes abused. There are,

and always have been, those who would abuse the power

afforded them by new technologies to copy and distribute

works that belong to others. Existing copyright laws pro-

vide severe penalties for such direct infringement, recog-

nizing that the few who are caught must provide an ex-

ample and deterrent for others.

But the entertainment industry has never been satis-

fied with attacking direct instances of infringement. For

more than a century, when it first claimed that the player

piano spelled the death of American music, the industry

has attacked in turn each new development that facili-

tates copying and distribution, from phonographs to

mimeographs, from audiotape players to VCRs, from com-

pact disks to mp3 players. As each new technology has

developed, the industry has sought to destroy or control it,

often extending their attacks to the inventors who created

and the investors who funded the product or service.

Fortunately, these attacks have been largely unsuccess-

ful. (And their failure, ironically, has been good for the

entertainment industry itself, which has in the long run

benefited hugely from the new methods of distribution.)

Under the bright-line rule established by this Court in

Sony, technologies and services that are “capable of sub-

stantial noninfringing uses” are protected from secondary

others use those technologies and services for direct in-

fringement of copyrights. Respousibility for copyright in-

fringement rests where it belongs: on the shoulders of

those who abuse products to infringe copyrights, not on

those who create products capable of substantial non-

infringing uses.

This bright-line protection has been critical to techno-

logical progress. Entrepreneurs have been able to develop

novel products without worrying that illegitimate uses

could impose ruinous liability. Because markets take

time to develop, and because the future uses to which a

product may one day be put (both legitimate and illegiti-

mate) are not necessarily evident in its early phases, Sony

allows an innovation to incubate without fear that third-

party infringement (present or future) will invite litiga-

tion.

Petitioners and their amici now ask the Court to over-

rule Sony (either directly or in the guise of interpretation)

and to depart from that bright-line rule. But none of their

reasons for doing so withstands scrutiny.

First, it is not true that the Sony test is meaningless be-

cause every product that could be used to infringe is also

capable of non-infringing uses. Some products (such as

descramblers) might have only infringing uses and would

not be protected. Sony protects only dual-use products

that are capable of substantial non-infringing uses.

Second, the fact that illicit copying is today easier than

ever, due to digital technologies, does not spell the death

of the entertainment industry any more than the player

piano spelled the death of American music. The industry

has been crying wolf for a century, while profits have

steadily increased. Indeed, products the industry origi-

nally attacked, such as the VCR and CD players, are

themselves responsible for much of that increase. In any

event, any fundamental changes in the law of copyright in

light of technological changes should be made, where they

have always been made, in Congress, not the courts.

Third, the claim that attacking individual acts of direct

infyingement is ineffectual is not, and never has been, an

excuse for re-directing the industry’s fire against the crea-

tors of new technologies that are capable of substantial

non-infringing uses and, hence, have substantial public-

interest benefits. The mandatory mechanism of statutory

damages for copyright infringement has crushing implica-

tions for multi-purpose technologies, where illicit use by

third parties could quickly mount into millions or even

’ gee I OP CLE e

billions of dollars of liability. It would be difficult to imag-

ine a more chilling environment for innovation.

Finally, the fact that a safe harbor for dual-use prod-

ucts might sometimes shelter those with bad intent is not

a reason to depart from a bright-line rule. If a companv

materially assists or encourages specific acts of infringe-

ment, secondary liability is appropriate. But the standard

activities of investing in, creating, developing, and mar-

keting products capable of substantial non-infringing uses

should be protected, without a fact-specific, inherently

amorphous (and hence litigation-inviting) inquiry into the

motivations or incentives of the inventor.

Even aside from the weakness of their attack on Sony,

the malleable standards with which petitioners and their

amici would replace it would have a devastating impact

on product innovation. The “predominance” standard

proposed by the United States, and supported by petition-

ers, would necessarily require a fact-intensive, quantita-

tive inquiry into the proporticnal amount of infringing

and non-infringing uses. It would be an open invitation to

costly and time-consuming litigation launched by en-

trenched businesses to quash start-up ventures. And, be-

cause the focus of such litigation would necessarily be on

a snapshot in time, it would ignore the dynamic processes

by which technological innovations move from the labora-

tory into the marketplace and develop unforeseen benefi- \

cial uses.

The product-modification standards proposed by peti-

tioners — whereby courts would decide whether products

should be re-designed to incorporate features that would

thwart copyright infringement — are even worse. Aside

from issues of judicial competence in judging the utility

and viability of alternative product designs — which,

again, is a dynamic not a static inquiry — such standards

would place the entire information technology industry at

risk: copyright-protecting devices could potentially be in-

corporated (at a high cost in re-engineering) at any point

in the hardware, software, and distribution networks that

constitute our information infrastructure. The scope of

what the entertainment industry is requesting — the po-

tential stranglehold that it seeks over the most vital por-

tion of our information economy — is truly breathtaking

and should be rejected.

ARGUMENT

Petitioners and their amici ask this Court to overrule

Sony. In some cases, they ask directly; in others, they

purport to seek only a clarification or refinement of the

status quo. But the bottom-line result is the same. They

seek to move away from the bright-line safe harbor cre-

ated by the Court, and relied upon by inventors and prod-

uct developers for the past two decades, in favor of an

amorphous test that would invite litigation and uncer-

tainty while suppressing innovation — all without doing

anything actually to protect copyrighted materials from

direct infringement. The case they make against Sony is

unconvincing and should in any event be made to Con-

gress, not the Court. More importantly, the tests with

which they propose to replace Sony would have a devas-

tating impact on the development of legitimate and valu-

able new products and services for consumers.

I. SONY ESTABLISHED A BRIGHT-LINE RULE

THAT PERMITS CAPITAL INVESTMENT

AGAINST A BACKDROP OF LEGAL CER-

TAINTY

1. “[{E]very invention is born into an uncongenial soci-

ety, has few friends and many enemies.”? In Sony, this

Court fashioned a margin of protection for such nascent

technologies. The Court articulated a bright-line rule for

determining liability under the doctrine of contributory

infringement that armed inventors and product develop-

ers — and those who fund them — with the knowledge

that a technology or service with legitimate uses would

not be driven out of the market because some or even

2 Joel Mokyr, The Lever of Riches: Technological Creativity and Eco-

nomic Progress 183 (1990) (internal quotation marks omitted).

most customers may use the product to infringe copy-

rights.

Borrowing from closely related concepts in patent law,

the Court noted that “contributory infringement is con-

fined to the knowing sale of a component especially made

for use in connection with a particular patent” such that

“a finding of contributory infringement is normally the

functional equivalent of holding that the disputed article

is within the monopoly granted to the patentee.” 464 U.S.

at 440-41 (emphasis added). Translating these principles

into copyright, the Court held that the sale of an “article[]

of commerce ... does not constitute contributory in-

fringement if the product is widely used for legitimate,

unobjectionable purposes. Indeed, it need merely be ca-

pable of substantial noninfringing uses.” Jd. at 442; see

also id. at 491 (Blackmun, J., dissenting) (liability only

appropriate when “virtually all of the product’s use . . . is

to infringe”).

The Court’s bright-line ru'e in Sony has been the mid-

wife for the technological revolution of the past two dec-

ades. It is not by chance that the Sony decision coincided

with a period of unprecedented innovation and technologi-

cal progress. By establishing a bright-line rule that pro-

tects new products and services provided they are “capa-

ble of substantial noninfringing uses,” Sony has provided

critical assurance to entrepreneurs that they could de-

velop novel ideas and products without worrying that

some unforeseen future use could impose ruinous liability.

Entrepreneurs frequently invent new products without

any clear picture of their potential uses, secure in the be-

lief that a good idea will eventually find a market. That

others could use the invention for copyright infringement

is and should be irrelevant to the question whe.her the

product or process can be placed in service of alternative,

legitimate ends. One cannot even begin to count the sta-

ples of modern life — radios, typewriters, tape recorders,

cameras, photocopiers, computers, fax machines, cassette

players, cell phones, CD burners, DVD players, e-mail,

cable modems and DSL for high-speed Internet access,

Internet search engines such as Google and Yahoo, TiVos,

and mp3 players such as the iPod — that can be used to

infringe copyrights and yet have perfectly legitimate uses

that we increasingly could not do without. Peer-to-peer

networks are another such innovation, whether used to

share photos among family and friends, to promote the

music of a new band, or to share research among scholars.

These are technologies of freedom that allow decentral-

ized propagation of information.’ They are critical to a

modern democracy, as well as to our economic well-being,

and must be protected. Admittedly, freedom is sometimes

abused. But Sony allows entrepreneurs to innovate se-

cure in the knowledge that a product that may be put to

both proper and improper uses will not subject the inven-

tor to ruinous liability, regardless of how the balance ul-

timately falls. The responsibility for copyright infringe-

ment rests squarely where it belongs, on the shoulders of

those who abuse such products to engage in specific acts

of unauthorized copying.

A critical feature of the Sony rule of law, moreover, is

that it is inherently forward-looking, focusing on whether

a product is capabie of non-infringing use. Because mar-

kets take time to develop, and because the future uses to

which a product may one day be put are not necessarily

evident in its early phases, Sony allows an innovation to

incubate without fear that a third party’s present in-

fringement will invite litigation that destroys the prospec-

tive venture.

3 Ithiel de Sola Pool, Technologies of Freedom: On Free Speech in an

Electronic Age 226 (Harvard Univ. Press 1983) (“The technologies used

for self-expression, human intercourse, and recording of knowledge are

in unprecedented flux. A panoply of electronic devices puts at every-

one’s hand capacities far beyond anything that the printing press could

offer. Machines that think, that bring great libraries into anybody's

study, that allow discourse among persons a half-world apart, are ex-

panders of human culture.”).

The Sony case itself provides the best illustration of the

fact that products often arrive before their primary mar-

kets emerge. At the time that case was decided, the Be-

tamax was used primarily for copying shows from over-

the-air broadcasts, either to build a library of such shows

or simply to engage in time-shifting. See 464 U.S. at 423

(surveys by both respondents and Sony “showed that the

primary use of the machine for most owners was ‘time-

shifting,’ ” although surveys also showed “that a substan-

tial number of interviewees had accumulated libraries of

tapes”). The primary dispute between the majority and

the dissent concerned whether time-shifting was itself a

fair use of the copyrighted material. Jd. at 442, 447-56:

id. at 477-86 (Blackmun, J., dissenting). But the Betamax

and its ultimately more successful competitor, the VHS

VCR, quickly evolved into something quite different: a

means of viewing lawfully rented movies. A whole indus-

try grew up to provide legitimate materials for a product

that the entertainment industry sought to crush in its in-

fancy. That was possible only because this Court in Sony

provided a protected space in which these legitimate uses

could grow. In that case, as in many others, the product

created its own legitimate market.

In other cases, an illegitimate market might develop af-

ter the fact. For example, BitTorrent (see p. 23, infra) was

initially developed to facilitate distribution of open-source

software, but the technology was quickly adapted by users

for infringing purposes. See Clive Thompson, The Bit-

Torrent Effect, Wired magazine, Jan. 2005, available at

http://www.wired.com/wired/archive/13.0 l/bittorrent.

html. There, too, Sony shields the creator from liability

even if the infringing use should come to predominate.

Sony thereby places secondary liability for copyright on a

par with patent law, which imposes contributory in-

fringement on “goods that are capable only of infringing

use in a patented invention.” Dawson Chem. Co. v. Rohm

& Haas Co., 448 U.S. 176, 213 (1980).

2. The Court's exercise in line drawing has accordingly

provided the legal certainty necessary for start-up firms

to mature, often with the support of venture funding. Pe-

titioners and their amici offer four reasons why the Court

should now depart from that bright-line rule. None with-

stands scrutiny.

First, pet’\»..ers and their amici suggest that the Sony

test is mean_agless because every product that could be

used to infringe copyrights could also be used for non-

infringing purposes. See Motion Picture Studio Pet. Br.

35-36: U.S. Br. 9: Law Prof. Br. 8-9; see also In re Aimster

that almost any technology might be deemed “capable in

- principle of noninfringing uses”), cert. denied, 540 U.S.

1107 (2004). But that is simply not true (though the as-

sertion does show the breathtaking scope of what peti-

tioners hope to accomplish here). For example, a product

that overrides the encryption of source code in copy-

righted software would not be capable of substantial non-

infringing uses. Its sole use would be specifically to per-

mit a copyright violation to occur. See, e.g., Cable/Home

Communication Corp. v. Network Productions, Inc., 902

F.2d 829, 837-39 (11th Cir. 1990) (developer liable for

promoting television signal descrambling chips).

By contrast, any product that simply permits general

digital copying (computers, CD burners, iPods) and distri-

bution (the Internet generally and peer-to-peer software

in particular) has far more potential legitimate uses than

illegitimate ones because there is much more information

that is freely available than is copyright protected. While

a majority of peer-to-peer software's current use may in-

volve unauthorized file sharing, it is only a matter of time

before the same software performing the same functions

will be overtaken by non-infringing uses. In digital form,

the roughly 30,000 new music albums released each year

in the United States‘ take up about 15 terabytes of stor-

age capacity. By way of comparison, more than 5 million

terabytes of digital files are produced and stored annu-

ally, huge quantities of which — even if subject to copy-

right protection — are made available for free to anyone

with access to the Internet.° By suppressing technologies

that ease access to this information, petitioners would

have this Court throw the baby out with the bath water.

Second, petitioners and their amici suggest that Sony

must be reconsidered because digital technologies have

made the copying and distribution of copyrighted materi-

als too easy. See Motion Picture Studio Pet. Br. 12: Prof.

Menell Br. 15-19; Law Prof. Br. 6; cf. U.S. Br. 21-22. But

the entertainment industry has been crying wolf for a

century, ever since John Philip Sousa claimed that the

player piano spelled the end of music in America. Each

new technology has been attacked as a grave threat to the

sanctity of copyright, yet somehow the sanctity of copy-

right has survived.’ The Sony case again provides the

* Felix Oberholzer & Koleman Strumpf, The Effect of File Sharing

on Record Sales: An Empirical Analysis 25 (Mar. 2004), available at

http://www_.unc.edu/~cigar/papers/F ileSharing_March2004 pdf.

* Google News Release, Google Achieves Search Milestone With Im-

mediate Access To More Than 6 Billion Items (Feb. 17, 2004) (explain-

ing that Google had indexed more than 4 billion web pages).

* See, e.g.. Mary Holden, Intellectual-Property Disputes Flare on the

Electronic Frontier, Chi. Daily L. Bull, Apr. 22, 1995, at 1 (“Every in-

best illustration of this fact. The Chairman of the Motion

Picture Association of America testified before Congress

that the motion picture industry would suffer devastating

financial losses if the VCR were not strangled at birth.

See Home Recording of Copyrighted Works: Hearings Be-

fore the Subcomm. on Courts, Civil Liberties, and the Ad-

ministration of Justice of the House Comm. on the Judici-

ary, 97th Cong., 2d Sess. (1982) (“[W]e are facing a very

new and a very troubling assault on our fiscal security, on

our very economic life and we are facing it from a thing

called the video cassette recorder and its necessary com-

panion called the blank tape. . . . | say to you that the

VCR is to the American film producer and the American

public as the Boston strangler is to the woman home

alone.”) (testimony of Jack Valenti, President, Motion Pic-

ture Association of America, Inc.), excerpt available at

http://cryptome.org/hrew-hear.htm. In fact, however, the

VCR and its successor the DVD player are today used

overwhelmingly to replay legitimately rented videos, and

have proved the prime generator of wealth for the movie

industry. Video and DVD rentals and sales now generate

substantially more revenue than movie theaters.*

In any event, even if petitioners are correct that digital

technologies are the Armageddon of copyright, that is a

point more properly directed to Congress. As this Court

noted in Sony, as “significant changes in technology” have

try's trade associations “declared war on recordable Compact Discs,

charging they ‘represent an even greater potential threat to copynght

owners than Digital Audio Tape. " Comm. Daily (Nov. 10, 1988). In

1998. the RIAA filed suit against Diamond Multimedia Technologies to

enyomn the release of the Rio mp3 player on the grounds that it facili-

tates music piracy. See Jim Hu, Music Group Sues Over MP3 Device,

CNet News.com (Oct. 9, 1998), available at http://news.com.com/

Music+group+sues+over+ MP3+device/2 100- 1023_3-216534. html.

* In 2003, consumers spent $16.1 billion on DVDs, $6.4 billion on

VHS purchases/rentals. and $9.2 bilhon on movie tickets. See Con-

sumer Electronics Association, Video Source Components, available at

http //www ce org/publications/books_references/digital_america/home_

theater/video_source_ components asp.

developed in this country, “it has been the Congress that

has fashioned the new rules that new technology made

necessary.” 464 U.S. at 430-31 & n.11 (citing player pi-

anos, photocopiers, cable TV, and audio tape recorders).

Indeed, Congress has already sought to address issues

connected with digital recordings and the Internet in the

1998 Digital Millenium Copyright Act (“DMCA”), without

in any way changing the bright-line rule of statutory con-

struction set forth in Sory. And Congress has been hold-

ing hearings on the specific issue of peer-to-peer file shar-

ing for several years without as yet deciding that any

change in the standards for contributory infringement is

needed. One issue in particular that has bred caution is

the potentially ruinous effects on inventors if copyright’s

rigid and punitive statutory remedial scheme were ex-

tended to multi-use technologies. See pp. 16-17, infra.

Because Congress alone has the institutional compe-

tence to consider and balance the competing interests at

stake here, and because Congress alone can adjust the

existing remedial scheme to fit new circumstances, this

Court has stressed “[t]he judiciary’s reluctance to expand

the protections afforded by the copyright without explicit

legislative guidance.” Sony, 464 U.S. at 431. Petitioners

should address their concerns to Congress rather than ask

this Court to rewrite the legal rules for contributory in-

fringement established in Sony that have proven so suc-

cessful. See id. (noting that Congress has “the institu-

tional ability to accommodate fully the varied permuta-

tions of competing interests that are inevitably implicated

by such new technology”). See also Hilton v. South Caro-

lina Pub. Rys. Comm'n, 502 U.S. 197, 205 (1991) (“the

doctrine of stare decisis is most compelling” in cases of

“statutory construction”).

Third, petitioners and their amici suggest that because

infringement is so widespread they must either attack

millions of individual acts of infringement or allow the

value of their copyrighted works to bleed away, suffering

death by a thousand cuts. See Motion Picture Studio Pet.

Br. 22; Songwriter Pet. Br. 9, 15; Prof. Menell Br. 13; Law

Prof. Br. 13. They want to break out of this “Hobson's

choice.” Baseball Br. 4, by focusing their attacks on the

inventors, investors, and entrepreneurs who create the

technologies and services that make the many acts of in-

fringement so easy to commit. But that is like the drunk

searching for his key under the street lamp because the

light is better there. Even if suppressing innovation in

the means of copying and distributing materials is more

effective than challenging individual acts of infringement,

that does not make it legitimate. Products with substan-

tial non-infringing uses should be encouraged not sup-

pressed. Persons who abuse those products to infringe

copyrights are liable, not the inventors and designers who

try to develop improved technologies.

In any event, petitioners’ argument proves too much.

According to them, copyright should already be dead be-

cause digital recording and distribution technologies are

so widespread and easy to use. Yet the entertainment in-

dustry is still thriving. Obviously, many people still re-

spect copyrights. They buy CDs. They buy or rent DVDs.

They download music from industry-sanctioned sources.

And, as for those who do not respect copyrights, the in-

dustry has developed means for dealing with them as

® See, e.g., RIAA Press Release, Record Industry Announces Mid-

Year 2004 Shipment Numbers (Oct. 20, 2004) (Overall, CDs and all

other audio and video music products shipped to retail increased by 8.5

percent in the first six months of 2004 . . . while the dollar value of

those shipments increased 4.5 percent.”); R. Kinsey Lowe, 2004: The

Bottom Line, L.A. Times, Jan. 3, 2005, at E1 (“Fueled largely by DVDs,

‘combined consumer spending on home video [in 2004] will end up

somewhere north of $25 billion, up from a little over $22 billion [in

2003]. said Scott Hettrick, editor in chief of the trade publication DVD

Exclusive.”); Apple Press Release, iTunes Music Store Downloads Top

a Quarter Billion Songs (Jan. 24, 2005) (“{MJusic fans have purchased

and downloaded more than 250 million songs from the iTunes® Music

Store. iTunes users are now downloading one and a quarter million

songs per day, which is an annual run rate of almost half a billion

songs per year.”).

well, however numerous they might be. The entertain-

ment industry has already launched successive waves of

litigation in a well-publicized campaign to terrorize home-

owners (most of whom couldn’t burn a CD or download a

song if their lives depended on it) for the sins of their

Internet-savvy 13-year-olds.'° This campaign has enjoyed

marked success, with illegal downloads dropping signifi-

cantly.'' In short, the industry has managed to shine a

spotlight on actual cases of infringement and to discour-

age those with punitive sanctions.'? Expanding punitive

sanctions to inventors and entrepreneurs who create

"© See, e.g., Recording Industry Sues Fayetteville Woman, Assoc.

Press State & Local Wire (May 5, 2004) (“A grandmother has been

sued by the recording industry for allowing her grandson to illegally

download and share about 500 copyrighted songs over the Internet... .

RIAA has offered to settle the lawsuit for $3,500, but Johnson said she

doesn't have the money.”); Ted Bridis, Music Group Files 261 Copy-

right Lawsuits Against Internet Users, Assoc. Press Newswires (Sept.

9. 2003) (“Durwood Pickle, 71, of Richardson, Texas, said his teenage

grandchildren downloaded music onto his computer during their visits

to his home. . . . ‘I didn’t do it, and I don't feel like I'm responsible,

Pickle said. .. . [Pickle] said he rarely uses the computer in his home.

‘Tm not a computer-type person,’ Pickle said.”); Music Industry Sues

83-Year-Old Dead Woman, Assoc. Press (Feb. 4, 2005), available at

http://www. boston.com/news/odd/articles/2005/02/04/music_industry

sues_83_year_old_dead_woman (the woman's daughter explained that

her mother hated computers and didn't even know how to turn 6ne on:

she added wryly: “I believe that if music companies are going to set

examples they need to do it to appropriate people and not dead peo-

ple[.] .. . 1 am pretty sure she is not going to leave Greenwood Memo-

rial Park (where she is buried) to attend the hearing.”).

'! See, e.g., International Federation of the Phonographic Industry

IFPI-05 Digital Music Report at 23 (Jan. 2005) (showing a decline in

illegal music files on the Internet from 1.1 billion in April 2003, to 870

million in January 2005, and that the number of infringing web/FTP

music sites on the Internet has declined by 25% since January 2004),

available at http://www ..ifpi.org/site-content/library/digital-music-

report-2005 pdf.

'? The industry has also engaged in various forms of self-help,

such as “poisoning and pollution.” See Nicolas Christin, Andreas S.

Weigend & John Chuang, Content Availability, Pollution and Poison-

ing in File Sharing Peer-to-Peer. Networks (2005), available at

http://p2pecon. berkeley edu/pub/CWC-ECO05.pdf.

products with substantial non-infringing uses is neither

necessary nor justified.

Finally, petitioners and their amici suggest that the

Sony test encourages bad behavior by inventors and

product designers who hide behind its protections in order

to make money off infringement. See Motion Picture Stu-

dio Pet. Br. 9-11, 27-29; U.S. Br. 17; Am. Tax Reform Br.

13-15. That is certainly possible, but it is not a reason to

change the bright-line test established by this Court. As

long as a product is capable of substantial, non-infringing

uses, it is a sucially useful product, whose development

should be encouraged. Abuse of the product should be at-

tacked, not the product itself, nor the inventor behind it,

nor the venture capitalist who funded the venture. If a

company materially assists or encourages specific acts of

infringement — whether through customer support

mechanisms or other communications — secondary liabil-

ity might well be appropriate. See, ¢.g., Cable/ Home

Communication, 902 F.2d at 837-39 (active promotion of

television signal descrambling chips); Sega Enters. Ltd. v.

MAPHIA, 948 F. Supp. 923, 933 (N.D. Cal. 1996) (Inter-

net bulletin board operator actively encouraged users to

upload copyrighted games). But the mere acts of develop-

ing, advertising, marketing, upgrading, and supporting a

multi-use product that is capable of substantial non-

infringing uses should be protected, without necessitating

a fact-specific, inherently amorphous inquiry into the mo-

tivations and incentives of the inventor.'*

It is critical to understand that the threat of secondary

liability from copyright suits is qualitatively different

from most other sorts of business risk that investors can

insure against or build into their risk calculations. The

mandatory mechanism of statutory damages — designed

to discourage direct infringement — has crushing implica-

13 Amicus NVCA takes no position on whether, on the record here,

respondents materially assisted or encouraged specific acts of in-

fringement.

tions for vendors of multi-purpose technologies, where

damages from unforeseen users can quickly mount in the

millions and even billions of dollars. And the indetermi-

nate reach of such secondary liability means that not

merely start-up capital is at risk, but also the personal

wealth of start-up’s officers, directors, and investors.'4 ~

The litigation risk in such circumstances is wholly eae

sided: minimal attorneys’ fees for the plaintiffs versus fi-

nancial annihilation for the defendants. It would be im-

possible to create a more chilling environment for creativ-

ity and product development. '®

At bottom, the problem with departing from the bright-

line rule of Sony is tautological: the industry would then

'* The prospect of such litigation is far from th iti

to suing Napster, for example, the recording adeete ben tenemenes

against venture capital firms and other investors that provided early

funding. See In re Napster, Inc. Copyright Litig., Nos. C-MDL-00- 1369-

MHP & C-04-1166-MHP, 2005 WL 273178, at *1 (N.D. Cal. Feb. 03

2005) (discussing suit versus venture capital firm Hummer Winblad

Venture Partners); UMG Recordings, Inc. v. Bertelsmann AG 222

F.R.D. 408, 413-14 (N.D. Cal. 2004) (discussing suit against investor

Bertelsmann). Indeed, after driving mp3.com into bankruptcy and

acquiring its assets, the studios have even brought suit against the

lawyers that performed corporate work for mp3.com in its start-u

phase. Jon Healey, MP3.com Sues Former Copyright Counsel LA

Times, Jan. 19, 2002, at C2. These scorched-earth litigation tactics are

expressly designed to discourage the development of any product that

is capable of infringing uses — a complete inversion of the Sony rule.

'® See Mark A. Lemley & R. Anthony Reese, Reducing Digi

right Infringement Without Restricting Innovation, 56 tg te a

1345, 1388 (2004) (discussing how the threat of liability has deterred

innova among computer programmers); Joseph P. Liu, The

and the Regulation of Scientific Research, 18 Berkeley Tech. Sey a

(2003) (discussing ways in which threat of liability under the Digital

Millennium Copyright Act deters innovation in field of encryption);

Assaf Hamdani, Who's Liable for Cyberwrongs?, 87 Cornell L. Rev. 901

(2002) (demonstrating that threat of secondary liability has led to over-

deterrence); Matthew Fagin, Frank Pasquale & Kim Weatherall, Be-

yond Napster: Using Antitrust Law to Advance and Enhance Online

Music Distribution, 8 B.U. J. Sci. & Tech. L. 451, 500 (2002) (“Innova-

tion in the technologies of distribution will decline markedly if poten-

tial new innovators are chilled by a threat of legal action”).

no longer have a bright-line rule. An unpredictable, fact-

driven standard would encourage litigation, and the pros-

pect of such ruinous litigation would inevitably inhibit

investment and innovation. We would all be the losers

thereby. That is most clearly seen by examining the al-

ternative tests for secondary liability proposed by peti-

tioners and the United States to which we now turn.

Il. REPLACING THE SONY RULE WITH ANY OF

THE PROPOSED STANDARDS WOULD DETER

INVESTMENT AND INNOVATION

Both petitioners and the United States ask the Court to

replace Sony's clear rule of law with malleable legal stan-

dards that would trade certainty for legal risk. Moving

from the bright-line Sony rule to any sort of malleable

standard — with its attendant loss of certainty — would

undermine investment in innovative technology. But the

particular standards proposed by petitioners and by the

United States would have especially disastrous conse-

quences for the companies funded by venture firms and

innovation more generally.

A. The “Predominance” Standard Articulated by

the United States Is Impracticable

Selectively quoting from the Sony decision, the United

States attempts to rewrite the standard for contributory

liability in a manner that threatens to sap investment in

technology-driven industries. According to the United

States, Sony's “commercial significance” test requires a

company-specific analysis of the qualitative balance be-

tween a product's legitimate and infringing uses. “[T]he

primary metric for measuring whether the seller's product

has commercially significant noninfringing uses,” the

United States contends, consists of “the relative signifi-

cance to the defendant’s business of a product’s infringing

versus noninfringing uses.” U.S. Br. 17. Where “the vi-

ability of the defendant's business is dependent on the

revenue and consumer interest generated by such in-

fringement,” the United States would have a court find

contributory infringement. By contrast, when “nonin-

fringing uses predominate,” the court could not find a

Separate and apart from the absence of any require-

ment in Sony that non-infringing uses “predominate,”!”

the legal test proffered by the United States is impracti-

cable and counterproductive. First, a “predominance”

analysis would necessarily require a fact-intensive, quan-

titative inquiry into the proportional amount of infringing

and non-infringing uses at a particular point in time. But

this type of numerical calculus — which was rejected by

the majority in Sony — simply invites lengthy and costly

litigation. By creating “questions of fact” that will require

extensive discovery, it encourages entrenched businesses

to file suit against prospective competitors and any other

nascent business whose product threatens their monopoly

interests. See Matthew Bender & Co. v. West Publ’g Co.,

158 F.3d 693, 707 (2d Cir. 1998) (“The Supreme Court ap-

plied [its substantial non-infringing use] test to prevent

original work to control distribution of (and obtain royal-

ties from) products that might be used incidentally for in-

fringement, but that had _ substantial noninfringing

uses.”); 2 Paul Goldstein, Copyright § 6.1.2, at 6:11 (2d ed.

1996) (Sony test prevents copyright owners from “influ-

enc[ing] the price and availability of goods that are not

directly connected to its copyrighted work”). Because the

‘© Petitioners invite the Court to apply an analogous standard, ask-

ing whether a product or service is “principally used” for infringing or

non-infringing uses. See Motion Picture Studio Pet. Br. 31 (“the staple

article of commerce defense should not apply when the primary or

principal use of a product or service is infringing”).

'T Not even the Sony dissenters advocated such a test. thoug

dissenters would have remanded to the district court “to a aon

on the ‘percentage of legal versus illegal home-use recording,” 464

US. at 492-93 (Blackmun, J., dissenting), they would have found h-

= only if “virtually all of the product's use . . . is to infringe,” id. at

particular application of ae» uch legal standards would

require a time-consuming aiid fact-intensive inquiry, it

would ‘necessarily be expensive to litigate and create the

pervasive uncertainty that drives away investment. See

Lemley & Reese, 56 Stan. L. Rev. at 1388 (“Over and

above the direct restrictions on innovation, the threat of

lawsuits or criminal prosecutions against innovators is

likely to deter a significant amount of innovation, some of

which would unquestionably have been legal.”). Precisely

that result has been sought and obtained on several occa-

sions by the entertainment industry. See notes 7, 14,

supra; see also Brian Garrity, Victory Eludes Legal Fight

Over File Swapping, Billboard, Apr. 13, 2002, at 86 (“Most

investment in peer-to-peer technology has dried up during

the past 18 months, partly as a result of the threat of liti-

gation.”).

Judge Posner's articulation of a related standard in his

Aimster decision suffers from the same defect. While

Aimster could have turned on the fact that “Aimster has

failed to produce any evidence that its service has ever

been used for a noninfringing use,” the appellate court

repeatedly emphasized the need to examine the probabil-

ity or “frequency of such uses.” 334 F.3d at 653. But see

William M. Landes & Richard A. Posner, The Economic

Structure of Intellectual Property Law 119 (2003) (“while

many of Sony’s customers, perhaps most, were infringers,

others were not”). But any such quantitative inquiry en-

ables copyright-holding businesses to tie up their prospec-

tive competitors in court, forcing these entities to spend

scarce resources on litigation instead of experimentation.

It institutionalizes legal uncertainty and grants en-

trenched interests the ability to block or delay innovation.

The only certainty that such a standard establishes — the

certainty of litigation — represents the antithesis of the

Sony regime.

Second, the gloss placed by the United States on its

proposed “predominance” test is even more problematic.

According to the United States, the Court must determine

whether the product is “commercial[ly] viab[le] . . . if lim-

ited to noninfringing uses.” U.S. Br. 11 (citing Sony, 464

U.S. at 491 (Blackmun, J., dissenting)). But many prod-

ucts — such as file-sharing software among scholars —

are used for wholly legitimate purposes, even if they have

no commercial market whatsoever. It is noteworthy that

neither the studios nor the recording industry petitioners

— both of which have their own issues concerning what

products are “profitable”'* — support such a test. Indeed,

a commercial-viability test is particularly troubling in the

entertainment industry for the simple reason that entities

that control the existing means of distribution also control

the vast majority of popular copyrights. When those enti-

ties wish to crush a new, competing distribution model

they concertedly refuse to license, and it becomes a self.

fulfilling prophecy that the current proportion of uses tilts

towards infringement. But, if they lose in their efforts to

ban the new technology, they license and the proportion

changes. Exactly that happened with the VCR and the

iPod, among others, which leads to the final point.

Third, the predominance test necessarily focuses on a

snapshot in time, without regard for contemplated and

even unknown future uses. Because a fact-finder could

only evaluate the “relative significance to the defendant’s

'® According to the recording industry, as many as 85- :

ucts lose money. See RIAA, Issues: Sveqnantie Adhed > aS om

Downloading and _ Uploading, http://www.riaa.com/issues/music/

downup_faq.asp. As for the film industry, creative accounting appears

to eliminate “net profit” from even the highest grossing films. See, e.g

Carla Hall, Buchwald Award Set at $900,000; Both Sides Claim Vic.

tory in ‘Coming to America’ Dispute, Wash. Post, Mar. 16, 1992. at B1

(although the Eddie Murphy film “Coming to America” earned gross

profits for Paramount of $145 million, the studio claimed it did not

earn any net profits and hence had no need to pay the writer or pro-

ducer). Writers and producers filed similar lawsuits for two of the

highest grossing films ever, “Forrest Gump” and “Batman”, because

studio calculations arrived at negative or vastly undervalued net prof-

its. See Robert Welkos, 2 Producers of ‘Batman’ Sue Warner Enter-

tainment, L.A. Times, Mar. 27, 1992, at D1.

business” at a fixed point, the non-infringing uses of

which a product is capable are irrelevant to the inquiry.

That not only disregards the language of Sony, which held

that products avoid contributory liability provided that

they “merely be capable of substantial noninfringing

uses,” 464 U.S. at 442, but also ignores the natural proc-

esses by which technological innovations move from the

laboratory into the general marketplace. Once again, it

would enable entrenched copyright-holders to halt the

very experimentation that will uncover alternative, non-

infringing, and socially and economically beneficial uses.

The evolution of the business model for the VCR at is-

sue in Sony demonstrates the danger of predicting a fu-

ture pattern of use. While the studios predicted on the

basis of early experience that the VCR would destroy the

movie business, video and DVD rentals and sales cur-

rently generate substantially more revenue than movie

theaters. See note 8, supra. When industry executives

cannot accurately predict the direction of the market, a

legal standard that asks the federal courts to engage in

such predictions has little to recommend itself.

The iPod, which has been responsible for the resurgence

of Apple, has a similar story line. Apple first invited cus-

tomers to “rip, mix, and burn” their favorite music when

releasing its iTunes software in January 2001 and then

embedding it on the latest version of the iMac personal

computer.'? The iPod followed later that year, with an

initial 5 gigabit version that could hold up to 1,000 songs.

Apple was immediately attacked by the major studios and

19 See Dennis Sellers, Jobs: iTunes Is New, Free Jukebox Software

(Jan. 9, 2001), available at http://www.macworld.com/news/200 1/0 1/09/

itunes/index.php. The first mp3 commercial players were developed

several years earlier, and the music industry immediately filed — -

enjoin their sale. See Recording Indus. Ass'n of Am. v. Diamond .

timedia Sys., Inc., 180 F.3d 1072 (9th Cir. 1999) (suit against Rio —

able mp3 music player). It is only because of the legal protection af-

forded by this Court’s Sony decision that the iPod could be developed,

marketed, and released.

accused of inciting theft.2° But it was not until April 2003

that Apple launched its iTunes online music store, after

reaching agreements with all of the major studios to sell

the ability to download individual songs or entire CDs. In’

the first quarter of 2005 alone, Apple reported licensed

online music sales of roughly $275 million, and it is now

selling 1.25 million songs per day. Just as licensed video

sales and rentals have eclipsed movie theaters in reve-

nues, it appears clear that licensed online downloads will

eclipse CDs. But neither could do so without the protec-

tion afforded by Sony for mixed-use technologies.

Peer-to-peer sharing is likely to provide yet another ex-

ample if permitted to develop. Thanks to a file-sharing

technology called BitTorrent, millions of users were able

to quickly download and view “lengthy amateur videos

documenting the devastation of the December tsunami in

the Indian Ocean, helping to spur an outpouring of chari-

table aid.” Jonathan Krim, High-Tech Tension Over IIle-

gal Uses, Wash. Post, Feb. 22, 2005, at El, available at

http://www. washingtonpost.com/wp-dyn/articles/A42401-

2005Feb21.html?sub=AR. BitTorrent’s main use, how-

ever, appears to be among those who want to trade Hol-

lywood movies and TV shows, thus “putting it in the cross

hairs of the entertainment industry.” Jd. The technology

obviously is capable of substantial non-infringing uses;

subjecting the inventor to ruinous liability would deprive

the marketplace and consumers of the opportunity to de-

velop a legitimate market for those uses.2!

Biz, The Reporter.com, Mar. 1, 2002, available at http://www .larta.org/

pl/NewsArticles/02Marc01_HR_Eisner.htm.

*! While the United States and petitioners contend that it would be

more efficient for users seeking publicly available material to go di-

rectly to the website that houses it than to use peer-to-peer file-sharing

software, neither has offered any evidence to support this factual as-

sertion. The Ninth Circuit, by contrast, found that peer-to-peer ar-

rangements “significantly reducled] the distribution costs of public

domain and permissively shared art and speech.” Pet. App. 16a.

B. Economic Efficiency and Product Modifica-

tion Standards Are Similarly Flawed

The subsidiary analysis that the United States would

have the courts conduct in “closer cases” is equally flawed.

According to the United States, when the qualitative

analysis uncovers a rough balance between infringing and

non-infringing uses, “it will often be appropriate for the

court to look to subsidiary indicia,” including such factors

as “(a) how the defendant markets the product; (b) the ef-

ficiency of the product for noninfringing uses; and (c) what

steps the seller has taken to eliminate or discourage in-

fringing uses.” U.S. Br. 17. Petitioners propose a compa-

rable list of factors. See Motion Picture Studio Pet. Br.

23, 26, 27, 30-38, 40-44.

Any such wide-open inquiry would inject the federal

courts into the business of evaluating the efficacy of prod-

uct design, substituting judicial second-guessing for the

discipline of the marketplace. That is a task for which

they are uniquely ill-suited.

1. Efficiency. Both petitioners and the United States

contend that the courts must analyze the extent to which

a product can be altered such that infringing uses “can be

readily blocked without significantly affecting lawful

uses.” Motion Picture Studio Pet. Br. 33. Petitioners and

the United States would thus have the federal courts

evaluate economic viability of specific business models

and the utility of alternative product designs.

Not only do the federal courts lack institutional compe-

tence for performing such a delicate task, but the mere

prospect of such fact-intensive litigation will invariably

thwart investment and innovation. See Einer Elhauge,

While legitamate arguments may support these competing conclusions,

the prior question that the United States fails to address is whether

the federal courts have the institutional capabilities to weigh the

competing evidence in such complex areas as computer software

and the life sciences. The marketplace performs this same function

automatically.

Defining Better Monopolization Standards, 56 Stan. L.

Rev. 253, 301 (2003) (rejecting analogous patent law pro-

posal by Professor Louis Kaplow that “each restrictive

practice imposed by a patentee” be evaluated by balancing

““‘the reward the patentee receives’ from the practice

against ‘the monopoly loss that results’ ” on grounds that

such case-by-case analysis “seems beyond the ken of anti-

trust judges and juries, and having it resolved through

antitrust litigation is bound to produce great uncertainty

and-highly inconsistent results, which would make busi-

ness planning impossible”) (quoting Louis Kaplow, The

Patent-Antitrust Intersection: A Reappraisal, 97 Harv. L.

Rev. 1813, 1816 (1984)). The virtual certainty of costly

and time-consuming litigation, in which the judiciary,

rather than the market, determines the economic viability

of products, will have a chilling effect on venture funding.

While venture capitalists are trained to evaluate the vi-

ability of business ideas, they have no confidence in their

ability to predict the outcome of litigation over alleged in-

fringement. Because established business interests like

the Motion Picture Studios and the Recording Companies

have shown no hesitation to use the courts to lay siege to

potential competitors, lawsuits are a virtual certainty.

See notes 7, 14, supra.

While the oligopolies that own the copyright interests in

an array of audio and visual recordings may benefit from

such legal uncertainty, the American economy will suffer

significant harms.”* Innovation will inevitably occur, ir-

respective of the hurdles imposed by the courts, but litiga-

tion risk will drive that innovation and ir.vestment over-

seas. Millions of jobs and billions of dollars and revenue

will be lost, as the epicenter of technology shifts from the

United States to Europe and Asia.

*2 See William W. Fisher III], Promises to Keep: Technology, Law,

and the Future of Entertainment 83-85 (2004) (discussing the multi-

year delay in bringing digital audiotape technology to the U.S. market

because of threatened, and later actual, litigation).

Moreover, even if the federal courts did have the ability

to perform this product development function effectively,

the economic viability of a product or service is not static.

While a majority of peer-to-peer software's current use

may involve unauthorized file sharing, it is only a matter

of time before the same software performing the same

functions will be overtaken by non-infringing uses. As

noted above, the amount of lawfully shared information

available over the Internet dwarfs the amount of informa-

tion subject to copyright protection. See pp. 10-11, supra.

Because today’s economics say little about a product's vi-

ability over time, the costs of relying upon such an imper-

fect standard far outweigh any prospective benefits. It is

virtually certain that the federal courts would err in pre-

dicting the future viability of a product’s non-infringing

uses, and that they would improperly drive products or

services from the marketplace. It is equally certain that

such an unpredictable legal standard will spur litigation,

and that transaction costs associated with a _ time-

consuming judicial inquiry would discourage the invest-

ment needed to bring nascent technologies to market.

The burden of showing that a company or product is

“commercially successful in the marketplace on the basis

of ‘wide use for legitimate, unobjectionable purposes,’ ”

Motion Picture Studio Pet. Br. 35 (brackets omitted), as

petitioners propose, would be prohibitive. Faced with

pervasive legal uncertainty that cannot be managed, ven-

ture funding will shift to other industries or overseas.

2. Infringement Deterrence. Disavowing petitioners’

argument that companies have an affirmative legal duty

to modify their products to prevent infringing conduct, the

United States properly recognizes that imposing any such

obligation “would have the undesirable effect of chilling

technological innovation and constraining the product de-

velopment options of developers of software and other

digital technologies.” U.S. Br. 20 n.3. In the same breath,

however, the United States contends that the failure to

engage in this exact same conduct is somehow “probative

of the true nature of the defendant’s business.” /d. at 19.

The law does not, and should not, so provide. See Sony,

464 U.S. at 427 (noting that plaintiffs sought injunction

“requiring that the machines be rendered incapable of re-

cording copyrighted works”); id. at 494 (dissent noting

that “Sony may be able, for example, to build a VTR that

enables broadcasters to scramble the signal of individual

programs and ‘jam’ the unauthorized recording of them”):

see also Aimster, 334 F.3d at 648 (“Sony could have engi-

neered its video recorder in a way that would have re-

duced the likelihood of infringement”).2°

The United States again invites the federal courts to

second-guess design decisions and to create a federal

common-law analog to design-defect inquiry in products

liability law. But the United States does not identify the

source of this second-order obligation to modify a product

to minimize certain potential uses. Nor does the United

States confront the question whether the federal courts

possess the institutional competence to evaluate product

alterations in the industries that will be most affected by

any revision of Sony's holding on contributory liability —

computer software, information technology, and the life

sciences. They do not.

Because the incumbent businesses will invariably be

able to identify some modification that would hinder the

use of a product for infringement, the facially simple stan-

dard articulated by the United States — whether a com-

pany “has taken reasonably available steps to deter in-

23 Notwithstanding this recognition that the Court

the argument that the VCR could have been pee ne apes ryt

fringement, the Seventh Circuit nevertheless held that “if the infring-

ing uses are substantial then to avoid liability as a contributory in-

fringer the provider of the service must show that it would have been

disproportionately costly for him to eliminate or at least reduce sub-

stantially the infringing uses.” Aimster, 334 F.3d at 653. The Aimster

court cites no authority for this proposition and makes no attempt to

reconcile it with Sony. Petitioners, who advocate a similar standard,

rely solely on Aimster. See Motion Picture Studio Pet. Br. 32-33.

fringing uses and focus users on legitimate uses,” U.S. Br.

20 — rapidly descends into a morass of legal uncertainty.

It would place the courts in the business of judging the

efficacy of competing technological designs, divorced from

the information and feedback that the market automati-

cally provides. It is this prospect, rather than the proper

application of the Sony rule, that is “antithetical to ‘inno-

vation driven by quality competition in a well-functioning

... product market.’ " Motion Picture Studio Pet. Br. 42

(quoting Andrew Chin, Antitrust Analysis in Software

Product Markets: A First Principles Approach, 18 Harv.

J.L. & Tech. 1, 82 (2004)) (ellipsis in original). Faced with

unquantifiable litigation risk, venture funding will seek

out alternative investment opportunities, and the public,

again, will bear the costs.

The United States additionally ignores the potential

spillover effect of its novel rule of contributory liability.

For just as respondents may be able to take reasonable

steps to prevent unauthorized file sharing, similar filter-

ing devices could easily be written directly into the hard-

ware and software that together constitute the average

personal computer. Indeed, there are numerous technolo-

gies and services that could bear the potential brunt of a

design obligation to prevent copyright infringement: in-

cluding the browser software, the broadband connection

(be it cable modem or DSL), the Internet Service Provider,

and the backbone provider. Grokster and StreamCast

software ride on top of the Windows operating system,

which could also be modified to filter infringing uses. In-

deed, any filtering device that could be implemented in

Grokster or StreamCast software could just as easily be

implemented in Windows or in the Intel or AMD micro-

processors that run nearly all personal computers.**

24 Testifying at a Senate Commerce Committee hearing on February

28, 2002, the CEO of the Walt Disney Company attacked Apple, Dell

Computers, Microsoft, and Intel, among others, for failing to develop

digital nghts management functions and accused them of promoting

Grokster and StreamCast are bit players, small opera-

tions using very simple code to permit file sharing.”

They will come or go without any real impact on copyright

infringement. Grokster and StreamCast are just stalking

horses for the real targets of the Motion Picture Studios

and the Recording Companies. They want to force fun-

damental, and hugely expensive, changes in the software

and hardware that constitutes the Internet, by imposing

an obligation on providers to design and engineer their

systems to block unauthorized file sharing. Such an open-

ended standard of liability would be a proverbial Pan-

dora’s box.

The clear rule of law that this Court articulated in Sony

has provided the backdrop for an unprecedented period of

technological growth and innovation. That revolution in

informaticnal technology, in turn, has been responsible

for the creation of millions of jobs in the United States,

directly and indirectly contributing billions of dollars to

the GDP. Replacing the Sony rule with a more amor-

phous, fact-specific standard, as petitioners and the

United States have advocated, would place these indus-

tries, and the nascent businesses that are their life blood,

at risk. By substituting the prospect of expensive litiga-

tion against entrenched copyright-holders for the legal

certainty provided by a bright-line rule, any substantive

revisiting of Sony threatens, at a minimum, to impose sig-

piracy. See note 20, supra. Eisner urged Congress to “mandate that

device manufacturers build the necessary hardware and/or software” to

protect against copyright piracy “in all digital media devices.” Tes.i-

mony of Michael D. Eisner, Chairman & CEO, The Walt Disney Com-

pany, Before the Committee on Commerce, Science, and Transporta-

tion, United States Senate, at 2-3 (Feb. 28, 2002), available at

http://commerce.senate.gov/hearings/022802eisner.pdf.

ee A simple file-sharing program requires as little as 15 lines of code.

Windows, by contrast, contains about 50 million lines of code. See Rick

Whiting, The Sector That Produces Most of Today's Sojtware Probably

Will Look Dramatically Different in Just a Few Years — Industry in

Flux, InformationWeek at 34 (Dec. 6, 2004), available at http://

www .informationweek.com/showArticle jhtm!?articlel[D=5480019.

nificant delays on the dissemination and market accep-

tance of new products and innovations. For venture capi-

tal firms, the additional layer of legal uncertainty — a

risk that can be neither measured nor managed — will

discourage investment in critical information technolo-

gies. The market, rather than the federal courts, should

drive such investment decisions. -

CONCLUSION

This Court should re-affirm the bright-line rule in Sony,

which creates a safe harbor for products that are capable

of substantial non-infringing uses.

Respectfully submitted,

MICHAEL K. KELLOGG

Counsel of Record

MARK L. EVANS

DAVID L. SCHWARZ

KELLOGG, HUBER, HANSEN,

TODD, EVANS & FIGEL,

P.L.L.C.

1615 M Street, N.W.

Suite 400

Washington, D.C. 20036

(202) 326-7900

Counsel for Amicus Curiae

March 1, 2005

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.