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Oral Arguments in Grokster & Ch. 4, 5 of "Free Culture"
Monday, August 23 2004 @ 03:20 AM EDT

EFF has put up the oral arguments in Grokster[MP3] [Ogg], so you can hear the music industry lawyers try to persuade an unpersuadable court that P2P users are all or at least 90% thieves and that P2P systems like Grokster should be shut down like Napster was.

The following exchange will give you a feel for the event. One attorney argues to the court that "the Internet is not a license to steal," and that "there's nothing different from what they're doing from organizing and instructing the participants in a trafficking network that is trading in counterfeit materials".

One of the judges interrupts him and says: "Let me say what your problem is. You can use these harsh terms, but you are dealing with something new. And the question is, Does the statutory monopoly that Congress has given you reach out to that something new, and that's a very debatable question. You don't solve it by calling it theft. You have to show why this court should extend a statutory monopoly to cover the new thing. That's your problem. So address that, if you would, rather than use abusive language." You don't want to miss listening to the attorney's reaction to that rebuke.

What the judge told him matches so exactly what Larry Lessig writes in "Free Culture", especially chapter 4 and 5 on Pirates and Piracy, that I've made a quick mp3 of those chapters, which you can listen to, if you'd enjoy to. Here it is as Ogg Vorbis. It's not a professional reading, naturally, and I cough at one point, so I apologize in advance. But I only learned how to use Audacity to record, and not yet how to edit. Here's a mirror, in case needed, for chapters 4 and 5 of Free Culture reading, thanks to Matt: http://www.lamp5.net

It is, I think, such a close match in thought that I really think the judges must have read his book and been influenced by it. The Grokster hearing is about a 15 MB mp3; the book is about 70, so those of you on dialup probably could read the chapters from the book yourselves by the time it would take to download it, so you may wish to skip my mp3 and either download "Free Culture" or buy it. Translations and many other formats, including more audio, are here.

We've had several requests for a transcript, one from a deaf programmer who was going a bit crazy not being able to follow along and who wrote:

"For a deaf person, who is professional software developer, and who is interested in the copyright issues, those MP3 files are not accessible.

"That interesting discussion, which is at distance of 25:40 minutes into the file, is as close as Alpha Centauri. We'll probably reach Alpha Centauri and return from it before that section can be directly heard by a deaf person."

Of course, we responded. And so here is the beginning 6 minutes, which I did, and then a gap we'll fill as more transcripts arrive. The second section is from 14:30 to 20:30, and yes, eventually, I'll fix all the names properly. This is very much a work in progress, so feel free to help out. If you see any errors, do let us know.

Here's a third section that has just arrived, from 10:00 to about 15:00. There may be some overlap, so bear with us as we weave it all together.

UPDATE: We have finished the transcript, thanks to Griffin3, gdeinsta, thparkth, Daddio, Totosplatz, Simon Gibbs, seanlynch, darkonc, Jonathan, ujay, and Galik, who all pitched in and got this done lickety split, thanks to distributing the work among so many willing community hands. This is not an official court transcript, obviously, and any errors are Groklaw's, not the court's.

There were actually more lawyers on this case than even on SCO v. IBM, mostly because there were multiple plaintiffs, songwriters, music publishers, and movie studios, and more than one defendant, not to mention the various amici who wished also to be involved. One of them was the Commissioner of Baseball, and I've been trying to figure out why. It takes the first three pages of the decision just to list all the plaintiffs and three more pages to list all the lawyers. Only a subset of all the attorneys spoke at the hearing, but the entire list is available in the decision. If you are curious, Russell Frackman, who represented MGM et al, is with the firm of Michael Silberberg; Carey Ramos, representing Jerry Lieber et al, is with Paul, Weiss, Rifkind, Wharton & Garrison; Fred von Lohmann, representing StreamCast Networks, is with the Electric Frontier Foundation. And Michael Page, representing Grokster, is with Keker & Van Nest.

The decision is here, if you wish to review. The Sony Betamax decision, frequently referred to, is here. The three judges hearing the arguments on February 3, 2004, were Robert Boochever, John T. Noonan, and Sidney R. Thomas, who wrote the final opinion, which was filed August 19, 2004 and which in summary found for Grokster and StreamCast:

"This appeal presents the question of whether distributors of peer-to-peer file-sharing computer networking software may be held contributorily or vicariously liable for copyright infringements by users. Under the circumstances presented by this case, we conclude that the defendants are not liable for contributory and vicarious copyright infringement and affirm the district court’s partial grant of summary judgment."

******************

Transcript of Grokster hearing:

[Gavel sound]

Judge Thomas: You may be seated. Good afternoon, ladies and gentlemen. We are now set to argue the case of MGM v. Grokster et al. You may proceed.

Russell Frackman: Good afternoon, Your Honors. My name is Russell Frackman. I represent the plaintiffs in the MGM appeal.

Judge Thomas: Is Grokster [phonetic - grock-stir] the correct pronunciation, by the way?

Frackman: Grokster is, I believe, the correct... I have a few other names for it, but . . . [laughter in the court]

Judge Thomas: I'm sure we'll be hearing about that.

Frackman: With the court's permission, I would like to speak for as close to fifteen minutes as I can. My colleague, Mr. Ramos, who represents the plaintiffs in the Lieber case, will speak for as close to ten minutes as he can, and we'd like to reserve five minutes for rebuttal.

Judge Thomas: Very well.

Frackman: Now, Your Honors, in our view, there is one single, overarching question before the court and that is whether the defendants can be permitted to knowingly build and operate and profit from a business that is built on and depends on preventable -- I underline preventable here -- massive copyright infringement, a business that could be operated lawfully, if the defendants chose to, but which they choose not to, in fact to ignore the ability to operate the business lawfully. . .

Judge Noonan: You know, when you put it that way, the word that flashes into one's mind is Sony. Almost everything you said could have been applied to Sony. So what's the difference?

Frackman: A great deal of difference, Judge Noonan.

Judge Noonan: But Sony did many of these things that you attribute to Grokster.

Frackman: Sony was a business that at the end of the day, according to the United States Supreme Court, operated largely and primarily lawfully for time shifting. . .

Judge Noonan: That wasn't the criterion. You know that? You know that was not the criterion. It was just that they could put out a, quote, substantial number of noninfringing uses.

Frackman: It was... They had a substantial, a primary number of noninfringing users.

Judge Noonan: [unclear] Is that in Sony?

Frackman: Yes, Your Honor. 75% according to the surveys.

Judge Noonan: Is that part of the opinion?

Frackman: Yes, sir.

Judge Noonan: Where?

Frackman: It's in the footnotes in Sony that discuss in particular the surveys that were conducted by both sides.

Judge Noonan: This makes the difference? It's primary?

Frackman: No, Your Honor. That's one of the considerations.

Judge Noonan: That's something you found in the facts of Sony. It's not, I don't think you find it in just the statements.

Frackman: Sony is obviously a very fact-intensive opinion. That is one of the aspects.

Judge Noonan: I mean, you wanted to distinguish Sony. But 80% of how you presented the question, every word would have applied to Sony and I want to know what the difference is.

Frackman: If I can, Judge Noonan...

Judge Noonan: Go ahead.

Frackman: The difference is in Sony, there was, number 1, no evidence that the infringement was preventable. The injunction sought by the plaintiffs in that case and what the Supreme Court said was, if we find in favor of a minority number of plaintiffs here, 10%, who own a minority amount of copyrighted works, that's the end of the technology. It's shut down. It's over. It's done with. And under those circumstances, at the very least, it is not just or proper or appropriate or fair to permit a minority number of defendants to close off a technology.

Number 2, Judge Noonan, and in a difference to what I posited the question here, there was no evidence in Sony that the business, that the VTR machine, could be operated in a noninfringing manner, uh, let me put it this way, that the infringements could be separated out from the noninfringements. It was an all-or-nothing situation.

Number 3, Judge Noonan, in Sony , there was no ongoing relationship. The Supreme Court makes a point of saying that. Sony made a product, put it into the stream of commerce, sold it, got its money when it sold its product, and that was the end of it. The defendants here make their money in just the opposite way. They give away their product -- their software -- in fact, they license it, because they continue to hold title to it, for the very purpose of capitalizing from this ongoing relationship, advertising relationship that they have, an ongoing relationship that I would submit to the court, and I, and supported by the record, is based on 90% infringement in a situation where they could have filtered precisely the same way that this court ordered Napster to filter. Because Judge. . .

Judge Noonan: Is there anything in Sony that tells us we ought to look at the percentages? Anything in the opinion of the court?

Frackman: Um . . .

Judge Noonan: Isn't the word "substantial" noninfringing use?

Frackman: The court used, the court in Sony uses several iterations. One is "substantial noninfringing use" and the other is "commercially significant noninfringing use."

Judge Noonan:Is that not the case here?

Frackman: No, Your Honor, it definitely is not the case here. Judge Wilson, in his opinion, indicated, ah, seemed to believe that there was no dispute; however as we have set forth in our briefs, there was a significant dispute as to whether there was a substantial noninfringing use here, or a commercially significant noninfringing use.

Judge Noonan: Well, I read one of the briefs that said there was something like seven hundred million files, is that correct?

Frackman: Oh, I would imagine, many many more than that.

Judge Noonan: Many more. And that your highest figure of your protected uses was 90%, so 10% of seven hundred million or something, are noninfringing. That sounds like a lot of noninfringing files to me.

Frackman: Actually, Your Honor, to be precise about it, 90% were infringing, the other 10%, we could not determine.

Judge Noonan: Well, those are *your* figures?

Frackman: Yes, Your Honor. In Napster, I would point out to the court, the number was 87% infringing. This court in Napster indicated that there were noninfringing uses. Napster's "New Artist" program, for example. And what this court in Napster said was, that doesn't matter, and it doesn't matter for a couple of reasons. It doesn't matter, number one, because the plaintiffs aren't trying to stop those noninfringing uses, only the infringing uses. And it doesn't matter, number two, this court said in Napster, because the Sony case is of little assistance, that's this court's language, of little assistance to the plaintiffs, to the defendants I should say, because of actual, specific knowledge of infringing activity. That's the way *this* court read the Sony decision, because, at the end of the day, Your Honor, everything I said about the defendants here, I would submit, I could have and indeed three years ago did say about Napster.

Judge Noonan: Yeah, but at the end of the day, we have to look at the Supreme Court, I think. We can't--

Frackman: Absolutely so, absolutely so, and in fact I want this court to look to the Supreme Court in that regard, just like this court in Napster looked to the Supreme Court. This court has a lengthy discussion in Napster of the impact of the Sony decision in this particular case. And I would, I glean from that two things, at least. Number one, that this court had an interpretation of Sonywhich I would submit is consistent with Sony, that said that Sony stands for the proposition that the court may not infer, simply from the mere fact that a product, and of course our view is that this is not a product, it's a system and a business, but a product, from the mere fact that a product may be used for infringement, the court may not infer knowledge. This court, then said, that is not the case here. The plaintiffs are not asking us to infer knowledge from the mere fact that the product may be used for infringement.

Judge Noonan: Didn't Sony advertise its product as a way of taping your favorite show?

Frackman: According to the Supreme Court, no, there was no advertising that induced, in the Supreme Court language, no advertising that induced infringement, in that case.

Judge Noonan: You're a little skeptical about that aren't you?

Frackman: Not really. I was just thumbing through to find the the quote which . . . and I am, I'm not skeptical of it, Your Honor. I know it's near the beginning but I don't know exactly where. But if I may, the Sony decision informed this court's view of Napster, this court's view of online infringement, and what this court said was their... we don't have to rely, and the plaintiffs aren't asking us to rely, on the mere fact that a product may be used to infringe. They've got overwhelming evidence and we... and the court cited it in Napster in the footnote including actual notice of 12,000 files. Well, here we gave actual notice of 8 million files. They have overwhelming both actual and constructive knowelege and that makes... that simply makes Sony inapplicable as a defense here. And what this court ended up saying in that regard, if I can direct the court to the end of the Sony discussion, and that's on page 1021: “Regardless of the number of Napster's infringing versus noninfringing uses the evidentiary record here supported the district court's finding that the plaintiffs would likely prevail in establishing that Napster knew or had reason to know of its users' infringement of plaintiff's copyrights”. And that's why this court said Sony is of little assistance.

Now the district court, Judge Wilson, ignored this issue and this standard. And in addition to ignoring it, I would submit, Your Honors, he, number 1, said that there was no issue as to substantial noninfringing uses here. A, under Napster 1 that doesn't matter, because there was no issue as to actual, specific knowledge. But, B, it was seriously contested. The only evidence in the record is the evidence that we put in. 90% infringing use. The defendants, who had at least equal access to their systems and to their indexes, chose not to put in any evidence at all of the percentage of infringing verses noninfringing uses. He only...

Judge Noonan: But Judge Wilson does refer to.. he makes a finding there are substantial noninfringing uses. That's a finding of fact...

Frackman: Well but he can't do...

Judge Noonan: ... you have to show he is wrong.

Frackman: No he can't do that, Your Honor. This is summary judgment. It's contested. All I have to do is show that it's a...

Judge Noonan: ...contested when all you've got is 90%. There's 10% that is the other...

Frackman: And, and that...

Judge Noonan: Where's the contest?

Frackman: The contest is that it has to be substantial. 90%...

Judge Noonan: 10% is not substantial?

Frackman: No, Your Honor. 10% is, number 1, not substantial when you have 90% that's infringing...

Judge Noonan: That's a question of law...

Frackman: Number 2. . .

Judge Noonan: I suppose...

Frackman: Number 2, in Napster, of course, we had 87% not 90%...

Judge Noonan: Well, that's not the... I don't think the percentage is an established ...

Frackman: Number 2, it was their burden to come up on this defense to show what was noninfringing. We had anecdotal evidence. That's all it was...

Judge Noonan: That may be good enough.

Frackman: I think when you examine the evidence.

Judge Noonan: What?

Frackman: When you examine that anecdotal evidence you see one work of Shakespeare here, lots of reference to peer-to-peer systems generally, not to these systems, very nonspecific. When we did our survey and we picked out, I think it was 1600 at random, there wasn't a single public domain material there. If you look at Judge Wilson's examples in his opinion, they are indeed not noninfringing uses. He talks about distributing movie trailers, that's not noninfringing. That's an infringing use. That's copyrighted work. . . .

[14:30 - 20:30]

He talks about using the software where it's legal. Well, it's...it may be legal outside the United States, but this is a US case based on US copyright law, US infringers, US copyright, US plaintiffs. "We're sharing the works of Shakespeare", of which in the record there is maybe a single work of Shakespeare or a couple that were found. Not only that, Your Honor, what the Supreme Court says is, not only must it be substantially noninfringing use, it must be a commercially significant noninfringing use, which is to say it has to be something that they could base a business on. There was absolutely no evidence here that this business, and one would expect absolutely no evidence, that a business that is based on Napster -- they started out based on Napster -- OpenNap, bringing Napster's users, Napster's works, when this court said their users are infringers, the works are infringing. They took those users and brought them to their systems. That's the basis...that's the commercial basis of their system. That's in the record.

You have to have a commercially significant use. They had barely any use, it certainly was not commercially significant and ultimately, Your Honor, I would submit...and my portion of my time, er, is fleeting, but I would leave you with the one final thought that I think pulls it all together, which is if 10% is significant and if 10% is commercially significant, then let them build their business on the 10%. And they can go on and do it with a simple fix. They can eliminate the 90% infringement, same kind of simple fix that Napster was required to implement, and the copyright law can not and ought not to tolerate 90% infringing -- 90% infringement -- that is fixable in a business operated for profit, simply because there is a very small number, as there was in Napster, of noninfringing, assertedly noninfringing, uses.

Judge Thomas: Before you sit down, you've focused on the word preventable, and the district court made a finding, or at least made the observation, that if you shut down these services today, that the infringement would continue. I think the words were that the users would share files with little or no interruption. I guess two parts. One is, do you agree with that, and two, if it's true, then aren't we just chasing the wind here? Isn't this use going to continue and in fact you really are left without a remedy?

Frackman: No, it's not true, Your Honor...not accurate, I should say. A couple of things. We pointed out in our brief, our expert, Professor Horowitz testified in his declaration, that if they simply walked away, the system would eventually degrade and it would disappear; it would close down. Certainly Grokster, all they have to do is to stop paying their 60% to their licensor. We saw what happened to Music City when it stopped paying; it was gone. That's number one.

Number two, Your Honor, I would submit that -- so I think it's factually incorrect and certainly contested in the record -- but maybe more important, I think it also in a sense is asking the wrong question. After all, when Napster was closed down by this court, it continued. OpenNap -- they used OpenNap. Napster continued. That didn't mean that this court ought not to shut down Napster for massive infringement, but the fact, the wrong, the wrong has been done. The putting together of the system, the operating of the system. The fact of the matter, as we pointed out to Judge Wilson, is they haven't walked away, and they're not going to walk away because that's how they make their money. And finally...

Judge Thomas: I guess the question is especially, as we're talking about Open Source programs, that's out of the stream of commerce, it's going to be very difficult to control that. Even if you obtain an injunction in this case. This is more of a practical question.

Frackman: You've got two aspects here, of course. You have the FastTrack system, which is a closed proprietary system, and then you have the Morpheus system. The Morpheus system does interact with Gnutella. The evidence in the record, by the way, is it is not Gnutella. It is, the majority of their program is proprietary to StreamCast. But the fact that if they walk away nothing might happen doesn't answer the question of the ability to control. They can be ordered by this court, as Napster was, to do something to control.

If I leave my office with the light on without flipping the switch, the light's going to stay on, but eventually it'll burn out. That's what we've said here -- eventually this will disappear. But I also have the ability to flip the switch, and what we're ultimately asking the court and Judge Wilson to do is to order the same kind of injunctive relief that this court affirmed in Napster 2, which is, in essence, flip the switch, the defendants, control it, and the evidence certainly is that even though it is based on Gnutella, even though it is a decentralized system, filters and blocks can be put into place that will limit the infringement over that aspect of the system, and, based on Napster 1, based on Napster 2, that is not only something that ultimately we believe the district court should order after this case is reversed. But it's not an idle act. We're dealing with millions and millions and millions of users here, who can be blocked from distributing and copying copyrighted works.

Judge Thomas: Thank you, counsel. Your colleague's getting nervous, so you better get to him.

Frackman: So was I.

[5 second pause]

Carey Ramos: May it please the court, my name is Carey Ramos, and I'm here today on behalf of over 27,000 songwriters and music publishers who own the rights to over 90% of the music recorded in the US. They've been certified as a class in this case. I was going to begin by talking about how effectively defendants' services are built on the backs of my client's music, that's what lures people to these sites. They don't go there because they think their technology is cool; they go there because they want to get music and movies, and that is reaching into my client's pockets. But I'd like to address some of the points, one of the points that came up that Judge Norris had asked about, and focus on a couple of very specific issues and then step down. One thing I wanted to clarify with regard to Judge Norris's question--

Judge Thomas: Judge Noonan, it was.

Ramos: I apologize. Forgive me. The 10% that Mr. Frackman referred to and that Judge Noonan, forgive me, Your Honor, asked about. We were not able to determine whether those were infringement or not. In other words, we couldn't figure out what those were. We did not find any of the examples that were given by the defendants. We didn't find the Bible, we didn't find Shakespeare, we didn't find any of the noninfringing works or categories of noninfringing works they referred to. We just weren't able to identify them. Those may be infringing as well. We put forward a survey that showed that we were able to determine that 90% were infringing. They did not put forward any competing survey, so there's no opposing evidence on the other side saying that 10% is noninfringing or any other number is noninfringing. That is the sole record here and as Mr. Frackman said, I think 90% is by definition higher than 87%.

Second, defendants claim that all they do is distribute software. In fact, they do much more. They upgrade software, they promote their services, they filter out pornography and computer viruses, but let's just focus on the software, and demystify it a little bit.

Software is a set of instructions. This court has said that before, that is what software is. It's instructions to a general purpose computer to do something. And here those instructions are to create a massive network for trafficking in pirated music. This includes instructions to use these computers to become supernodes, listing available music and movies, to ultra peers, to identify other users who have copyrighted content, and most significantly those instructions include a hook that requires that the user's computer go back to the defendant's web site every time they enter the network, so they can sell their advertising. That's key here, as Mr. Frackman said. There is a continuing relationship between the defendants and their users, and they are following the instructions that created the network, that creates the site and facilities that this court spoke about in Napster.

There's no question that if the defendants had formed a network for trafficking in physical pirated goods, by distributing instructions to each of the participants in how to copy and distribute the pirated goods, they'd be liable, irrespective of whether they were careful to be sure they weren't physically present at the moment the goods changed hands because they wanted to argue later, "We couldn't stop that sale; we weren't there." They would be liable. So why is it any different here? The defendants use the talismatic term "technology", as if that's going to give them immunity, and I would suggest to this court, the Internet is not a license to steal. There's nothing different from what they're doing from organizing and instructing the participants in a trafficking network that is trading in counterfeit materials than what they are doing.

Judge Noonan: Let me say what your problem is. You can use these harsh terms, but you are dealing with something new. And the question is, Does the statutory monopoly that Congress has given you reach out to that somthing new? And that's a very debatable question. You don't solve it by calling it theft. You have to show why this court should extend a statutory monopoly to cover the new thing. That's your problem.

Ramos: Your Honor...

Judge Noonan: So address that, if you would...

Ramos: Your Honor, I would be, I. . .

Judge Noonan: ...rather than use abusive language.

Ramos: You Honor, the, the... and to get your name wrong, which I apologize for.

Judge Thomas: I'm sure Judge Norris has an opinion on this. [courtroom laughter]

Ramos: I keep coming back to him.

Judge Thomas: That is an important point.

Ramos: Pardon me?

Judge Thomas: It is an important point, and I hope you address his question.

Ramos: Yes, I will, Your Honor. The Copyright Act specifically contemplates that there are going to be changes in technology. If you look at the definitions in the Copyright Act, they're broadly drafted to anticipate that there will be changes in the technology by which copyrighted materials are distributed and copied. And indeed -- in this regard, I can speak on behalf of my clients -- in 1995, Congress amended the Copyright Act specifically to say that the regime for copyright that applies to musical works, which my clients own the rights to, would apply on the Internet as well as in the physical world. And I think that makes it absolutely clear -- that was Congress's intent. Congress anticipated that technology would change and in effect, you know, asked the courts to enforce the laws as technology continues to evolve. Were that not the case, we would very quickly, my clients would very quickly lose their rights with every new piece of technology that comes out. But I do want to emphasize, because Judge Noonan used, I guess, I may have used the word theft, but Judge Noonan used the word monopoly. The copyright monopoly is very limited. It has numerous exemptions, for facts and other things. It is a very weak right. It is an ephemeral right. Once my clients write songs, they can't put them back into a locked box. They're out in the world. And they rely on the courts, on the law, to protect them. If the law is not there to protect them, they effectively lose their rights.

That is what we fear has happened here. They are not able to be compensated for the massive distribution of their works on these services. The one other thing I wanted say and then I will sit down is that these defendants originally had registration servers, they required everybody to register, and that gave them the ability to kick people off if they wanted to. And in Napster this court specifically said, if you have that ability, that constitutes the right and abililty to supervise under the vicarious leg of our claim.

Judge Thomas: Doesn't that go to the damage portion of the case, which is not before us, though?

Ramos: No, Your Honor, I think it does not. It goes to the question of whether they have the right and ability to supervise with regard to vicarious liability. And remember, vicarious. . .

Judge Thomas:As I understand the sysem now, and you can correct me if you think I'm wrong, that ability no longer exists in the system.

Ramos: Your Honor, it doesn't exist in the sytem for a very good reason. They got rid of it intentionally. In the record, at page 5114, you will find a request from Grokster to KaZaa, to Mr. Zindstrom, who is responsible for writing the FastTrack software, quote, "Per our contract, please forward to us the latest update that includes no requirement for registration server and any other improvements that are currently available. They wanted to get rid of that. They got rid of it shortly after we filed our lawsuits. I think that's very telling. And it clearly establishes they had the right and the ability to do it. They did it before. Why did they get rid of it?

Registration is very, is a very valuable thing from an economic standpoint. It's very common in the computer industry to register users when they come to their sites. They disabled, I would suggest, because they knew under Napster, that proved that they were liable. And I think that's like taking the speedometer out of your car and think you can beat a speeding ticket based on that.

Judge Thomas: Or perhaps they were just trying to take a lesson from Napster and get a use that was conforming with existing law. I'm sure that's what, I'm sure they'll tell us that.

[5 second pause, crowd noise]

Judge Thomas: But it's their turn.

Ramos: It is their turn, and I thank the court, and again I apologize for taking the extra time.

Judge Thomas: We will see that they get the extra time. [30:28-32]

[5 second pause]

Judge Thomas: Do you have a time division as well?

Fred von Lohmann:Yes, Your Honor. May it please the court, Fred von Lohmann, representing appellee StreamCast Networks, and here with Michael Page, who I will be sharing my time with, who represents appellee Grokster.

The record here is replete with undisputed evidence that the Morpheus and Grokster products are being used today to distribute millions of authorized video games, millions of authorized songs, Jive Media has distributed hundreds of thousands of authorized music videos for one artist alone. Famous bands such as Widespread Panic, Pearl Jam, Fish, Dave Matthews Band, have all authorized the sharing of their live concert recordings among their fans> In fact, contrary to Mr. Frackman's representation, appellant's own expert in searching the network was unable to avoid finding the Bible, the Koran, and the Communist Manifesto, demonstrating the use of these networks to distribute public domain materials.

The record is undisputed that these pieces of software are capable of substantial noninfringing uses, the appellants here do not seriously contest the capability for noninfringing use. Instead, they make the same arguments that two of their number made before the Supreme Court twenty years ago. They argued then that Sony's executives knew that the Betamax would be used for infringement. They argued then that proportion should be the test, that primary use should be the test, and they argued, again, contrary to Mr. Frackman's representation, that the Betamax could be easily modified so as to prevent or reduce the incidence of infringing uses. On that point in particular I direct the court's attention to page 494 of the Sony ruling in Justice Blackman's dissent, in which he discusses this so-called "jamming" possibility. The Supreme Court nevertheless rejected those arguments, as this court should here today. . .

Judge Noonan: Oh, you know, I think you're absolutely right as far as the matter of Sony goes. Your problem is the gloss that Napster managed to write on it.

[laughter from audience]

von Lohmann: I would agree with your *earlier* question, Your Honor, that of course [much laughter] the Sony ruling must control. But I will say this: I think the Napster gloss is not nearly the problem that appellants would have you believe. In fact, appellants distort, what I think the perfectly sensible ruling in Napster was by saying, in fact, that any notice delivered to a defendant automatically deprives them of the Betamax defense. That is not the holding of the Napster opinion. On page 1021 of this court's Napster ruling, the court extensively discusses what more needs to be shown before a defendant can be held liable. Judge Wilson read that portion of the Napster opinion closely, and concluded, in conjunction with other precedents on this point such as the Vault vs. Quaid case in the Fifth Circuit, that more is required merely than notice -- that there has to be specific knowledge coupled with, in conjunction with, the capacity to act on that knowledge. The rules suggested by appellants would lead to terrible results. Imagine, for example, if delivering a stack of notices to Xerox regarding the misdeeds of a Kinko's copy shop would suddenly make Xerox liable. They, after all, would then have actual knowledge, as the appellants constantly reiterate. Actual knowledge is not enough under the Sony case, and under this court's Napster ruling. There has to be a conjunction of actual knowledge, with material contribution. That was the piece that was missing here, as Judge Wilson correctly found below.

Judge Boochever: It's undisputed here that the defendants had actual knowledge, right?

von Lohmann: It is undisputed that notices were delivered to these two companies regarding specific infringements that allegedly were occurring on the network. I would agree that that would create actual knowledge under this court's Napster ruling. Of course, as Judge Wilson found, that alone is not enough. If it were, the Sony case today could be relitigated to a different result simply by delivering a stack of notices to Sony regarding users of VCRs who were committing copyright infringement.

I'd like to also specifically address a question that Judge Thomas asked, regarding whether or not the software would continue running if these companies were to close their doors, unplug all their computers. The answer is undisputed in this record that yes, it would continue running. I would direct the court's attention on that point to our brief, the Streamcast brief, at footnote 10, where we discuss the record on this question in specific. And in particular direct the court to volume 26 of the record, where appellant's expert, Professor Horowitz, was deposed on this very question. And in Volume 26 on page 7627 through 32 the expert was in fact forced to withdraw his prior statement in his declaration, in which he said, "Sure, this software would eventually decay of its own accord." Under examination and deposition, the professor was forced to concede that if the computer was running, and continued to be unchanged, it would continue to run, barring of course the slow decay of parts that may be contained in the computer.

Judge Noonan: Going back to your Xerox analogy, are you aware of any publisher suing Xerox?

von Lohmann: No, Your Honor. Although I do know -- this is not in the record, I'm afraid -- but I do know from personal knowledge that both Xerox and Kodak were under threat of suit when the photocopier was first brought into the market. The American Publisher's Association chose not to do that, and chose instead rather tellingly to pursue the actual institutions that owned the photocopiers leading to the famous case American Geophysical Union, where in fact a research institution was held liable for using photocopiers in ways that were in infringing.

In fact it was not until 1976, the Sony case was the first case ever brought against an equipment manufacturer for contributory and vicarious infringement.

Judge Thomas: Well, your software does a little bit more than provide mechanical means though, in the sense that you're searching the metafiles of the particular mp3 files. You are providing the users with a fairly sophisticated way of searching what is almost surely protected works, aren't you? It's not just a decentralized system. Well, go ahead and answer.

von Lohmann: I would disagree, Your Honor, respectfully. I believe it is a decentralized system and that the undisputed testimony of the experts makes that clear. I agree with you that the ability to parse for metadata, song title, album, artist, and things like that, make the tool a more powerful search tool than a tool that does not include those features. However, there's no reason to assume that just because you have the ability to search for an artist's name that that necessarily dictates infringing uses. In fact, we have evidence in the record that two million songs by Prodigy have been distributed with authorization, that music videos by artists like Little Romeo are distributed with permission. Similarly, live concert recordings by a number of bands, all of which were found -- there is clear evidence in the record that someone searched on the network, we had an individual search on the network and ascertain that all of these files were in fact available on the network. So I would submit that the ability to use metadata to refine your search, to find authorized files, is a perfectly legitimate use, and, in fact, these companies are always working to make their searching capabilities more powerful, just as a company like Google would be.

Judge Thomas:What do you think we ought to hold in terms of what constitutes substantial noninfringing activity?

von Lohmann: I believe in light of the Supreme Court's ruling in Sony as well as the Vault case and the patent context, I think the proper formulation of the rule is whether the noninfringing uses contribute independent commercial value to the product.

Judge Thomas: Even if the commercial value is de minimus?

von Lohmann: Yes. And in particular there I would direct the court's attention to the Fifth Circuit's ruling in the Vault vs. Quaid case, where it was conceded that the noninfringing uses standing alone would not have supported a market for the product at all. Nevertheless the Fifth Circuit found that the product in question was capable of substantial noninfringing uses. In other words, the court refused to imagine a hypothetical product where the infringing and the noninfringing uses had somehow been segregated and then imagine a market and attempt to figure out whether one or the other would sell. That's not the teaching of the Sony case, and in fact, in the Sony case on page 441 of the majority opinion, the court discusses the rule from the patent context; they imported the rule from the patent context, and they specifically quote a number of their own prior rulings saying that in order to be viewed as lacking a substantial noninfringing use a product must be uniquely suited for infringement or, quote, "have no other use than infringement" . So I would submit, Your Honor, that the test is not whether, it's not enough that a product may have, may not have enormous market success based solely on its noninfringing uses; that's not the test.

Judge Thomas: Under your formulation it wouldn't matter whether it's ninety percent, ninety-five percent or ninety-nine percent of infringing use, right?

von Lohmann: I think that's correct, the proportionality standard was specifically what was rejected by the Supreme Court in the Sony case. This court in 1982 specifically found for the movie studios in that case, on a theory that the primary use should control. Justice Blackmuns's dissent, in the Sony opinion, also sings the praises of a proportionality approach. That, however, was expressly rejected by the majority. In fact, I think the court's, the section of the opinion in the Sony decision, in Section 4(a) of the court's opinion is very telling on this point. The court found that the Sony Betamax VCR was capable of two substantial noninfringing uses, either of which would have been enough to support the court's ruling in favor of Sony.

In Section 4(a), the court discusses authorized uses of copyrighted works and in particular focuses on Mister Rogers, the ability to record sports programming, and points out that only 7.3% of Sony Betamax users were using the VCR for recording sports programming, for example. Nevertheless, at the very end of Section 4(a) of the court's opinion, it says that alone is enough to state a substantial noninfringing use. So I think, in fact, perhaps if we went beyond the 93% threshold there may be a question that would be open, but plainly under Sony anything below that threshold -- if we have a situation where as, I believe, Judge Noonan pointed out, the best the appellants could do is come up with a 90% figure, I think the decision is made by Sony if you will.

I'd also like to point out that appellant's position suffers from, I think, a more fundamental flaw. That flaw is ignoring the animating principal behind the Sony opinion. In that opinion on page 431 and on 432 in particular before the court goes into its analysis it explains what is motivating its concerns. It says that it is always been the realm of the legislature to define the scope of the copyright monopoly. Copyright is a creature of statute. It is always adjusting, as Mister Ramos has pointed out, to new technologies. What Mister Ramos has failed to point out is who is responsible for the adjusting. The court in the Sony ruling told us the answer to that question. It is Congress in the first instance.

The reasons for that, I think, are quite straightforward. First, it is a bad idea to decide the fate of a technology in its infancy. In fact, I think it is quite plain that in the early days of of the VCR, when the movie studios as one refused to license their films for reproduction on pre-recorded cassettes, that the movie studios had a much more serious problem with infringement when it came to the VCR. When, in fact, they entered the market, participated in the market, offered consumers choices that were noninfringing uses, their problem changed. And, of course, they went to Congress and sought numerous solutions for what they perceived as the VCR problem. In the end, in 1998, Congress gave them a partial solution. There is now a technology mandate that applies to VCR vendors in this country; similarly as Mister Ramos alluded to, in 1995 Congress created a new regime of compulsory licensing, mingled with a technology mandate to address the new problem of webcasting, the digital transmission of music -- Internet radio, if you will. Similarly, in 1992, Congress enacted the Audio Home Recording Act, addressing new digital technology, the digital audio tape recorder, mingling a compulsory license with a technology mandate.

These are the kinds of nuanced solutions the courts are not able to provide. As the Supreme Court points out in the Sony case, Congress has given to copyright owners, for violations of their exclusive rights, a, quote, "potent arsenal", unquote, of statutorially-mandated remedies. A court is not able to fashion freely intermediate regulatory solutions to address the tension between new technologies on the one hand and copyright owners' interests on the other. That is exactly what the Supreme Court recognized in the Sony ruling and the animating principle for its outcome there. And again, I think it's really rather odd that copyright owners, that the clients Mr. Ramos represents, would suddenly abandon what has worked well for them for a hundred years, namely legislative solutions, in favor of asking a court to step in and apply what have to be much less nuanced remedies to the problem.

Your Honor, I would like to leave the rest of my time to Mr. Page, to address the vicarious liability issues, unless you have further questions.

Judge Thomas:Thank you, counsel.

Michael Page: Good afternoon. May it please the Court, my name is Michael Page and I'm appearing on behalf of appellee, Grokster. Grokster is a small family-run company which licensed the FastTrack software from its creators and resells it or redistributes it under the Grokster name.

It is undisputed in the record that Grokster had and has no input into the design of the file-sharing features of the FastTrack software. It is undisputed in the record that Grokster never had and does not have access to the source code for the FastTrack software. And it is undisputed that today Grokster has no ability whatsoever to see what individual users are doing with that software, much less control it. They no more have the ability to control what they do than Microsoft has the ability to control what people use Outlook for.

Appellants don't really dispute that. What they're really saying is that Grokster, and StreamCast, and later KaZaa have the theoretical ability to have built a different product that would have given them that control. They say that we could have built a product that involved filtering. We strongly dispute that proposition. There's certainly no evidence that filtering would work. In fact the name-based filtering in Napster was a complete failure, leading these appellants in the Aimster case to tell the court that it was, quote "wholly ineffective."

Napster then attempted to implement digital fingerprinting and after many months, and many millions of dollars of effort, that failed. So, it's very much disputed whether, in fact, there's any solution that an individual technology vendor could do, much less a simple one. But that’s not a question this court needs to answer, or even ask. It's the wrong question. The correct question is: Does the current software give people the ability to distinguish between infringing and noninfringing uses and eliminate the former and not the latter?

The solutions analogized to flipping the switch on the wall don't do that. That's saying you have control because you have the ability to just go away. Sony had that level of control over what its users did. It could simply stop selling VCRs. Any technology vendor has that ability, if the ability to control is simply the ability to go away.

The problem with looking at what you could have built, and whether it would control, is that it expands the rule of vicarious liability without limit, because for vicarious liability you need only two things. You need a direct financial interest, which under the precedence has become simply any attenuated financial interest, and you need the ability to control.

If the ability to control just means you could build a tool that would better suit the copyright holder's interests, then Microsoft is clearly liable, the operating system would be the best place to put filtering. Every ISP is clearly liable. All of this traffic moves through ISPs. Every manufacturer of CD burners is liable, because you could build them just as Justice Blackmun suggested in Sony , to refuse to record anything that wasn't authorized.

This question was answered definitively by Sony. As Mr. Von Lohmann pointed out, Justice Blackmun in dissent said Sony should be liable, they could have built a VCR that respects a flag in the content and refuses to record it. Nonetheless, the majority found that Sony was not liable.

The Napster court reached the same conclusion. These same appellants urged the Napster court to hold Napster liable because it could have policed its premises. What the Ninth Circuit said in that was precisely that. When you get notice, it gives rise to a duty to police your premises, but that extends only to your border. And the Ninth Circuit was very careful to say that the duty to police is cabined by the current architecture of the system, not what *could* be built down the road, not what plaintiffs here would rather have seen built, but what control the defendant actually has.

To expand the law of vicarious liability, to attach liability to anyone who in theory could have acted as a policeman, leaves no border on it at all and leaves every technology vendor, every inventor, every merchant at the mercy of copyright holders who want to look around and go, "You could have done something about this. You're liable."

It's also bad policy. Regulating technologies in their infancy is a bad idea. Imagine had the Supreme Court agreed with appellants and had said VCR's are illegal, because you could build them to have that control. Today, VCR's garner more income for the music industry than movies. They would not exist had the studios gotten their wish and had them banned.

They told the world that the VCR was to copyright as the Boston Strangler is to a woman alone at home and predicted that it would be the death of copyright. This is not a new theme. Every time a new technology comes along, those with a vested interest in the old technology first ask the courts to ban it. Thankfully, the courts say no, and when they do, the copyright holders then find a way to make money off that new technology. Because every time technology removes the transaction costs between the artist and the consumer, that leaves money available for the artists. Radio was going to be the death of copyright. How can we compete with free? You're sending our music out into the airwaves for free for anyone to have. But when courts decline to stop technology, people find a way to develop those technologies to further develop noninfringing uses of those technologies and to monetize them, and in the long run it is always good for the consumers and the copyright holders. Efficiency is good for everybody, and these systems are simply more efficient versions of distribution. They have now reduced distribution costs, not low, but to zero. Courts should not step in and stop that progress.

Appellants have raised the issue of, but didn't you once have that ability? Saying there were once central servers. There were registration servers. They existed because earlier versions of the software couldn't do other things without that registration server. If we didn't have a central registration server, when someone went to send an instant message to a user who had chosen their own user name, the existence of multiple people who chose the same name made it impossible. Programming advances got to the point where the system was able to distinguish between those unique users and no longer needed it. But more to the point, when that registration server existed, it made no difference. Taking someone out of the registration server would keep them from being able to receive advertisements, it would keep them from being able to send instant messages to each other, it would keep them from being able to enter chat rooms, but it would not stop the file-sharing functions.

And even if it would, and it did not, that's not before this court. The District Court very carefully limited its ruling to the current version of the software. Grokster, in fact, asked for a full summary judgment ruling and instead got a partial summary judgment ruling that addressed only whether there is liability for distributing the current software standing alone. As to any of the factual issues of previous systems or what it used to be able to do or whether something someone said to a user once is a material assistance to infringement, those issues have not been decided by the District Court.

Another comment on appellant's argument that things are easily fixable. First, the right question is where does the obligation to change one's software to police other people's copyrights come from?

Judge Thomas: Well, in Napster, it came from a court.

[laughter]

Page: Respectfully, in Napster, it came from the fact that Napster had failed to exercise control it currently had. And the Ninth Circuit's order in Napster, this court's order said that that obligation is cabined by the existing architecture of the system.

Judge Thomas: Right.

Page: And that's why they were liable.

Judge Thomas: But as your colleague's pointed out, many of the techniques used to comply with the injunction simply didn't work in a technological manner. In other words, the filtering was ineffective. So it was somthing new that was attempted in Napster as opposed to the architecture of that system. You couldn't just shut off... they had to do some additional programming in Napster to comply with the injunction, is what I'm saying.

Page: Napster actually went to develop a fingerprinting system. All along, Napster wanted to build a system that worked sufficiently to be licensed. Their goal wasn't to be a pirate forever, it was to be a licensed outlet.

The fact that the District Court was able to order Napster to continue developing that new technology arose in the context of the remedy, once there was a finding of liability. It was only because of a failure to exercise the control Napster already had that there was liability in the first place. The liability finding in Napster doesn't spring from the fact that Napster didn't build a different system. It springs from the fact that they didn't do what they could with their existing system. And, of course, that is the seminal difference between Napster and these defendants, that the District Court alluded to and the appellants, as the District Court put it, refuse to appreciate. Unless the court has further questions, I'll submit.

Judge Thomas: Thank you, counsel. I'll give you five minutes for rebuttal.

Frackman: I'm fast. Just, if I can pick up where counsel left off, there is no distinction between what this court ordered Napster to do and the remedy of filtering here. [58:31] It is not, if the court looks at the record in the Napstercase, Napster did not have in place a filter at the time this court ordered it to filter. What Napster had was an index that it didn't look at. What it had, and this court said so, it didn't have the ability to determine the whether something was copyrighted or not copyrighted. No content went through Napster's system.

Judge Thomas: How do you respond to counsel's rejoinder to me that that really is a question of remedy and not . . .

Frackman: That was not a question of remedy, Your Honor. In Napster1, what this court said, was that you, Napster, have to exercise your reserved right to police to the fullest extent that you can. And the way you exercise it is by way of filtering. And, one way you exercise it at least is by way of filtering. And when you do not exercise that fully, in Napster 2, this court said, You're shut down. Now it did some filtering, Napster 2, in Napster 2, Napster came to this court and said, That's beyond our architecture. And the court said, No. That's your duty under vicarious liability to police. You have to implement a filtering system to the extent it is feasible. And there is no principal difference between the positon the defendants are in here and the position Napster was in in that case.

While we are talking about vicarious liability, I might add, as the court is aware, the Sony decision, as this court said in Napster, does not apply to vicarious liability. So here we have, number 1, Judge Wilson's finding that there was a direct financial benefit, and number 2, in several ways, in several ways, the ability to supervise, one of which is the ability to filter. The . . . another one of which is the ability these defendants admittedly have and they disabled themselves from implementing.

The registration system, the registration server, is identical to what Napster had and what this court in Napster said was sufficient to impose liability, sufficient ability to control. They disabled themselves from doing that. No clearer case, I would submit to the court, of turning a blind eye can be found than having something that the court says is the abililty to supervise and then saying, take it away from me. They have another ability to supervise that the court said was sufficient in Napster and in Fonovisa and that is in their terms of service. They have the absolute right under their terms of service and their user license agreement to disable sharing by users, to do away with users, to bar users. They actually did it. They banned users. They banned by IP address, they banned by user name, they exercised that right.

Now, they are in no different position, I would submit to the court, than had Napster, the day after the court ruled, said, 'We are closing our registration servers.' Well, that would not be permissible. And it is not permissible here. They had that ability, and they had to fully exercise it. Instead of fully exercising it, by, filtering and blocking as Napster did, they disabled their registration systems and said 'Sorry, were not going to do that.' Um, And I would submit to the court the ability to supervise is much broader than that.

Judge Noonan: If you would care to address the Xerox analogy for a minute.

Frackman: Yes, I would Your Honor.

Judge Noonan: What is common knowledge was brought to Xerox's knowledge... lots of books were copied in violation of copyright on Xerox machines... and just stop selling them.

Frackman: You have in the Xerox situation several differences from here. The first is that Xerox is not forming a nationwide, anonymous distribution system. It is not building a business that's based on infringement. It is in that respect arguably not contributing materially in the same way as somebody who builds a business, an anonymous marketplace to distribute copyrighted material.

Second, what these people are doing is they are distributing, upgrading, maintaining, keeping anonymous known infringers. It's an ongoing relationship. If you told Xerox that there is a band of thieves, a band of pirates, out there that are using these machines to infringe, then under the law of aiding and abetting and contributory infringement, if they continue to supply those machines to a band of infringers, and to upgrade them, to upkeep them, to tell them how to use them, to give them advice and counsel . . .

Judge Noonan: you don't think Kinko's would qualify as...?

Frackman: No I don't think so, Your Honor... [laughter]

But I.. but if they do, then I think that that's an issue. You've got round pegs and square holes here, and if I can close by coming back to the Sony case ..

Judge Thomas: Let's say that Xerox receives notice that students at UCLA, in their zeal for Judge Noonan's books, are copying them right and left. And are they liable if they keep selling copy machines to UCLA? Under your theory, I think yes.

Frackman: Under my theory, Your Honor, I think factually it's possible, but I think that the distinction is that Xerox would say that we are not contributing, we're not materially contributing. We're selling a product, we're getting out of the marketplace, we make our money by selling that product and then we are gone. We are not making the market, we are not providing the material, we do not have the ability to, to filter and block that infringement, which, by the way, in the Sony case says no such thing about, about the ability to block or filter.

Judge Noonan:Well, why isn't the ability to block in Sony, in Xerox, you just don't sell to certain people?

Frackman: I'm glad you asked me that, Judge Noonan, because that is.. that is the big distinction. Your Honor will remember that what Sony says is that at the end of the day you have to strike a balance. What's fair? What's just, under the circumstances? And as I said to the court, on page 420 of Sony, here's what the plaintiffs were asking for. They were asking for an injunction against the manufacturing and marketing of the Betamax VTR.

We're not asking for that. We're not asking for that at all. We're not saying that peer to peer systems shouldn't operate. We're only saying, and I will quote the court from Sony again, we're saying exactly what Sony said we could ask for, and this is at page, I think it's 446: "In an action for contributory infringement against the seller of copying equipment, the copyright holder may not prevail unless the relief he seeks affects only his programs or unless he speaks for virtually all copyright holders." Well, we do both here but on a more limited basis certainly. The relief we seek affects only us. Put in a system so that you ban users when we tell you that they're infringing. Put in a system so that you will implement blocking of our works and continue, continue to sell your VTR, continue to distribute your software, continue, continue to set up your distribution of noninfringing works. That's the balance here, that's the balance that Sony mandated and that's why Sony is completely different than this case.

JudgeThomas: Thank you, counsel.

Frackman: If the court has anything...

Judge Thomas: Excellent arguments, and the briefing has been superb. We'll take the case under advisement and we're adjourned for this session.

Female Officer/Clerk: All rise. This court for this session stands adjourned.

[Gavel sound.]


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