High Court Deals Blow To P2Ps, Adware Companies

In a closely watched case that pitted Hollywood against online file-sharing companies, the U.S. Supreme Court Monday unanimously ruled that peer-to-peer networks can be held liable for intentionally luring users to pirate copyrighted movies and videos.

"One who distributes a device with the object of promoting its use to infringe copyright ... is liable for the resulting acts of infringement by third parties," wrote Justice David Souter in an opinion for the court.

The Supreme Court also ruled 6-3 that Metro Goldwyn Mayer Studios and the entertainment industry companies that sided with it in the lawsuit had presented sufficient proof that peer-to-peer companies Grokster and StreamCast encouraged copyright infringement that the case shouldn't have been dismissed before trial.

Earlier, the trial court had dismissed the studios' lawsuit, and the 9th Circuit upheld the dismissal. "The record is replete with evidence that when they [Grokster and StreamCast] began to distribute their free software, each of them clearly voiced the objective that recipients use the software to download copyrighted works and took active steps to encourage infringement," wrote Souter.

The court sent the case back to the trial judge, with instructions to reconsider MGM's motion for summary judgment--that is, a verdict in its favor without going through a trial--against Grokster and StreamCast.

Stephen Breyer, in an opinion joined by two other judges, disagreed with the portion of the decision that returned the lawsuit to the district court. In a concurrence, he wrote that the district court properly dismissed the case against the file-sharing networks, because peer-to-peer technology can be used for noninfringing purposes.

Industry observers say that a secondary effect of the ruling is that it could hurt adware companies that bundle their software with peer-to-peer software, such as Claria and WhenU. Claria is bundled with the free version of Kazaa, while WhenU is bundled with the free version of BearShare's file-sharing software.

When Claria filed papers with the Securities and Exchange Commission last year, the company listed peer-to-peer network Kazaa as a major distributor. WhenU CEO Bill Day said that BearShare is a sizable distributors, but that WhenU had a number of other equally large distribution partners.

Claria did not respond to messages seeking comment by presstime.

While neither Kazaa nor BearShare were part of the lawsuit decided Monday, the ruling likely will impact how both companies do business. Alan Morris, executive vice president of Sharman Networks, which owns Kazaa, defended the company in a statement, "Sharman has never encouraged or assisted users of Kazaa software to share copyrighted material in violation of copyright law," he stated.

Adware/spyware researcher Eric Howes, an instructor at the University of Illinois at Urbana-Champaign who runs the site SpywareWarrior.com, said that the decision isn't as bad for adware companies as it would have been several months ago, because peer-to-peer networks "have been gradually moving away from adware bundles over the past few months."

Grokster itself no longer offers a free, adware-supported version. Instead, users can opt to pay the $29.95 download fee or to receive a free five-day trial.

Adware researcher and consultant Ben Edelman added that one of the ironies of the case is that major Hollywood studios apparently advertise to Claria subscribers--at least some of whom presumably received the software when they downloaded Kazaa. Edelman said that as recently as this weekend, he was served a Claria pop-ad promoting Universal Studios theme parks, while on the sites BMG.com and Disney.com.

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