Update The US Supreme Court has ruled unanimously against the free-wheeling ways of P2P software makers Grokster and StreamCast in a decision that will have many of the most vocal open technology advocates up in arms.

The ruling means that developers of P2P software can be held liable for their users' actions and that the software makers must work to prevent the distribution of copyrighted material. Two lower courts had already ruled that P2P software showed enough non-infringing uses for it to be protected under the well-known 1984 Sony ruling that permitted the sale of the VCR. The Supreme Court, however, disagreed with the lower courts, saying that they took too broad an interpretation on Sony and that the P2P firms made little to no effort to curb illegal file-trading.

"We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by the clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties," Justice David H. Souter wrote.

This decision sends the case back to a lower court where judges will revisit the request of the movie and music companies - represented by MGM - to declare P2P software makers liable for their users' copyright violations.

"There is substantial evidence in MGM's favor on all elements of inducement, and summary judgment in favor of Grokster and StreamCast was error," Souter wrote. "On remand, reconsideration of MGM's motion for summary judgment will be in order. The judgment of the Court of Appeals is vacated, and the case is remanded for further proceedings consistent with this opinion."

Many open technology backers feared that the Supreme Court would do as MGM asked and redefine the scope of the Sony decision. Such a move could have opened the way for the content owners to sue MP3 device makers, software firms and arguably even PC makers under the notion that they too should be liable for their users' actions as their products promote copyright infringement. While the Supreme Court touched on Sony in its ruling, it was careful to declare that no major reassessment of Sony would be in order.

Instead, the court simply said that the the lower courts in California saw part of the Sony decision as broader than intended.

"Copyright holders sued Sony as the manufacturer, claiming it was contributorily liable for infringement that occurred when VCR owners taped copyrighted programs because it supplied the means used to infringe, and it had constructive knowledge that infringement would occur," Souter wrote. "At the trial on the merits, the evidence showed that the principal use of the VCR was for "time-shifting," or taping a program for later viewing at a more convenient time, which the Court found to be a fair, not an infringing, use."

The Supremes argued that Sony presented a stronger balance between protecting both the rights of copyright holders and the rights of technology companies to create and innovate, respectively.

The Ninth Circuit has read Sony's limitation to mean that whenever a product is capable of substantial lawful use, the producer can never be held contributorily liable for third parties' infringing use of it; it read the rule as being this broad, even when an actual purpose to cause infringing use is shown by evidence independent of design and distribution of the product, unless the distributors had ìspecific knowledge of infringement at a time at which they contributed to the infringement, and failed to act upon that information. Because the Circuit found the StreamCast and Grokster software capable of substantial lawful use, it concluded on the basis of its reading of Sony that neither company could be held liable, since there was no showing that their software, being without any central server, afforded them knowledge of specific unlawful uses.

This view of Sony, however, was error, converting the case from one about liability resting on imputed intent to one about liability on any theory. Because Sony did not displace other theories of secondary liability, and because we find below that it was error to grant summary judgment to the companies on MGM's inducement claim, we do not revisit Sony further, as MGM requests, to add a more quantified description of the point of balance between protection and commerce when liability rests solely on distribution with knowledge that unlawful use will occur. It is enough to note that the Ninth Circuit's judgment rested on an erroneous understanding of Sony and to leave further consideration of the Sony rule for a day when that may be required.

Media companies have long battled against P2P technology, starting with the much-publicized lawsuits against the original Napster. In that case, Napster was rather easily shutdown because the media moguls were able to show that Napster planned to profit from its software, was okay with infringers and ran everything through a centralized server. The rise of decentralized P2P networks where no single entity controlled the flow of information caused the media companies much larger problems.

They could no longer cut off a given P2P application at the source. Instead, they decided to sue the makers of such software, hoping to curb its distribution, and that's where Grokster and StreamCast came in.

The lower courts ruling in favor of the P2P software makers prompted the media companies to sue individual users. These actions have resulted in thousands of lawsuits against the music labels and movie studios own customers. In today's ruling, the Supreme Court found that the P2P companies just never did enough to try and stop the distribution of copyrighted material.

"The record is replete with evidence that from the moment Grokster and StreamCast began to distribute their free software, each one clearly voiced the objective that recipients use it to download copyrighted works, and each took active steps to encourage infringement," Souter wrote.

The court, however, did recognize that the P2P technology is used for legitimate file-trading, which some open technology advocates used as a point for celebration on an otherwise disheartening day.

"Today's Court decision in the Grokster case underscores a principle Public Knowledge has long promoted - punish infringers, not technology," said Public Knowledge, a technology advocacy group. "The Court has sent the case back to the trial court so that the trial process can determine whether the defendant companies intentionally encouraged infringement. What this means is, to the extent that providers of P2P technology do not intentionally encourage infringement, they are exempt from secondary liability under our copyright law. The Court also acknowledged, importantly, that there are lawful uses for peer-to-peer technology, including distribution of electronic files 'by universities, government agencies, corporations, and libraries, among others."

You can read the court's decision in PDF here.®

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