Reducing digital copyright infringement without restricting innovation.

• Author: Lemley, Mark A.

INTRODUCTION I. SUING FACILITATORS A. Indirect Liability and "Dual-Use" Technologies 1. Napster 2. Aimster 3. Grokster B. Expansion of Vicarious Liability and the "Direct" Financial Interest Requirement C. Statutory Safe Harbors for Online Service Providers 1. Eligibility for safe harbors 2. Application to activities of p2p providers II. THE ECONOMICS OF DIGITAL COPYRIGHT INFRINGEMENT A. What Has Changed? B. What's Wrong with Suing Facilitators? 1. Lumping legal and illegal conduct together 2. Loss of the p2p dissemination network 3. Requiring the facilitator to police is not a solution 4. Agency cost problems 5. Harms to innovation C. What's the Alternative? III. EXPLORING ALTERNATIVES TO SUING FACILITATORS A. Raising Effective Sanctions B. Lowering Enforcement Costs 1. Levies 2. A streamlined dispute resolution system C. Providing Legitimate Alternatives D. Can Enforcement Work on the Internet? CONCLUSION INTRODUCTION

Suing actual infringers is becoming passe in digital copyright law. In the digital environment, the real stakes so far have been in suing those who facilitate infringement by others. Copyright owners tend not to sue those who trade software, video, or music files over the Internet. Indeed, such claims are so rare that the Recording Industry Association of America's (RIAA) recent suits against some actual infringers on peer-to-peer (p2p) networks sent shock waves through the legal community. Instead, copyright owners have mostly sued direct facilitators like Napster; (1) makers of software that can be used to share files; (2) those who provide tools to crack encryption that protects copyrighted works, (3) providers of search engines that help people find infringing material; (4) "quasi interact service providers" such as universities, (5) eBay, and Yahoo! Auction; (6) and even credit card companies that help individuals pay for infringing activity. (7)

Most of these suits rely on theories of secondary liability, focusing on those who provide services or write software that can he used in an act of infringement. (8) In addition, some recent suits appear to be based on a new theory that might be called "tertiary" liability that seeks to reach those who help the helpers. Cases in this vein include lawsuits filed against those who help others crack encryption, for example by providing links to software that can be used to crack encryption, (9) the copyright lawsuit against backbone providers for providing the wires on which copyrighted material flows, (10) the claims filed against the venture capital firm of Hummer Winblad for its role in funding Napster, (11) and (with an unusual twist) the malpractice suit against the law firm of Cooley Godward for advising mp3.com that it could assert defenses to copyright infringement. (12) The anticircumvention provisions of the Digital Millennium Copyright Act (DMCA) provide by statute for one particular type of tertiary liability (for providing tools that circumvent encryption protecting a copyrighted work and that help another get access to a copyrighted work in order to infringe that copyright), (13) and there have even been suggestions that there should be a claim for contributory violation of the DMCA's anticircumvention provisions, which should perhaps be termed quaternary liability for copyright infringement. (14)

Further, a number of doctrines that were designed to protect these secondary and tertiary "facilitators"--the "safe harbor" for online service providers, (15) the restrictive standard for contributory copyright infringement for equipment providers announced by the Supreme Court in the Sony Betamax case, (16) and the requirement that vicarious infringement be limited to cases of direct financial benefit (17)--are under attack. Recent court decisions undo some of the benefit of Section 512's protection for Internet service providers (ISPs), (18) which in any event are not particularly suited to limit secondary liability for p2p providers. Napster and Aimster rewrite the rule of Sony in a way that significantly limits its application. (19) Both Napster and Fonovisa have all but eliminated the requirement of direct financial benefit in vicarious infringement. (20) And proposed legislation would go even further in regulating the behavior of those who do not themselves infringe, injecting Congressional oversight into how software and consumer electronics are built (21) and permitting content owners to unleash destructive hacks of computer networks without fear of liability. (22)

There is of course a good reason copyright owners are suing facilitators. They see themselves as under threat from a flood of cheap, easy copies and a dramatic increase in the number of people who can make those copies. The high volume of illegal uses, and the low return to suing any one individual, make it more cost-effective to aim litigation at targets as far up the chain as possible. From the perspective of the music industry, it was easier and more effective to shut down Napster than to sue the millions of people who illegally traded files on Napster. So far, the courts have been largely willing to go along, shutting down a number of innovative services in the digital music realm. At least one district court refused to ban the provision of p2p software by StreamCast and Grokster, prompting the recording industry to reluctantly begin bringing some suits against users of p2p software and to start selling music online in earnest. (23) But copyright owners are vigorously appealing the decision in favor of the software providers, seeking to convince the Ninth Circuit to hold the software companies liable and thereby eliminate the need to pursue individual infringers.

In this Article, we focus on one strand of these cases against those who allegedly facilitate copyright infringement--those dealing with distribution of digital content over p2p networks. Unrestricted liability for anyone who is in any way involved with such copyright infringement is a bad idea. Indirect liability is a continuum in which acts most closely related to infringement and with the fewest affirmative benefits are the easiest to condemn. Napster was relatively easy to condemn because the service was limited to trading music files and virtually all of the files actually traded at the time of the suit were traded illegally. The Grokster case is a substantial step further removed from infringement, both because the defendants' involvement is less (indeed, resellers like Grokster are arguably merely conduits for providing software, an activity which should be legal under most circumstances) (24) and because the actual noninfringing uses of Kazaa and similar software involved in the case are greater. Lawsuits against Internet service providers, search engines, telephone companies, and other indirect providers, while not the focus of our attention here, are even more problematic because of the many legal uses of these services. The key policy point is that going after makers of technology for the uses to which their technologies may be put threatens to stifle innovation. Similarly, going after necessary third parties like investors and law firms will stifle investment in innovation. The fundamental difficulty is that while courts can make decisions about direct infringement on a case-by-case basis, lawsuits based on indirect liability sweep together both socially beneficial and socially harmful uses of a program or service, either permitting both uses or condemning both.

A middle ground has so far largely been lacking in this debate. (25) Our aim in this Article is to seek such ground. Optimal digital copyright policy with respect to p2p networks would do two things: deter technological innovators as little as possible and permit cost-effective enforcement of copyright in the digital environment. (26) Economically, one can estimate the cost to society from enforcement of the indirect liability rules against p2p providers as a function of the legal uses that that law effectively forbids, plus the foregone efficiency of the p2p distribution mechanism relative to industry-driven distribution of copyrighted content, plus the social value of foregone innovation that results from deterring would-be innovators. If we compare this cost to the benefits accrued by giving digital copyright owners another, more convenient, forum in which to sue, it is not at all clear that the benefits of the new, expanded indirect liability rules exceed the costs in most cases.

Moreover, we might not need to make this difficult tradeoff at all if copyright owners have effective alternatives to suing facilitators. (27) And the basic economics of copyright enforcement do suggest alternative approaches. It is not currently cost-effective for copyright owners to sue individual infringers, because there are tens of millions of them, because lawsuits are expensive, and because many infringers would only be liable for (or able to pay) minimal damages. Copyright owners are happy to sue facilitators instead, because there are fewer of them and both damages and the benefits of injunctive relief are substantial. Copyright owners have no incentive to permit optimal innovation by facilitators, because they do not benefit from that innovation, except indirectly. Individual infringers in turn have no incentive to change their behavior or to subscribe to fee-based services, because they suffer none of the costs of infringement, except indirectly. In this Article, we suggest three possible alternatives that might provide ways out of the digital copyright morass.

One solution is to change the incentives of individuals potentially engaged in copyright infringement. Because individual users of p2p networks know that it is extremely unlikely they will be sued, economic theory suggests that the only way to effectively deter infringement is to increase the effective sanction substantially for those few who are caught and prosecuted. (28) Were...