239 F.3d 1004 (2001)

Nos. 00-16401, 00-16403.

Argued and Submitted October 2, 2000.
Filed February 12, 2001.
As Amended April 3, 2001.

[1005] [1006] [1007] [1008] [1009] David Boies, Jonathan Schiller and Robert Silver, Boies, Schiller & Flexner, Armonk, New York, Laurence F. Pulgram, David L. Hayes, Daniel Johnson, Jr. and Darryl M. Woo, Fenwick & West, Palo Alto, California, for the defendant-appellant.

Russell J. Frackman (argued), George M. Borkowski, Jeffrey D. Goldman, Roy L. Shults, and Peter B. Gelblum, Mitchell Silberberg & Knupp LLP, Los Angeles, CA, Leon P. Gold, Hank Goldsmith, Lawrence I. Weinstein, Frank P. Scibilia, Proskauer Rose LLP, New York, New York, Steven B. Fabrizio, Recording Industry Ass'n of America, Inc., Washington, DC, for A & M Records, Inc. Plaintiffs-Appellees.

Carey R. Ramos(argued), Aidan Synnott, Michael C. Keats, Lewis E. Farberman, Paul Weiss, Rifkind Wharton & Garrison, New York, New York, Jeffrey G. Knowles, Keith Evans-Orville, Julia D. Greer, Coblentz, Patch, Duffy & Bass LLP, San Francisco, California, for Leiber plaintiffs-appellees.

Hannah Bentley, San Anselmo, California, for amicus Casanova Records.

Andrew P. Bridges, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, California, for amicus Digital Media Association.

Bruce G. Joseph, Thomas W. Kirby, and Scott E. Bain, Wiley, Rein & Fielding, Washington, D.C., for amici Ad Hoc Copyright Coalition; Commercial Internet Exchange; Computer & Communications Industry Association; Information Technology Association of America; Netcoalition.com; United States Internet Industry Association, and United States Telecommunications Association.

Scott R. McIntosh, Civil Division, Department of Justice, Washington, D.C., for amicus United States.

Ann Brick, San Francisco, California, for amici American Civil Liberties Union and the American Civil Liberties Union of Northern California.

Judith B. Jennison, Perkins Coie, San Francisco, California, for amicus Scour, Inc.

Ralph Oman, Dechert, Price & Rhoads, Washington, D.C., as amicus.

Christopher Tayback, Quinn, Emanuel, Urquhart, Oliver & Hedges, Los Angeles, California, for amicus National Academy of Recording Arts & Sciences.

[1010] E. Edward Bruce, Covington & Burling, Washington, D.C., for amicus Business Software Alliance.

Kevin T. Baine, Williams & Connolly, Washington, D.C., for amici Motion Picture Association of America, Inc., Software & Information Industry Association, American Film Marketing Association, Association of American Publishers, American Society of Media Photographers, Professional Photographers Association, Graphic Artists Guild, Interactive Digital Software Association, American Society of Composers, Authors and Publishers, Broadcast Music, Inc., Producers Guild of America, Directors Guild of America, Inc., Writers Guild of America, West, Inc., American Federation of Musicians of the United States and Canada, Reed Elsevier, Inc., American Federation of Television and Radio Artists, Office of the Commissioner of Baseball, Songwriters Guild of America, and AmSong, Inc.; Joel M. Litvin, New York, New York, for amicus National Basketball Association.

Salvatore A. Romano, Seyfarth, Shaw, Washington, D.C., for amici National Association of Recording Merchandisers, Inc. and Video Software Dealers Association.

Erwin Chemerinsky, University of Southern California School of Law, Los Angeles, California, for amicus Law Professors Erwin Chemerinsky, Kenneth L. Karst, Steven Shiffrin, Rodney A. Smolla and Marcy Strauss.

Barry I. Slotnick, Richards & O'Neil, New York, New York, for amicus Association for Independent Music.

Morton David Goldberg, Cowan, Liebowitz & Latman, New York, New York, for amici Alliance Entertainment Corp., Audible Inc., Blue Spike, Inc., The Clandestine Group, Inc., Digimarc Corporation, Digital Media on Demand, Inc., FullAudio Corporation, InterTrust Technologies Corporation, Oak Technology, Inc., Reciprocal, Inc., RioPort, Inc., RPK SecureMedia Inc., Verance Corporation, and VNU USA, Inc.

Richie T. Thomas, Squire, Sanders & Dempsey, Washington, D.C., for amici Consumer Electronics Association, Digital Future Coalition, and Computer & Communications Industry Association.

Karen B. Tripp, Houston, Texas, for amici Association of American Physicians & Surgeons, Inc. and Eagle Forum Education and Legal Defense Fund.

Professor Jessica Litman, Wayne State University Law School, Detroit, Michigan; Professor Keith Aoki, University of Oregon School of Law; Professor Ann Bartow, University of South Carolina School of Law; Professor Dan Burk, University of Minnesota; Professor Julie Cohen, Georgetown University School of Law; Professors Christine Haight Farley and Peter Jaszi, Washington College of Law, American University; Professor Lydia Pallas Loren, Lewis and Clark College Northwestern School of Law; Professor Pamela Samuelson, Boalt Hall School of Law, University of California Berkeley; Professor Shubha Ghosh, University at Buffalo, SUNY; Professors Paul J. Heald, Allen Post Professor of Law, L. Ray Patterson, Pope Brock Professor of Law, and Laura N. Gasaway, University of Georgia School of Law; Professor Michael Madison, University of Pittsburgh School of Law; Professor Ruth Okediji, University of Oklahoma Law School; Alfred C. Yen, Associate Dean for Academic Affairs and Professor of Law, Boston College Law School; Professor Diame Zimmerman, New York University School of Law, and Professor Dennis Karjala, Arizona State University College of Law, for amicus Copyright Law Professors.

Before: MARY M. SCHROEDER, Chief Judge, ROBERT R. BEEZER and RICHARD A. PAEZ, Circuit Judges.

Argued and Submitted October 2, 2000. — San Francisco, California

ORDER AND AMENDED OPINION

The Opinion filed February 12, 2001 in this appeal is amended as follows:

Slip opinion at 2196, lines 4-6 — delete the see generally citation to "Copyright Infringement Issues on the Internet" and insert: "see generally 3 Melville B. Nimmer & David Nimmer, Nimmer On Copyright §§ 12.04[A][2] & [A][2][b] (2000) (confining Sony to contributory infringement analysis: "Contributory infringement itself is of two types — personal conduct that forms part of or furthers the infringement and contribution of machinery or goods that provide the means to infringe")."

Slip opinion at 2203, first full paragraph, lines 1-2 — insert "not" between "Napster argues that the district court erred in" and "finding that . . ."

Slip opinion at 2204, last paragraph, line 5 — delete "911 F.2d 970 at 976-77" and insert "911 F.2d at 976-77"

BEEZER, Circuit Judge:

Plaintiffs are engaged in the commercial recording, distribution and sale of copyrighted [1011] musical compositions and sound recordings. The complaint alleges that Napster, Inc. ("Napster") is a contributory and vicarious copyright infringer. On July 26, 2000, the district court granted plaintiffs' motion for a preliminary injunction. The injunction was slightly modified by written opinion on August 10, 2000. A & M Records, Inc. v. Napster, Inc., 114 F.Supp.2d 896 (N.D.Cal.2000). The district court preliminarily enjoined Napster "from engaging in, or facilitating others in copying, downloading, uploading, transmitting, or distributing plaintiffs' copyrighted musical compositions and sound recordings, protected by either federal or state law, without express permission of the rights owner." Id. at 927. Federal Rule of Civil Procedure 65(c) requires successful plaintiffs to post a bond for damages incurred by the enjoined party in the event that the injunction was wrongfully issued. The district court set bond in this case at $5 million.

We entered a temporary stay of the preliminary injunction pending resolution of this appeal. We have jurisdiction pursuant to 28 U.S.C. § 1292(a)(1). We affirm in part, reverse in part and remand.

I

We have examined the papers submitted in support of and in response to the injunction application and it appears that Napster has designed and operates a system which permits the transmission and retention of sound recordings employing digital technology.

In 1987, the Moving Picture Experts Group set a standard file format for the storage of audio recordings in a digital format called MPEG-3, abbreviated as "MP3." Digital MP3 files are created through a process colloquially called "ripping." Ripping software allows a computer owner to copy an audio compact disk ("audio CD") directly onto a computer's hard drive by compressing the audio information on the CD into the MP3 format. The MP3's compressed format allows for rapid transmission of digital audio files from one computer to another by electronic mail or any other file transfer protocol.

Napster facilitates the transmission of MP3 files between and among its users. Through a process commonly called "peer-to-peer" file sharing, Napster allows its users to: (1) make MP3 music files stored on individual computer hard drives available for copying by other Napster users; (2) search for MP3 music files stored on other users' computers; and (3) transfer exact copies of the contents of other users' MP3 files from one computer to another via the Internet. These functions are made possible by Napster's MusicShare software, available free of charge from Napster's Internet site, and Napster's network servers and server-side software. Napster provides technical support for the indexing and searching of MP3 files, as well as for its other functions, including a "chat room," where users can meet to discuss music, and a directory where participating artists can provide information about their music.

A. Accessing the System

In order to copy MP3 files through the Napster system, a user must first access Napster's Internet site and download^[1] the MusicShare software to his individual computer. See http://www.Napster.com. Once the software is installed, the user can access the Napster system. A first-time user is required to register with the Napster system by creating a "user name" and password.

B. Listing Available Files

If a registered user wants to list available files stored in his computer's hard drive on Napster for others to access, he [1012] must first create a "user library" directory on his computer's hard drive. The user then saves his MP3 files in the library directory, using self-designated file names. He next must log into the Napster system using his user name and password. His MusicShare software then searches his user library and verifies that the available files are properly formatted. If in the correct MP3 format, the names of the MP3 files will be uploaded from the user's computer to the Napster servers. The content of the MP3 files remains stored in the user's computer.

Once uploaded to the Napster servers, the user's MP3 file names are stored in a server-side "library" under the user's name and become part of a "collective directory" of files available for transfer during the time the user is logged onto the Napster system. The collective directory is fluid; it tracks users who are connected in real time, displaying only file names that are immediately accessible.

C. Searching For Available Files

Napster allows a user to locate other users' MP3 files in two ways: through Napster's search function and through its "hotlist" function.

Software located on the Napster servers maintains a "search index" of Napster's collective directory. To search the files available from Napster users currently connected to the network servers, the individual user accesses a form in the MusicShare software stored in his computer and enters either the name of a song or an artist as the object of the search. The form is then transmitted to a Napster server and automatically compared to the MP3 file names listed in the server's search index. Napster's server compiles a list of all MP3 file names pulled from the search index which include the same search terms entered on the search form and transmits the list to the searching user. The Napster server does not search the contents of any MP3 file; rather, the search is limited to "a text search of the file names indexed in a particular cluster. Those file names may contain typographical errors or otherwise inaccurate descriptions of the content of the files since they are designated by other users." Napster, 114 F.Supp.2d at 906.

To use the "hotlist" function, the Napster user creates a list of other users' names from whom he has obtained MP3 files in the past. When logged onto Napster's servers, the system alerts the user if any user on his list (a "hotlisted user") is also logged onto the system. If so, the user can access an index of all MP3 file names in a particular hotlisted user's library and request a file in the library by selecting the file name. The contents of the hotlisted user's MP3 file are not stored on the Napster system.

D. Transferring Copies of an MP3 file

To transfer a copy of the contents of a requested MP3 file, the Napster server software obtains the Internet address of the requesting user and the Internet address of the "host user" (the user with the available files). See generally Brookfield Communications, Inc. v. West Coast Entm't Corp., 174 F.3d 1036, 1044 (9th Cir.1999) (describing, in detail, the structure of the Internet). The Napster servers then communicate the host user's Internet address to the requesting user. The requesting user's computer uses this information to establish a connection with the host user and downloads a copy of the contents of the MP3 file from one computer to the other over the Internet, "peer-to-peer." A downloaded MP3 file can be played directly from the user's hard drive using Napster's MusicShare program or other software. The file may also be transferred back onto an audio CD if the user has access to equipment designed for that purpose. In both cases, the quality of the original sound recording is slightly diminished by transfer to the MP3 format.

This architecture is described in some detail to promote an understanding of transmission mechanics as opposed to the content of the transmissions. The content [1013] is the subject of our copyright infringement analysis.

II

We review a grant or denial of a preliminary injunction for abuse of discretion. Gorbach v. Reno, 219 F.3d 1087, 1091 (9th Cir.2000) (en banc). Application of erroneous legal principles represents an abuse of discretion by the district court. Rucker v. Davis, 237 F.3d 1113, 1118-19 (9th Cir.2001) (en banc). If the district court is claimed to have relied on an erroneous legal premise in reaching its decision to grant or deny a preliminary injunction, we will review the underlying issue of law de novo. Id. at 1118 (citing Does 1-5 v. Chandler, 83 F.3d 1150, 1152 (9th Cir. 1996)).

On review, we are required to determine, "whether the court employed the appropriate legal standards governing the issuance of a preliminary injunction and whether the district court correctly apprehended the law with respect to the underlying issues in the case." Id. "As long as the district court got the law right, `it will not be reversed simply because the appellate court would have arrived at a different result if it had applied the law to the facts of the case.'" Gregorio T. v. Wilson, 59 F.3d 1002, 1004 (9th Cir.1995) (quoting Sports Form, Inc. v. United Press, Int'l, 686 F.2d 750, 752 (9th Cir.1982)).

Preliminary injunctive relief is available to a party who demonstrates either: (1) a combination of probable success on the merits and the possibility of irreparable harm; or (2) that serious questions are raised and the balance of hardships tips in its favor. Prudential Real Estate Affiliates, Inc. v. PPR Realty, Inc., 204 F.3d 867, 874 (9th Cir.2000). "These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases." Id.

III

Plaintiffs claim Napster users are engaged in the wholesale reproduction and distribution of copyrighted works, all constituting direct infringement.^[2] The district court agreed. We note that the district court's conclusion that plaintiffs have presented a prima facie case of direct infringement by Napster users is not presently appealed by Napster. We only need briefly address the threshold requirements.

A. Infringement

Plaintiffs must satisfy two requirements to present a prima facie case of direct infringement: (1) they must show ownership of the allegedly infringed material and (2) they must demonstrate that the alleged infringers violate at least one exclusive right granted to copyright holders under 17 U.S.C. § 106. See 17 U.S.C. § 501(a) (infringement occurs when alleged infringer engages in activity listed in § 106); see also Baxter v. MCA, Inc., 812 F.2d 421, 423 (9th Cir.1987); see, e.g., S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1085 n. 3 (9th Cir.1989) ("The word `copying' is shorthand for the infringing of any of the copyright owner's five exclusive rights. . . ."). Plaintiffs have sufficiently demonstrated ownership. The record supports the district court's determination that "as much as eighty-seven percent of the files available on Napster may be copyrighted and more than seventy percent may be owned or administered by plaintiffs." Napster, 114 F.Supp.2d at 911.

The district court further determined that plaintiffs' exclusive rights under § 106 were violated: "here the evidence establishes [1014] that a majority of Napster users use the service to download and upload copyrighted music. . . . And by doing that, it constitutes — the uses constitute direct infringement of plaintiffs' musical compositions, recordings." A & M Records, Inc. v. Napster, Inc., Nos. 99-5183, 00-0074, 2000 WL 1009483, at *1 (N.D.Cal. July 26, 2000) (transcript of proceedings). The district court also noted that "it is pretty much acknowledged . . . by Napster that this is infringement." Id. We agree that plaintiffs have shown that Napster users infringe at least two of the copyright holders' exclusive rights: the rights of reproduction, § 106(1); and distribution, § 106(3). Napster users who upload file names to the search index for others to copy violate plaintiffs' distribution rights. Napster users who download files containing copyrighted music violate plaintiffs' reproduction rights.

Napster asserts an affirmative defense to the charge that its users directly infringe plaintiffs' copyrighted musical compositions and sound recordings.

B. Fair Use

Napster contends that its users do not directly infringe plaintiffs' copyrights because the users are engaged in fair use of the material. See 17 U.S.C. § 107 ("[T]he fair use of a copyrighted work . . . is not an infringement of copyright."). Napster identifies three specific alleged fair uses: sampling, where users make temporary copies of a work before purchasing; space-shifting, where users access a sound recording through the Napster system that they already own in audio CD format; and permissive distribution of recordings by both new and established artists.

The district court considered factors listed in 17 U.S.C. § 107, which guide a court's fair use determination. These factors are: (1) the purpose and character of the use; (2) the nature of the copyrighted work; (3) the "amount and substantiality of the portion used" in relation to the work as a whole; and (4) the effect of the use upon the potential market for the work or the value of the work. See 17 U.S.C. § 107. The district court first conducted a general analysis of Napster system uses under § 107, and then applied its reasoning to the alleged fair uses identified by Napster. The district court concluded that Napster users are not fair users.^[3] [1015] We agree. We first address the court's overall fair use analysis.

1. Purpose and Character of the Use

This factor focuses on whether the new work merely replaces the object of the original creation or instead adds a further purpose or different character. In other words, this factor asks "whether and to what extent the new work is `transformative.'" See Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 579, 114 S.Ct. 1164, 127 L.Ed.2d 500 (1994).

The district court first concluded that downloading MP3 files does not transform the copyrighted work. Napster, 114 F.Supp.2d at 912. This conclusion is supportable. Courts have been reluctant to find fair use when an original work is merely retransmitted in a different medium. See, e.g., Infinity Broadcast Corp. v. Kirkwood, 150 F.3d 104, 108 (2d Cir.1998) (concluding that retransmission of radio broadcast over telephone lines is not transformative); UMG Recordings, Inc. v. MP3.com, Inc., 92 F.Supp.2d 349, 351 (S.D.N.Y.) (finding that reproduction of audio CD into MP3 format does not "transform" the work), certification denied, 2000 WL 710056 (S.D.N.Y. June 1, 2000) ("Defendant's copyright infringement was clear, and the mere fact that it was clothed in the exotic webbing of the Internet does not disguise its illegality.").

This "purpose and character" element also requires the district court to determine whether the allegedly infringing use is commercial or noncommercial. See Campbell, 510 U.S. at 584-85, 114 S.Ct. 1164. A commercial use weighs against a finding of fair use but is not conclusive on the issue. Id. The district court determined that Napster users engage in commercial use of the copyrighted materials largely because (1) "a host user sending a file cannot be said to engage in a personal use when distributing that file to an anonymous requester" and (2) "Napster users get for free something they would ordinarily have to buy." Napster, 114 F.Supp.2d at 912. The district court's findings are not clearly erroneous.

Direct economic benefit is not required to demonstrate a commercial use. Rather, repeated and exploitative copying of copyrighted works, even if the copies are not offered for sale, may constitute a commercial use. See Worldwide Church of God v. Philadelphia Church of God, 227 F.3d 1110, 1118 (9th Cir.2000) (stating that church that copied religious text for its members "unquestionably profit[ed]" from the unauthorized "distribution and use of [the text] without having to account to the copyright holder"); American Geophysical Union v. Texaco, Inc., 60 F.3d 913, 922 (2d Cir.1994) (finding that researchers at for-profit laboratory gained indirect economic advantage by photocopying copyrighted scholarly articles). In the record before us, commercial use is demonstrated by a showing that repeated and exploitative unauthorized copies of copyrighted works were made to save the expense of purchasing authorized copies. See Worldwide Church, 227 F.3d at 1117-18; Sega Enters. Ltd. v. MAPHIA, 857 F.Supp. 679, 687 (N.D.Cal.1994) (finding commercial use when individuals downloaded copies of video games "to avoid having to buy video game cartridges"); see also American Geophysical, 60 F.3d at 922. Plaintiffs made such a showing before the district court.^[4]

We also note that the definition of a financially motivated transaction for the purposes of criminal copyright actions includes trading infringing copies of a work for other items, "including the receipt of other copyrighted works." See No Electronic Theft Act ("NET Act"), Pub.L. No. 105-147, 18 U.S.C. § 101 (defining "Financial Gain").

[1016] 2. The Nature of the Use

Works that are creative in nature are "closer to the core of intended copyright protection" than are more fact-based works. See Campbell, 510 U.S. at 586, 114 S.Ct. 1164. The district court determined that plaintiffs' "copyrighted musical compositions and sound recordings are creative in nature . . . which cuts against a finding of fair use under the second factor." Napster, 114 F.Supp.2d at 913. We find no error in the district court's conclusion.

3. The Portion Used

"While `wholesale copying does not preclude fair use per se,' copying an entire work `militates against a finding of fair use.'" Worldwide Church, 227 F.3d at 1118 (quoting Hustler Magazine, Inc. v. Moral Majority, Inc., 796 F.2d 1148, 1155 (9th Cir.1986)). The district court determined that Napster users engage in "wholesale copying" of copyrighted work because file transfer necessarily "involves copying the entirety of the copyrighted work." Napster, 114 F.Supp.2d at 913. We agree. We note, however, that under certain circumstances, a court will conclude that a use is fair even when the protected work is copied in its entirety. See, e.g., Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 449-50, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984) (acknowledging that fair use of time-shifting necessarily involved making a full copy of a protected work).

4. Effect of Use on Market

"Fair use, when properly applied, is limited to copying by others which does not materially impair the marketability of the work which is copied." Harper & Row Publishers, Inc. v. Nation Enters., 471 U.S. 539, 566-67, 105 S.Ct. 2218, 85 L.Ed.2d 588 (1985). "[T]he importance of this [fourth] factor will vary, not only with the amount of harm, but also with the relative strength of the showing on the other factors." Campbell, 510 U.S. at 591 n. 21, 114 S.Ct. 1164. The proof required to demonstrate present or future market harm varies with the purpose and character of the use:

A challenge to a noncommercial use of a copyrighted work requires proof either that the particular use is harmful, or that if it should become widespread, it would adversely affect the potential market for the copyrighted work. . . . If the intended use is for commercial gain, that likelihood [of market harm] may be presumed. But if it is for a noncommercial purpose, the likelihood must be demonstrated.

Sony, 464 U.S. at 451, 104 S.Ct. 774 (emphases added).

Addressing this factor, the district court concluded that Napster harms the market in "at least" two ways: it reduces audio CD sales among college students and it "raises barriers to plaintiffs' entry into the market for the digital downloading of music." Napster, 114 F.Supp.2d at 913. The district court relied on evidence plaintiffs submitted to show that Napster use harms the market for their copyrighted musical compositions and sound recordings. In a separate memorandum and order regarding the parties' objections to the expert reports, the district court examined each report, finding some more appropriate and probative than others. A & M Records, Inc. v. Napster, Inc., Nos. 99-5183 & 00-0074, 2000 WL 1170106 (N.D.Cal. August 10, 2000). Notably, plaintiffs' expert, Dr. E. Deborah Jay, conducted a survey (the "Jay Report") using a random sample of college and university students to track their reasons for using Napster and the impact Napster had on their music purchases. Id. at *2. The court recognized that the Jay Report focused on just one segment of the Napster user population and found "evidence of lost sales attributable to college use to be probative of irreparable harm for purposes of the preliminary injunction motion." Id. at *3.

Plaintiffs also offered a study conducted by Michael Fine, Chief Executive Officer of Soundscan, (the "Fine Report") to determine the effect of online sharing of MP3 [1017] files in order to show irreparable harm. Fine found that online file sharing had resulted in a loss of "album" sales within college markets. After reviewing defendant's objections to the Fine Report and expressing some concerns regarding the methodology and findings, the district court refused to exclude the Fine Report insofar as plaintiffs offered it to show irreparable harm. Id. at *6.

Plaintiffs' expert Dr. David J. Teece studied several issues ("Teece Report"), including whether plaintiffs had suffered or were likely to suffer harm in their existing and planned businesses due to Napster use. Id. Napster objected that the report had not undergone peer review. The district court noted that such reports generally are not subject to such scrutiny and overruled defendant's objections. Id.

As for defendant's experts, plaintiffs objected to the report of Dr. Peter S. Fader, in which the expert concluded that Napster is beneficial to the music industry because MP3 music file-sharing stimulates more audio CD sales than it displaces. Id. at *7. The district court found problems in Dr. Fader's minimal role in overseeing the administration of the survey and the lack of objective data in his report. The court decided the generality of the report rendered it "of dubious reliability and value." The court did not exclude the report, however, but chose "not to rely on Fader's findings in determining the issues of fair use and irreparable harm." Id. at *8.

The district court cited both the Jay and Fine Reports in support of its finding that Napster use harms the market for plaintiffs' copyrighted musical compositions and sound recordings by reducing CD sales among college students. The district court cited the Teece Report to show the harm Napster use caused in raising barriers to plaintiffs' entry into the market for digital downloading of music. Napster, 114 F.Supp.2d at 910. The district court's careful consideration of defendant's objections to these reports and decision to rely on the reports for specific issues demonstrates a proper exercise of discretion in addition to a correct application of the fair use doctrine. Defendant has failed to show any basis for disturbing the district court's findings.

We, therefore, conclude that the district court made sound findings related to Napster's deleterious effect on the present and future digital download market. Moreover, lack of harm to an established market cannot deprive the copyright holder of the right to develop alternative markets for the works. See L.A. Times v. Free Republic, 54 U.S.P.Q.2d 1453, 1469-71 (C.D.Cal.2000) (stating that online market for plaintiff newspapers' articles was harmed because plaintiffs demonstrated that "[defendants] are attempting to exploit the market for viewing their articles online"); see also UMG Recordings, 92 F.Supp.2d at 352 ("Any allegedly positive impact of defendant's activities on plaintiffs' prior market in no way frees defendant to usurp a further market that directly derives from reproduction of the plaintiffs' copyrighted works."). Here, similar to L.A. Times and UMG Recordings, the record supports the district court's finding that the "record company plaintiffs have already expended considerable funds and effort to commence Internet sales and licensing for digital downloads." 114 F.Supp.2d at 915. Having digital downloads available for free on the Napster system necessarily harms the copyright holders' attempts to charge for the same downloads.

Judge Patel did not abuse her discretion in reaching the above fair use conclusions, nor were the findings of fact with respect to fair use considerations clearly erroneous. We next address Napster's identified uses of sampling and space-shifting.

5. Identified Uses

Napster maintains that its identified uses of sampling and space-shifting were wrongly excluded as fair uses by the district court.

[1018] a. Sampling

Napster contends that its users download MP3 files to "sample" the music in order to decide whether to purchase the recording. Napster argues that the district court: (1) erred in concluding that sampling is a commercial use because it conflated a noncommercial use with a personal use; (2) erred in determining that sampling adversely affects the market for plaintiffs' copyrighted music, a requirement if the use is noncommercial; and (3) erroneously concluded that sampling is not a fair use because it determined that samplers may also engage in other infringing activity.

The district court determined that sampling remains a commercial use even if some users eventually purchase the music. We find no error in the district court's determination. Plaintiffs have established that they are likely to succeed in proving that even authorized temporary downloading of individual songs for sampling purposes is commercial in nature. See Napster, 114 F.Supp.2d at 913. The record supports a finding that free promotional downloads are highly regulated by the record company plaintiffs and that the companies collect royalties for song samples available on retail Internet sites. Id. Evidence relied on by the district court demonstrates that the free downloads provided by the record companies consist of thirty-to-sixty second samples or are full songs programmed to "time out," that is, exist only for a short time on the downloader's computer. Id. at 913-14. In comparison, Napster users download a full, free and permanent copy of the recording. Id. at 914-15. The determination by the district court as to the commercial purpose and character of sampling is not clearly erroneous.

The district court further found that both the market for audio CDs and market for online distribution are adversely affected by Napster's service. As stated in our discussion of the district court's general fair use analysis: the court did not abuse its discretion when it found that, overall, Napster has an adverse impact on the audio CD and digital download markets. Contrary to Napster's assertion that the district court failed to specifically address the market impact of sampling, the district court determined that "[e]ven if the type of sampling supposedly done on Napster were a non-commercial use, plaintiffs have demonstrated a substantial likelihood that it would adversely affect the potential market for their copyrighted works if it became widespread." Napster, 114 F.Supp.2d at 914. The record supports the district court's preliminary determinations that: (1) the more music that sampling users download, the less likely they are to eventually purchase the recordings on audio CD; and (2) even if the audio CD market is not harmed, Napster has adverse effects on the developing digital download market.

Napster further argues that the district court erred in rejecting its evidence that the users' downloading of "samples" increases or tends to increase audio CD sales. The district court, however, correctly noted that "any potential enhancement of plaintiffs' sales . . . would not tip the fair use analysis conclusively in favor of defendant." Id. at 914. We agree that increased sales of copyrighted material attributable to unauthorized use should not deprive the copyright holder of the right to license the material. See Campbell, 510 U.S. at 591 n. 21, 114 S.Ct. 1164 ("Even favorable evidence, without more, is no guarantee of fairness. Judge Leval gives the example of the film producer's appropriation of a composer's previously unknown song that turns the song into a commercial success; the boon to the song does not make the film's simple copying fair."); see also L.A. Times, 54 U.S.P.Q.2d at 1471-72. Nor does positive impact in one market, here the audio CD market, deprive the copyright holder of the right to develop identified alternative markets, here the digital download market. See id. at 1469-71.

[1019] We find no error in the district court's factual findings or abuse of discretion in the court's conclusion that plaintiffs will likely prevail in establishing that sampling does not constitute a fair use.

b. Space-Shifting

Napster also maintains that space-shifting is a fair use. Space-shifting occurs when a Napster user downloads MP3 music files in order to listen to music he already owns on audio CD. See id. at 915-16. Napster asserts that we have already held that space-shifting of musical compositions and sound recordings is a fair use. See Recording Indus. Ass'n of Am. v. Diamond Multimedia Sys., Inc., 180 F.3d 1072, 1079 (9th Cir.1999) ("Rio [a portable MP3 player] merely makes copies in order to render portable, or `space-shift,' those files that already reside on a user's hard drive. . . . Such copying is a paradigmatic noncommercial personal use."). See also generally Sony, 464 U.S. at 423, 104 S.Ct. 774 (holding that "time-shifting," where a video tape recorder owner records a television show for later viewing, is a fair use).

We conclude that the district court did not err when it refused to apply the "shifting" analyses of Sony and Diamond. Both Diamond and Sony are inapposite because the methods of shifting in these cases did not also simultaneously involve distribution of the copyrighted material to the general public; the time or space-shifting of copyrighted material exposed the material only to the original user. In Diamond, for example, the copyrighted music was transferred from the user's computer hard drive to the user's portable MP3 player. So too Sony, where "the majority of VCR purchasers . . . did not distribute taped television broadcasts, but merely enjoyed them at home." Napster, 114 F.Supp.2d at 913. Conversely, it is obvious that once a user lists a copy of music he already owns on the Napster system in order to access the music from another location, the song becomes "available to millions of other individuals," not just the original CD owner. See UMG Recordings, 92 F.Supp.2d at 351-52 (finding space-shifting of MP3 files not a fair use even when previous ownership is demonstrated before a download is allowed); cf. Religious Tech. Ctr. v. Lerma, No. 95-1107A, 1996 WL 633131, at *6 (E.D.Va. Oct.4, 1996) (suggesting that storing copyrighted material on computer disk for later review is not a fair use).

c. Other Uses

Permissive reproduction by either independent or established artists is the final fair use claim made by Napster. The district court noted that plaintiffs did not seek to enjoin this and any other noninfringing use of the Napster system, including: chat rooms, message boards and Napster's New Artist Program. Napster, 114 F.Supp.2d at 917. Plaintiffs do not challenge these uses on appeal.

We find no error in the district court's determination that plaintiffs will likely succeed in establishing that Napster users do not have a fair use defense. Accordingly, we next address whether Napster is secondarily liable for the direct infringement under two doctrines of copyright law: contributory copyright infringement and vicarious copyright infringement.

IV

We first address plaintiffs' claim that Napster is liable for contributory copyright infringement. Traditionally, "one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a `contributory' infringer." Gershwin Publ'g Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1162 (2d Cir.1971); see also Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 264 (9th Cir.1996). Put differently, liability exists if the defendant engages in "personal conduct that encourages or assists the infringement." Matthew Bender & Co. v. West Publ'g Co., 158 F.3d 693, 706 (2d Cir.1998).

[1020] The district court determined that plaintiffs in all likelihood would establish Napster's liability as a contributory infringer. The district court did not err; Napster, by its conduct, knowingly encourages and assists the infringement of plaintiffs' copyrights.

A. Knowledge

Contributory liability requires that the secondary infringer "know or have reason to know" of direct infringement. Cable/Home Communication Corp. v. Network Prods., Inc., 902 F.2d 829, 845 & 846 n. 29 (11th Cir.1990); Religious Tech. Ctr. v. Netcom On-Line Communication Servs., Inc., 907 F.Supp. 1361, 1373-74 (N.D.Cal.1995) (framing issue as "whether Netcom knew or should have known of" the infringing activities). The district court found that Napster had both actual and constructive knowledge that its users exchanged copyrighted music. The district court also concluded that the law does not require knowledge of "specific acts of infringement" and rejected Napster's contention that because the company cannot distinguish infringing from noninfringing files, it does not "know" of the direct infringement. 114 F.Supp.2d at 917.

It is apparent from the record that Napster has knowledge, both actual and constructive,^[5] of direct infringement. Napster claims that it is nevertheless protected from contributory liability by the teaching of Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984). We disagree. We observe that Napster's actual, specific knowledge of direct infringement renders Sony's holding of limited assistance to Napster. We are compelled to make a clear distinction between the architecture of the Napster system and Napster's conduct in relation to the operational capacity of the system.

The Sony Court refused to hold the manufacturer and retailers of video tape recorders liable for contributory infringement despite evidence that such machines could be and were used to infringe plaintiffs' copyrighted television shows. Sony stated that if liability "is to be imposed on petitioners in this case, it must rest on the fact that they have sold equipment with constructive knowledge of the fact that their customers may use that equipment to make unauthorized copies of copyrighted material." Id. at 439, 104 S.Ct. 774 (emphasis added). The Sony Court declined to impute the requisite level of knowledge where the defendants made and sold equipment capable of both infringing and "substantial noninfringing uses." Id. at 442 (adopting a modified "staple article of commerce" doctrine from patent law). See also Universal City Studios, Inc. v. Sony Corp., 480 F.Supp. 429, 459 (C.D.Cal. 1979) ("This court agrees with defendants that their knowledge was insufficient to make them contributory infringers."), rev'd, 659 F.2d 963 (9th Cir.1981), rev'd, 464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984); Alfred C. Yen, Internet Service Provider Liability for Subscriber Copyright Infringement, Enterprise Liability, and the First Amendment, 88 Geo. L.J. 1833, 1874 & 1893 n.210 (2000) (suggesting that, after Sony, most Internet service providers lack "the requisite level of knowledge" for the imposition of contributory liability).

We are bound to follow Sony, and will not impute the requisite level of knowledge to Napster merely because [1021] peer-to-peer file sharing technology may be used to infringe plaintiffs' copyrights. See 464 U.S. at 436, 104 S.Ct. 774 (rejecting argument that merely supplying the "`means' to accomplish an infringing activity" leads to imposition of liability). We depart from the reasoning of the district court that Napster failed to demonstrate that its system is capable of commercially significant noninfringing uses. See Napster, 114 F.Supp.2d at 916, 917-18. The district court improperly confined the use analysis to current uses, ignoring the system's capabilities. See generally Sony, 464 U.S. at 442-43, 104 S.Ct. 774 (framing inquiry as whether the video tape recorder is "capable of commercially significant noninfringing uses") (emphasis added). Consequently, the district court placed undue weight on the proportion of current infringing use as compared to current and future noninfringing use. See generally Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 264-67 (5th Cir.1988) (single noninfringing use implicated Sony). Nonetheless, whether we might arrive at a different result is not the issue here. See Sports Form, Inc. v. United Press Int'l, Inc., 686 F.2d 750, 752 (9th Cir.1982). The instant appeal occurs at an early point in the proceedings and "the fully developed factual record may be materially different from that initially before the district court. . . ." Id. at 753. Regardless of the number of Napster's infringing versus noninfringing uses, the evidentiary record here supported the district court's finding that plaintiffs would likely prevail in establishing that Napster knew or had reason to know of its users' infringement of plaintiffs' copyrights.

This analysis is similar to that of Religious Technology Center v. Netcom On-Line Communication Services, Inc., which suggests that in an online context, evidence of actual knowledge of specific acts of infringement is required to hold a computer system operator liable for contributory copyright infringement. 907 F.Supp. at 1371. Netcom considered the potential contributory copyright liability of a computer bulletin board operator whose system supported the posting of infringing material. Id. at 1374. The court, in denying Netcom's motion for summary judgment of noninfringement and plaintiff's motion for judgment on the pleadings, found that a disputed issue of fact existed as to whether the operator had sufficient knowledge of infringing activity. Id. at 1374-75.

The court determined that for the operator to have sufficient knowledge, the copyright holder must "provide the necessary documentation to show there is likely infringement." 907 F.Supp. at 1374; cf. Cubby, Inc. v. CompuServe, Inc., 776 F.Supp. 135, 141 (S.D.N.Y.1991) (recognizing that online service provider does not and cannot examine every hyperlink for potentially defamatory material). If such documentation was provided, the court reasoned that Netcom would be liable for contributory infringement because its failure to remove the material "and thereby stop an infringing copy from being distributed worldwide constitutes substantial participation" in distribution of copyrighted material. Id.

We agree that if a computer system operator learns of specific infringing material available on his system and fails to purge such material from the system, the operator knows of and contributes to direct infringement. See Netcom, 907 F.Supp. at 1374. Conversely, absent any specific information which identifies infringing activity, a computer system operator cannot be liable for contributory infringement merely because the structure of the system allows for the exchange of copyrighted material. See Sony, 464 U.S. at 436, 442-43, 104 S.Ct. 774. To enjoin simply because a computer network allows for infringing use would, in our opinion, violate Sony and potentially restrict activity unrelated to infringing use.

We nevertheless conclude that sufficient knowledge exists to impose contributory liability when linked to demonstrated infringing use of the Napster system. See Napster, 114 F.Supp.2d at 919 ("Religious [1022] Technology Center would not mandate a determination that Napster, Inc. lacks the knowledge requisite to contributory infringement."). The record supports the district court's finding that Napster has actual knowledge that specific infringing material is available using its system, that it could block access to the system by suppliers of the infringing material, and that it failed to remove the material. See Napster, 114 F.Supp.2d at 918, 920-21.^[6]

B. Material Contribution

Under the facts as found by the district court, Napster materially contributes to the infringing activity. Relying on Fonovisa, the district court concluded that "[w]ithout the support services defendant provides, Napster users could not find and download the music they want with the ease of which defendant boasts." Napster, 114 F.Supp.2d at 919-20 ("Napster is an integrated service designed to enable users to locate and download MP3 music files."). We agree that Napster provides "the site and facilities" for direct infringement. See Fonovisa, 76 F.3d at 264; cf. Netcom, 907 F.Supp. at 1372 ("Netcom will be liable for contributory infringement since its failure to cancel [a user's] infringing message and thereby stop an infringing copy from being distributed worldwide constitutes substantial participation."). The district court correctly applied the reasoning in Fonovisa, and properly found that Napster materially contributes to direct infringement.

We affirm the district court's conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the contributory copyright infringement claim. We will address the scope of the injunction in part VIII of this opinion.

V

We turn to the question whether Napster engages in vicarious copyright infringement. Vicarious copyright liability is an "outgrowth" of respondeat superior. Fonovisa, 76 F.3d at 262. In the context of copyright law, vicarious liability extends beyond an employer/employee relationship to cases in which a defendant "has the right and ability to supervise the infringing activity and also has a direct financial interest in such activities." Id. (quoting Gershwin, 443 F.2d at 1162); see also Polygram Int'l Publ'g, Inc. v. Nevada/TIG, Inc., 855 F.Supp. 1314, 1325-26 (D.Mass.1994) (describing vicarious liability as a form of risk allocation).

Before moving into this discussion, we note that Sony's "staple article of commerce" analysis has no application to Napster's potential liability for vicarious copyright infringement. See Sony, 464 U.S. at 434-435, 104 S.Ct. 774; see generally 3 Melville B. Nimmer & David Nimmer, Nimmer On Copyright §§ 12.04[A][2] & [A][2][b] (2000) (confining Sony to contributory infringement analysis: "Contributory infringement itself is of two types — personal conduct that forms part of or furthers the infringement and contribution of machinery or goods that provide the means to infringe"). 617 PLI/Pat 455, 528 (Sept. 2, 2000) (indicating that the "staple article of commerce" doctrine "provides a defense only to contributory infringement, not to vicarious infringement"). The issues of Sony's liability under the "doctrines of `direct infringement' and `vicarious liability'" were not before the Supreme Court, although the Court recognized that the "lines between direct infringement, contributory infringement, and vicarious liability are not clearly drawn." Id. at 435 n. 17, 104 S.Ct. 774. Consequently, when the Sony Court used the term "vicarious [1023] liability," it did so broadly and outside of a technical analysis of the doctrine of vicarious copyright infringement. Id. at 435 ("[V]icarious liability is imposed in virtually all areas of the law, and the concept of contributory infringement is merely a species of the broader problem of identifying the circumstances in which it is just to hold one individual accountable for the actions of another."); see also Black's Law Dictionary 927 (7th ed. 1999) (defining "vicarious liability" in a manner similar to the definition used in Sony).

A. Financial Benefit

The district court determined that plaintiffs had demonstrated they would likely succeed in establishing that Napster has a direct financial interest in the infringing activity. Napster, 114 F.Supp.2d at 921-22. We agree. Financial benefit exists where the availability of infringing material "acts as a `draw' for customers." Fonovisa, 76 F.3d at 263-64 (stating that financial benefit may be shown "where infringing performances enhance the attractiveness of a venue"). Ample evidence supports the district court's finding that Napster's future revenue is directly dependent upon "increases in userbase." More users register with the Napster system as the "quality and quantity of available music increases." 114 F.Supp.2d at 902. We conclude that the district court did not err in determining that Napster financially benefits from the availability of protected works on its system.

B. Supervision

The district court determined that Napster has the right and ability to supervise its users' conduct. Napster, 114 F.Supp.2d at 920-21 (finding that Napster's representations to the court regarding "its improved methods of blocking users about whom rights holders complain . . . is tantamount to an admission that defendant can, and sometimes does, police its service"). We agree in part.

The ability to block infringers' access to a particular environment for any reason whatsoever is evidence of the right and ability to supervise. See Fonovisa, 76 F.3d at 262 ("Cherry Auction had the right to terminate vendors for any reason whatsoever and through that right had the ability to control the activities of vendors on the premises."); cf. Netcom, 907 F.Supp. at 1375-76 (indicating that plaintiff raised a genuine issue of fact regarding ability to supervise by presenting evidence that an electronic bulletin board service can suspend subscriber's accounts). Here, plaintiffs have demonstrated that Napster retains the right to control access to its system. Napster has an express reservation of rights policy, stating on its website that it expressly reserves the "right to refuse service and terminate accounts in [its] discretion, including, but not limited to, if Napster believes that user conduct violates applicable law . . . or for any reason in Napster's sole discretion, with or without cause."

To escape imposition of vicarious liability, the reserved right to police must be exercised to its fullest extent. Turning a blind eye to detectable acts of infringement for the sake of profit gives rise to liability. See, e.g., Fonovisa, 76 F.3d at 261 ("There is no dispute for the purposes of this appeal that Cherry Auction and its operators were aware that vendors in their swap meets were selling counterfeit recordings."); see also Gershwin, 443 F.2d at 1161-62 (citing Shapiro, Bernstein & Co. v. H.L. Green Co., 316 F.2d 304 (2d Cir.1963), for the proposition that "failure to police the conduct of the primary infringer" leads to imposition of vicarious liability for copyright infringement).

The district court correctly determined that Napster had the right and ability to police its system and failed to exercise that right to prevent the exchange of copyrighted material. The district court, however, failed to recognize that the boundaries of the premises that Napster "controls and patrols" are limited. See, e.g., Fonovisa, 76 F.3d at 262-63 (in addition to having the right to exclude vendors, defendant "controlled and patrolled" the premises); see also Polygram, 855 F.Supp. at 1328-29 (in addition to having the contractual right to remove exhibitors, trade show operator reserved the right to police during the show and had its "employees walk the [1024] aisles to ensure `rules compliance'"). Put differently, Napster's reserved "right and ability" to police is cabined by the system's current architecture. As shown by the record, the Napster system does not "read" the content of indexed files, other than to check that they are in the proper MP3 format.

Napster, however, has the ability to locate infringing material listed on its search indices, and the right to terminate users' access to the system. The file name indices, therefore, are within the "premises" that Napster has the ability to police. We recognize that the files are user-named and may not match copyrighted material exactly (for example, the artist or song could be spelled wrong). For Napster to function effectively, however, file names must reasonably or roughly correspond to the material contained in the files, otherwise no user could ever locate any desired music. As a practical matter, Napster, its users and the record company plaintiffs have equal access to infringing material by employing Napster's "search function."

Our review of the record requires us to accept the district court's conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the vicarious copyright infringement claim. Napster's failure to police the system's "premises," combined with a showing that Napster financially benefits from the continuing availability of infringing files on its system, leads to the imposition of vicarious liability. We address the scope of the injunction in part VIII of this opinion.

VI

We next address whether Napster has asserted defenses which would preclude the entry of a preliminary injunction.

Napster alleges that two statutes insulate it from liability. First, Napster asserts that its users engage in actions protected by § 1008 of the Audio Home Recording Act of 1992, 17 U.S.C. § 1008. Second, Napster argues that its liability for contributory and vicarious infringement is limited by the Digital Millennium Copyright Act, 17 U.S.C. § 512. We address the application of each statute in turn.

A. Audio Home Recording Act

The statute states in part:

No action may be brought under this title alleging infringement of copyright based on the manufacture, importation, or distribution of a digital audio recording device, a digital audio recording medium, an analog recording device, or an analog recording medium, or based on the noncommercial use by a consumer of such a device or medium for making digital musical recordings or analog musical recordings.

17 U.S.C. § 1008 (emphases added). Napster contends that MP3 file exchange is the type of "noncommercial use" protected from infringement actions by the statute. Napster asserts it cannot be secondarily liable for users' nonactionable exchange of copyrighted musical recordings.

The district court rejected Napster's argument, stating that the Audio Home Recording Act is "irrelevant" to the action because: (1) plaintiffs did not bring claims under the Audio Home Recording Act; and (2) the Audio Home Recording Act does not cover the downloading of MP3 files. Napster, 114 F.Supp.2d at 916 n. 19.

We agree with the district court that the Audio Home Recording Act does not cover the downloading of MP3 files to computer hard drives. First, "[u]nder the plain meaning of the Act's definition of digital audio recording devices, computers (and their hard drives) are not digital audio recording devices because their `primary purpose' is not to make digital audio copied recordings." Recording Indus. Ass'n of Am. v. Diamond Multimedia Sys., Inc., 180 F.3d 1072, 1078 (9th Cir.1999). Second, notwithstanding Napster's claim that computers are "digital audio recording devices," computers do not make "digital music recordings" as defined by the Audio Home Recording Act. Id. at 1077 (citing S. Rep. 102-294) ("There are simply no [1025] grounds in either the plain language of the definition or in the legislative history for interpreting the term `digital musical recording' to include songs fixed on computer hard drives.").

B. Digital Millennium Copyright Act

Napster also interposes a statutory limitation on liability by asserting the protections of the "safe harbor" from copyright infringement suits for "Internet service providers" contained in the Digital Millennium Copyright Act, 17 U.S.C. § 512. See Napster, 114 F.Supp.2d at 919 n. 24. The district court did not give this statutory limitation any weight favoring a denial of temporary injunctive relief. The court concluded that Napster "has failed to persuade this court that subsection 512(d) shelters contributory infringers." Id.

We need not accept a blanket conclusion that § 512 of the Digital Millennium Copyright Act will never protect secondary infringers. See S. Rep. 105-190, at 40 (1998) ("The limitations in subsections (a) through (d) protect qualifying service providers from liability for all monetary relief for direct, vicarious, and contributory infringement."), reprinted in Melville B. Nimmer & David Nimmer, Nimmer on Copyright: Congressional Committee Reports on the Digital Millennium Copyright Act and Concurrent Amendments (2000); see also Charles S. Wright, Actual Versus Legal Control: Reading Vicarious Liability for Copyright Infringement Into the Digital Millennium Copyright Act of 1998, 75 Wash. L.Rev. 1005, 1028-31 (July 2000) ("[T]he committee reports leave no doubt that Congress intended to provide some relief from vicarious liability").

We do not agree that Napster's potential liability for contributory and vicarious infringement renders the Digital Millennium Copyright Act inapplicable per se. We instead recognize that this issue will be more fully developed at trial. At this stage of the litigation, plaintiffs raise serious questions regarding Napster's ability to obtain shelter under § 512, and plaintiffs also demonstrate that the balance of hardships tips in their favor. See Prudential Real Estate, 204 F.3d at 874; see also Micro Star v. Formgen, Inc. 154 F.3d 1107, 1109 (9th Cir.1998) ("A party seeking a preliminary injunction must show . . . `that serious questions going to the merits were raised and the balance of hardships tips sharply in its favor.'").

Plaintiffs have raised and continue to raise significant questions under this statute, including: (1) whether Napster is an Internet service provider as defined by 17 U.S.C. § 512(d); (2) whether copyright owners must give a service provider "official" notice of infringing activity in order for it to have knowledge or awareness of infringing activity on its system; and (3) whether Napster complies with § 512(i), which requires a service provider to timely establish a detailed copyright compliance policy. See A & M Records, Inc. v. Napster, Inc., No. 99-05183, 2000 WL 573136 (N.D.Cal. May 12, 2000) (denying summary judgment to Napster under a different subsection of the Digital Millennium Copyright Act, § 512(a)).

The district court considered ample evidence to support its determination that the balance of hardships tips in plaintiffs' favor:

Any destruction of Napster, Inc. by a preliminary injunction is speculative compared to the statistical evidence of massive, unauthorized downloading and uploading of plaintiffs' copyrighted works-as many as 10,000 files per second by defendant's own admission. See Kessler Dec. ¶ 29. The court has every reason to believe that, without a preliminary injunction, these numbers will mushroom as Napster users, and newcomers attracted by the publicity, scramble to obtain as much free music as possible before trial.

114 F.Supp.2d at 926.

VII

Napster contends that even if the district court's preliminary determinations that it is liable for facilitating copyright infringement are correct, the district court [1026] improperly rejected valid affirmative defenses of waiver, implied license and copyright misuse. We address the defenses in turn.

A. Waiver

"Waiver is the intentional relinquishment of a known right with knowledge of its existence and the intent to relinquish it." United States v. King Features Entm't, Inc., 843 F.2d 394, 399 (9th Cir.1988). In copyright, waiver or abandonment of copyright "occurs only if there is an intent by the copyright proprietor to surrender rights in his work." 4 Melville B. Nimmer & David Nimmer, Nimmer On Copyright ¶ 13.06 (2000); see also Micro Star v. Formgen, Inc., 154 F.3d 1107, 1114 (9th Cir.1998) (discussing abandonment).

Napster argues that the district court erred in not finding that plaintiffs knowingly provided consumers with technology designed to copy and distribute MP3 files over the Internet and, thus, waived any legal authority to exercise exclusive control over creation and distribution of MP3 files. The district court, however, was not convinced "that the record companies created the monster that is now devouring their intellectual property rights." Napster, 114 F.Supp.2d at 924. We find no error in the district court's finding that "in hastening the proliferation of MP3 files, plaintiffs did [nothing] more than seek partners for their commercial downloading ventures and develop music players for files they planned to sell over the Internet." Id.^[7]

B. Implied License

Napster also argues that plaintiffs granted the company an implied license by encouraging MP3 file exchange over the Internet. Courts have found implied licenses only in "narrow" circumstances where one party "created a work at [the other's] request and handed it over, intending that [the other] copy and distribute it." SmithKline Beecham Consumer Healthcare, L.P. v. Watson Pharms., Inc., 211 F.3d 21, 25 (2d Cir.2000) (quoting Effects Assocs., Inc. v. Cohen, 908 F.2d 555, 558 (9th Cir.1990)), cert. denied, ___ U.S. ___, 121 S.Ct. 173, 148 L.Ed.2d 118 (2000). The district court observed that no evidence exists to support this defense: "indeed, the RIAA gave defendant express notice that it objected to the availability of its members' copyrighted music on Napster." Napster, 114 F.Supp.2d at 924-25. The record supports this conclusion.

C. Misuse

The defense of copyright misuse forbids a copyright holder from "secur[ing] an exclusive right or limited monopoly not granted by the Copyright Office." Lasercomb Am., Inc. v. Reynolds, 911 F.2d 970, 977-79 (4th Cir.1990), quoted in Practice Mgmt. Info. Corp. v. American Med. Ass'n, 121 F.3d 516, 520 (9th Cir.), amended by 133 F.3d 1140 (9th Cir.1997). Napster alleges that online distribution is not within the copyright monopoly. According to Napster, plaintiffs have colluded to "use their copyrights to extend their control to online distributions."

We find no error in the district court's preliminary rejection of this affirmative defense. The misuse defense prevents copyright holders from leveraging their limited monopoly to allow them control of areas outside the monopoly. See Lasercomb, 911 F.2d at 976-77; see also Religious [1027] Tech. Ctr. v. Lerma, No. 95-1107A, 1996 WL 633131, at *11 (E.D.Va. Oct.4, 1996) (listing circumstances which indicate improper leverage).^[8] There is no evidence here that plaintiffs seek to control areas outside of their grant of monopoly. Rather, plaintiffs seek to control reproduction and distribution of their copyrighted works, exclusive rights of copyright holders. 17 U.S.C. § 106; see also, e.g., UMG Recordings, 92 F.Supp.2d at 351 ("A [copyright holder's] `exclusive' rights, derived from the Constitution and the Copyright Act, include the right, within broad limits, to curb the development of such a derivative market by refusing to license a copyrighted work or by doing so only on terms the copyright owner finds acceptable."). That the copyrighted works are transmitted in another medium-MP3 format rather than audio CD-has no bearing on our analysis. See id. at 351 (finding that reproduction of audio CD into MP3 format does not "transform" the work).

VIII

The district court correctly recognized that a preliminary injunction against Napster's participation in copyright infringement is not only warranted but required. We believe, however, that the scope of the injunction needs modification in light of our opinion. Specifically, we reiterate that contributory liability may potentially be imposed only to the extent that Napster: (1) receives reasonable knowledge of specific infringing files with copyrighted musical compositions and sound recordings; (2) knows or should know that such files are available on the Napster system; and (3) fails to act to prevent viral distribution of the works. See Netcom, 907 F.Supp. at 1374-75. The mere existence of the Napster system, absent actual notice and Napster's demonstrated failure to remove the offending material, is insufficient to impose contributory liability. See Sony, 464 U.S. at 442-43, 104 S.Ct. 774.

Conversely, Napster may be vicariously liable when it fails to affirmatively use its ability to patrol its system and preclude access to potentially infringing files listed in its search index. Napster has both the ability to use its search function to identify infringing musical recordings and the right to bar participation of users who engage in the transmission of infringing files.

The preliminary injunction which we stayed is overbroad because it places on Napster the entire burden of ensuring that no "copying, downloading, uploading, transmitting, or distributing" of plaintiffs' works occur on the system. As stated, we place the burden on plaintiffs to provide notice to Napster of copyrighted works and files containing such works available on the Napster system before Napster has the duty to disable access to the offending content. Napster, however, also bears the burden of policing the system within the limits of the system. Here, we recognize that this is not an exact science in that the files are user named. In crafting the injunction on remand, the district court should recognize that Napster's system does not currently appear to allow Napster access to users' MP3 files.

Based on our decision to remand, Napster's additional arguments on appeal [1028] going to the scope of the injunction need not be addressed. We, however, briefly address Napster's First Amendment argument so that it is not reasserted on remand. Napster contends that the present injunction violates the First Amendment because it is broader than necessary. The company asserts two distinct free speech rights: (1) its right to publish a "directory" (here, the search index) and (2) its users' right to exchange information. We note that First Amendment concerns in copyright are allayed by the presence of the fair use doctrine. See 17 U.S.C. § 107; see generally Nihon Keizai Shimbun v. Comline Business Data, Inc., 166 F.3d 65, 74 (2d Cir.1999); Netcom, 923 F.Supp. at 1258 (stating that the Copyright Act balances First Amendment concerns with the rights of copyright holders). There was a preliminary determination here that Napster users are not fair users. Uses of copyrighted material that are not fair uses are rightfully enjoined. See Dr. Seuss Enters. v. Penguin Books USA, Inc., 109 F.3d 1394, 1403 (9th Cir.1997) (rejecting defendants' claim that injunction would constitute a prior restraint in violation of the First Amendment).

IX

We address Napster's remaining arguments: (1) that the court erred in setting a $5 million bond, and (2) that the district court should have imposed a constructive royalty payment structure in lieu of an injunction.

A. Bond

Napster argues that the $5 million bond is insufficient because the company's value is between $1.5 and $2 billion. We review objections to the amount of a bond for abuse of discretion. Walczak v. EPL Prolong, Inc., 198 F.3d 725 (9th Cir.1999).

We are reluctant to dramatically raise bond amounts on appeal. See GoTo.com, Inc. v. The Walt Disney Co., 202 F.3d 1199, 1211 (9th Cir.2000); see also Fed.R.Civ.P. 65(c). The district court considered competing evidence of Napster's value and the deleterious effect that any injunction would have upon the Napster system. We cannot say that Judge Patel abused her discretion when she fixed the penal sum required for the bond.

B. Royalties

Napster contends that the district court should have imposed a monetary penalty by way of a compulsory royalty in place of an injunction. We are asked to do what the district court refused.

Napster tells us that "where great public injury would be worked by an injunction, the courts might . . . award damages or a continuing royalty instead of an injunction in such special circumstances." Abend v. MCA, Inc., 863 F.2d 1465, 1479 (9th Cir.1988) (quoting 3 Melville B. Nimmer & David Nimmer, Nimmer On Copyright § 14.06[B] (1988)), aff'd, 495 U.S. 207, 110 S.Ct. 1750, 109 L.Ed.2d 184 (1990). We are at a total loss to find any "special circumstances" simply because this case requires us to apply well-established doctrines of copyright law to a new technology. Neither do we agree with Napster that an injunction would cause "great public injury." Further, we narrowly construe any suggestion that compulsory royalties are appropriate in this context because Congress has arguably limited the application of compulsory royalties to specific circumstances, none of which are present here. See 17 U.S.C. § 115.

The Copyright Act provides for various sanctions for infringers. See, e.g., 17 U.S.C. §§ 502 (injunctions); 504 (damages); and 506 (criminal penalties); see also 18 U.S.C. § 2319A (criminal penalties for the unauthorized fixation of and trafficking in sound recordings and music videos of live musical performances). These statutory sanctions represent a more than adequate legislative solution to the problem created by copyright infringement.

Imposing a compulsory royalty payment schedule would give Napster an "easy out" of this case. If such royalties were imposed, [1029] Napster would avoid penalties for any future violation of an injunction, statutory copyright damages and any possible criminal penalties for continuing infringement. The royalty structure would also grant Napster the luxury of either choosing to continue and pay royalties or shut down. On the other hand, the wronged parties would be forced to do business with a company that profits from the wrongful use of intellectual properties. Plaintiffs would lose the power to control their intellectual property: they could not make a business decision not to license their property to Napster, and, in the event they planned to do business with Napster, compulsory royalties would take away the copyright holders' ability to negotiate the terms of any contractual arrangement.

X

We affirm in part, reverse in part and remand.

We direct that the preliminary injunction fashioned by the district court prior to this appeal shall remain stayed until it is modified by the district court to conform to the requirements of this opinion. We order a partial remand of this case on the date of the filing of this opinion for the limited purpose of permitting the district court to proceed with the settlement and entry of the modified preliminary injunction.

Even though the preliminary injunction requires modification, appellees have substantially and primarily prevailed on appeal. Appellees shall recover their statutory costs on appeal. See Fed. R.App. P. 39(a)(4) ("[i]f a judgment is affirmed in part, reversed in part, modified, or vacated, costs are taxed only as the court orders.").

AFFIRMED IN PART, REVERSED IN PART AND REMANDED.

[1] "To download means to receive information, typically a file, from another computer to yours via your modem. . . . The opposite term is upload, which means to send a file to another computer." United States v. Mohrbacher, 182 F.3d 1041, 1048 (9th Cir.1999) (quoting Robin Williams, Jargon, An Informal Dictionary of Computer Terms 170-71 (1993)).

[2] Secondary liability for copyright infringement does not exist in the absence of direct infringement by a third party. Religious Tech. Ctr. v. Netcom On-Line Communication Servs., Inc., 907 F.Supp. 1361, 1371 (N.D.Cal. 1995) ("[T]here can be no contributory infringement by a defendant without direct infringement by another."). It follows that Napster does not facilitate infringement of the copyright laws in the absence of direct infringement by its users.

[3] Napster asserts that because plaintiffs seek injunctive relief, they have the burden of showing a likelihood that they would prevail against any affirmative defenses raised by Napster, including its fair use defense under 17 U.S.C. § 107. See Atari Games Corp. v. Nintendo, 975 F.2d 832, 837 (Fed.Cir.1992) (following Ninth Circuit law, and stating that plaintiff must show likelihood of success on prima facie copyright infringement case and likelihood that it would overcome copyright misuse defense); see also Dr. Seuss Enters. v. Penguin Books USA, 924 F.Supp. 1559, 1562 (S.D.Cal.1996) ("The plaintiff's burden of showing a likelihood of success on the merits includes the burden of showing a likelihood that it would prevail against any affirmative defenses raised by the defendant."), aff'd, 109 F.3d 1394 (9th Cir.1997); Religious Tech. Ctr. v. Netcom On-Line Communication Servs., 923 F.Supp. 1231, 1242 n. 12 (1995) (same); 2 William W. Schwarzer et al., California Practice Guide, Federal Civil Procedure Before Trial ¶ 13:47 (2000) (advising that when a preliminary injunction is sought "plaintiff must demonstrate a likelihood of prevailing on any affirmative defense as well as on plaintiff's case in chief"). But see Fair Use of Copyrighted Works, H.R. Rep. 102-836 n.3 (criticizing a Northern District of New York case in which "the district court erroneously held that where the copyright owner seeks a preliminary injunction, the copyright owner bears the burden of disproving the [fair use] defense"); see also 1 William F. Patry, Copyright Law & Practice, 725, 725 n.27 (1994) (citing cases placing burden on defendant at preliminary injunction stage).

The district court stated that "defendant bears the burden of proving. . . affirmative defenses." Napster, 114 F.Supp.2d at 912. Plaintiffs assert that the district court did not err in placing the burden on Napster. We conclude that even if plaintiffs bear the burden of establishing that they would likely prevail against Napster's affirmative defenses at the preliminary injunction stage, the record supports the district court's conclusion that Napster users do not engage in fair use of the copyrighted materials.

[4] Napster counters that even if certain users engage in commercial use by downloading instead of purchasing the music, space-shifting and sampling are nevertheless non commercial in nature. We address this contention in our discussion of these specific uses, infra.

[5] The district court found actual knowledge because: (1) a document authored by Napster co-founder Sean Parker mentioned "the need to remain ignorant of users' real names and IP addresses `since they are exchanging pirated music'"; and (2) the Recording Industry Association of America ("RIAA") informed Napster of more than 12,000 infringing files, some of which are still available. 114 F.Supp.2d at 918. The district court found constructive knowledge because: (a) Napster executives have recording industry experience; (b) they have enforced intellectual property rights in other instances; (c) Napster executives have downloaded copyrighted songs from the system; and (d) they have promoted the site with "screen shots listing infringing files." Id. at 919.

[6] As stated by the district court:

Plaintiff[s] . . . demonstrate that defendant had actual notice of direct infringement because the RIAA informed it of more than 12,000 infringing files. See Creighton 12/3/99 Dec., Exh. D. Although Napster, Inc. purportedly terminated the users offering these files, the songs are still available using the Napster service, as are the copyrighted works which the record company plaintiffs identified in Schedules A and B of their complaint. See Creighton Supp. Dec. ¶¶ 3-4.

114 F.Supp.2d at 918.

[7] Napster additionally asserts that the district court improperly refused to allow additional discovery into affirmative defenses and also erroneously failed to hold an evidentiary hearing. The denial of an evidentiary hearing is reviewed for abuse of discretion, Kenneally v. Lungren, 967 F.2d 329, 335 (9th Cir.1992), as is the court's decision to deny further discovery. See Sablan v. Dep't of Finance, 856 F.2d 1317, 1321 (9th Cir.1988) (stating that decision to deny discovery will not be disturbed except upon a clear showing "that the denial of discovery results in actual and substantial prejudice"). We conclude that the court did not abuse its discretion in denying further discovery and refusing to conduct an evidentiary hearing.

[8] The district court correctly stated that "most of the cases" that recognize the affirmative defense of copyright misuse involve unduly restrictive licensing schemes. See Napster, 114 F.Supp.2d at 923; see also Lasercomb, 911 F.2d at 973 (stating that "a misuse of copyright defense is inherent in the law of copyright"). We have also suggested, however, that a unilateral refusal to license a copyright may constitute wrongful exclusionary conduct giving rise to a claim of misuse, but assume that the "desire to exclude others . . . is a presumptively valid business justification for any immediate harm to consumers." See Image Tech. Servs. v. Eastman Kodak Co., 125 F.3d 1195, 1218 (9th Cir.1997). But see Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1362 (Fed.Cir.1999) ("[M]arket power does not `impose on the intellectual property owner an obligation to license the use of that property to others.'") (quoting United States Dep't of Justice & Fed. Trade Comm'n, Antitrust Guidelines for the Licensing of Intellectual Property 4 (1995)).

Respondent companies distribute free software that allows computer users to share electronic files through peer-to-peer networks, so called because the computers communicate directly with each other, not through central servers. Although such networks can be used to share any type of digital file, recipients of respondents' software have mostly used them to share copyrighted music and video files without authorization. Seeking damages and an injunction, a group of movie studios and other copyright holders (hereinafter MGM) sued respondents for their users' copyright infringements, alleging that respondents knowingly and intentionally distributed their software to enable users to infringe copyrighted works in violation of the Copyright Act.

Discovery revealed that billions of files are shared across peer-to-peer networks each month. Respondents are aware that users employ their software primarily to download copyrighted files, although the decentralized networks do not reveal which files are copied, and when. Respondents have sometimes learned about the infringement directly when users have e-mailed questions regarding copyrighted works, and respondents have replied with guidance. Respondents are not merely passive recipients of information about infringement. The record is replete with evidence that when they 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. After the notorious file-sharing service, Napster, was sued by copyright holders for facilitating copyright infringement, both respondents promoted and marketed themselves as Napster alternatives. They receive no revenue from users, but, instead, generate income by selling advertising space, then streaming the advertising to their users. As the number of users increases, advertising opportunities are worth more. There is no evidence that either respondent made an effort to filter copyrighted material from users' downloads or otherwise to impede the sharing of copyrighted files.

While acknowledging that respondents' users had directly infringed MGM's copyrights, the District Court nonetheless granted respondents summary judgment as to liability arising from distribution of their software. [545 U.S. 914] The Ninth Circuit affirmed. It read Sony Corp. of America v. Universal City Studios, Inc., 464 U. S. 417, as holding that the distribution of a commercial product capable of substantial noninfringing uses could not give rise to contributory liability for infringement unless the distributor had actual knowledge of specific instances of infringement and failed to act on that knowledge. Because the appeals court found respondents' software to be capable of substantial noninfringing uses and because respondents had no actual knowledge of infringement owing to the software's decentralized architecture, the court held that they were not liable. It also held that they did not materially contribute to their users' infringement because the users themselves searched for, retrieved, and stored the infringing files, with no involvement by respondents beyond providing the software in the first place. Finally, the court held that respondents could not be held liable under a vicarious infringement theory because they did not monitor or control the software's use, had no agreed-upon right or current ability to supervise its use, and had no independent duty to police infringement.

Held: One who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, going beyond mere distribution with knowledge of third-party action, is liable for the resulting acts of infringement by third parties using the device, regardless of the device's lawful uses. Pp. 928-941.

(a) The tension between the competing values of supporting creativity through copyright protection and promoting technological innovation by limiting infringement liability is the subject of this case. Despite offsetting considerations, the argument for imposing indirect liability here is powerful, given the number of infringing downloads that occur daily using respondents' software. When a widely shared product is used to commit infringement, it may be impossible to enforce rights in the protected work effectively against all direct infringers, so that the only practical alternative is to go against the device's distributor for secondary liability on a theory of contributory or vicarious infringement. One infringes contributorily by intentionally inducing or encouraging direct infringement, and infringes vicariously by profiting from direct infringement while declining to exercise the right to stop or limit it. Although "[t]he Copyright Act does not expressly render anyone liable for [another's] infringement," Sony, 464 U. S., at 434, these secondary liability doctrines emerged from common law principles and are well established in the law, e. g., id., at 486. Pp. 928-931.

(b) Sony addressed a claim that secondary liability for infringement can arise from the very distribution of a commercial product. There, [545 U.S. 915] copyright holders sued Sony, the manufacturer of videocassette recorders, claiming that it was contributorily liable for the infringement that occurred when VCR owners taped copyrighted programs. The evidence showed that the VCR's principal use was "time-shifting," i. e., taping a program for later viewing at a more convenient time, which the Court found to be a fair, noninfringing use. 464 U. S., at 423-424. Moreover, there was no evidence that Sony had desired to bring about taping in violation of copyright or taken active steps to increase its profits from unlawful taping. Id., at 438. On those facts, the only conceivable basis for liability was on a theory of contributory infringement through distribution of a product. Id., at 439. Because the VCR was "capable of commercially significant noninfringing uses," the Court held that Sony was not liable. Id., at 442. This theory reflected patent law's traditional staple article of commerce doctrine that distribution of a component of a patented device will not violate the patent if it is suitable for use in other ways. 35 U. S. C. § 271(c). The doctrine absolves the equivocal conduct of selling an item with lawful and unlawful uses and limits liability to instances of more acute fault. In this case, the Ninth Circuit misread Sony to mean that when a product is capable of substantial lawful use, the producer cannot be held contributorily liable for third parties' infringing use of it, even when an actual purpose to cause infringing use is shown, unless the distributors had specific knowledge of infringement at a time when they contributed to the infringement and failed to act upon that information. Sony did not displace other secondary liability theories. Pp. 931-934.

(c) Nothing in Sony requires courts to ignore evidence of intent to promote infringement if such evidence exists. It was never meant to foreclose rules of fault-based liability derived from the common law. 464 U. S., at 439. Where evidence goes beyond a product's characteristics or the knowledge that it may be put to infringing uses, and shows statements or actions directed to promoting infringement, Sony's staple-article rule will not preclude liability. At common law a copyright or patent defendant who "not only expected but invoked [infringing use] by advertisement" was liable for infringement. Kalem Co. v. Harper Brothers, 222 U. S. 55, 62-63. The rule on inducement of infringement as developed in the early cases is no different today. Evidence of active steps taken to encourage direct infringement, such as advertising an infringing use or instructing how to engage in an infringing use, shows an affirmative intent that the product be used to infringe, and overcomes the law's reluctance to find liability when a defendant merely sells a commercial product suitable for some lawful use. A rule that premises liability on purposeful, culpable expression and conduct [545 U.S. 916] does nothing to compromise legitimate commerce or discourage innovation having a lawful promise. Pp. 934-937.

(d) On the record presented, respondents' unlawful objective is unmistakable. The classic instance of inducement is by advertisement or solicitation that broadcasts a message designed to stimulate others to commit violations. MGM argues persuasively that such a message is shown here. Three features of the evidence of intent are particularly notable. First, each of the respondents showed itself to be aiming to satisfy a known source of demand for copyright infringement, the market comprising former Napster users. Respondents' efforts to supply services to former Napster users indicate a principal, if not exclusive, intent to bring about infringement. Second, neither respondent attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software. While the Ninth Circuit treated that failure as irrelevant because respondents lacked an independent duty to monitor their users' activity, this evidence underscores their intentional facilitation of their users' infringement. Third, respondents make money by selling advertising space, then by directing ads to the screens of computers employing their software. The more their software is used, the more ads are sent out and the greater the advertising revenue. Since the extent of the software's use determines the gain to the distributors, the commercial sense of their enterprise turns on high-volume use, which the record shows is infringing. This evidence alone would not justify an inference of unlawful intent, but its import is clear in the entire record's context. Pp. 937-940.

(e) In addition to intent to bring about infringement and distribution of a device suitable for infringing use, the inducement theory requires evidence of actual infringement by recipients of the device, the software in this case. There is evidence of such infringement on a gigantic scale. Because substantial evidence supports MGM on all elements, summary judgment for respondents was error. On remand, reconsideration of MGM's summary judgment motion will be in order. Pp. 940-941.

380 F. 3d 1154, vacated and remanded.

SOUTER, J., delivered the opinion for a unanimous Court. GINSBURG, J., filed a concurring opinion, in which REHNQUIST, C. J., and KENNEDY, J., joined, post, p. 942. BREYER, J., filed a concurring opinion, in which STEVENS and O'CONNOR, JJ., joined, post, p. 949.

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Donald B. Verrilli, Jr., argued the cause for petitioners. With him on the briefs for the motion picture studio and recording company petitioners were Ian Heath Gershengorn, [545 U.S. 917] William M. Hohengarten, Steven B. Fabrizio, Thomas J. Perrelli, Matthew J. Oppenheim, David E. Kendall, Thomas G. Hentoff, Kenneth W. Starr, Russell J. Frackman, George M. Borkowski, Robert M. Schwartz, Gregory P. Goeckner, Dean C. Garfield, Elaine J. Goldenberg, Matthew Hersh, Steven M. Marks, and Stanley Pierre-Louis. Carey R. Ramos, Peter L. Felcher, Aidan Synnott, Theodore K. Cheng, Kelli L. Sager, Andrew J. Thomas, Jeffrey H. Blum, and Jeffrey L. Fisher filed briefs for the songwriter and music publisher petitioners.

Acting Solicitor General Clement argued the cause for the United States as amicus curiae urging reversal. With him on the brief were Assistant Attorney General Keisler, Deputy Solicitor General Hungar, Douglas H. Hallward-Driemeier, Anthony A. Yang, David O. Carson, and John M. Whealan.

Richard G. Taranto argued the cause for respondents. With him on the brief were H. Bartow Farr III, Cindy A. Cohn, Fred Von Lohmann, Michael H. Page, Mark A. Lemley, Charles S. Baker, and Matthew A. Neco.^[*]

[545 U.S. 918] JUSTICE SOUTER delivered the opinion of the Court.

The question is under what circumstances the distributor of a product capable of both lawful and unlawful use is liable [545 U.S. 919] for acts of copyright infringement by third parties using the product. We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.

Respondents, Grokster, Ltd., and StreamCast Networks, Inc., defendants in the trial court, distribute free software products that allow computer users to share electronic files through peer-to-peer networks, so called because users' computers communicate directly with each other, not through [545 U.S. 920] central servers. The advantage of peer-to-peer networks over information networks of other types shows up in their substantial and growing popularity. Because they need no central computer server to mediate the exchange of information or files among users, the high-bandwidth communications capacity for a server may be dispensed with, and the need for costly server storage space is eliminated. Since copies of a file (particularly a popular one) are available on many users' computers, file requests and retrievals may be faster than on other types of networks, and since file exchanges do not travel through a server, communications can take place between any computers that remain connected to the network without risk that a glitch in the server will disable the network in its entirety. Given these benefits in security, cost, and efficiency, peer-to-peer networks are employed to store and distribute electronic files by universities, government agencies, corporations, and libraries, among others.^[1]

Other users of peer-to-peer networks include individual recipients of Grokster's and StreamCast's software, and although the networks that they enjoy through using the software can be used to share any type of digital file, they have prominently employed those networks in sharing copyrighted music and video files without authorization. A group of copyright holders (MGM for short, but including motion picture studios, recording companies, songwriters, and music publishers) sued Grokster and StreamCast for their users' copyright infringements, alleging that they [545 U.S. 921] knowingly and intentionally distributed their software to enable users to reproduce and distribute the copyrighted works in violation of the Copyright Act, 17 U. S. C. § 101 et seq. (2000 ed. and Supp. II).^[2] MGM sought damages and an injunction.

Discovery during the litigation revealed the way the software worked, the business aims of each defendant company, and the predilections of the users. Grokster's eponymous software employs what is known as FastTrack technology, a protocol developed by others and licensed to Grokster. StreamCast distributes a very similar product except that its software, called Morpheus, relies on what is known as Gnutella technology.^[3] A user who downloads and installs either software possesses the protocol to send requests for files directly to the computers of others using software compatible with FastTrack or Gnutella. On the FastTrack network opened by the Grokster software, the user's request goes to a computer given an indexing capacity by the software and designated a supernode, or to some other computer with comparable power and capacity to collect temporary indexes of the files available on the computers of users connected to it. The supernode (or indexing computer) searches its own index and may communicate the search request to other supernodes. If the file is found, the supernode discloses its location to the computer requesting it, and the requesting user can download the file directly from the computer located. The copied file is placed in a designated sharing folder on the requesting user's computer, where it is available for other users to download in turn, along with any other file in that folder.[545 U.S. 922] In the Gnutella network made available by Morpheus, the process is mostly the same, except that in some versions of the Gnutella protocol there are no supernodes. In these versions, peer computers using the protocol communicate directly with each other. When a user enters a search request into the Morpheus software, it sends the request to computers connected with it, which in turn pass the request along to other connected peers. The search results are communicated to the requesting computer, and the user can download desired files directly from peers' computers. As this description indicates, Grokster and StreamCast use no servers to intercept the content of the search requests or to mediate the file transfers conducted by users of the software, there being no central point through which the substance of the communications passes in either direction.^[4]

Although Grokster and StreamCast do not therefore know when particular files are copied, a few searches using their software would show what is available on the networks the software reaches. MGM commissioned a statistician to conduct a systematic search, and his study showed that nearly 90% of the files available for download on the FastTrack system were copyrighted works.^[5] Grokster and StreamCast dispute this figure, raising methodological problems and arguing that free copying even of copyrighted works may be authorized by the rightholders. They also argue that potential noninfringing uses of their software are significant in kind, even if infrequent in practice. Some musical performers, for example, have gained new audiences by distributing [545 U.S. 923] their copyrighted works for free across peer-to-peer networks, and some distributors of unprotected content have used peer-to-peer networks to disseminate files, Shakespeare being an example. Indeed, StreamCast has given Morpheus users the opportunity to download the briefs in this very case, though their popularity has not been quantified.

As for quantification, the parties' anecdotal and statistical evidence entered thus far to show the content available on the FastTrack and Gnutella networks does not say much about which files are actually downloaded by users, and no one can say how often the software is used to obtain copies of unprotected material. But MGM's evidence gives reason to think that the vast majority of users' downloads are acts of infringement, and because well over 100 million copies of the software in question are known to have been downloaded, and billions of files are shared across the FastTrack and Gnutella networks each month, the probable scope of copyright infringement is staggering.

Grokster and StreamCast concede the infringement in most downloads, Brief for Respondents 10, n. 6, and it is uncontested that they are aware that users employ their software primarily to download copyrighted files, even if the decentralized FastTrack and Gnutella networks fail to reveal which files are being copied, and when. From time to time, moreover, the companies have learned about their users' infringement directly, as from users who have sent e-mail to each company with questions about playing copyrighted movies they had downloaded, to whom the companies have responded with guidance.^[6] App. 559-563, 808-816, 939-954. And MGM notified the companies of 8 million copyrighted files that could be obtained using their software.

Grokster and StreamCast are not, however, merely passive recipients of information about infringing use. The record is replete with evidence that from the moment Grokster [545 U.S. 924] 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.

After the notorious file-sharing service, Napster, was sued by copyright holders for facilitation of copyright infringement, A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896 (ND Cal. 2000), aff'd in part, rev'd in part, 239 F. 3d 1004 (CA9 2001), StreamCast gave away a software program of a kind known as OpenNap, designed as compatible with the Napster program and open to Napster users for downloading files from other Napster and OpenNap users' computers. Evidence indicates that "[i]t was always [StreamCast's] intent to use [its OpenNap network] to be able to capture email addresses of [its] initial target market so that [it] could promote [its] StreamCast Morpheus interface to them," App. 861; indeed, the OpenNap program was engineered "`to leverage Napster's 50 million user base,'" id., at 746.

StreamCast monitored both the number of users downloading its OpenNap program and the number of music files they downloaded. Id., at 859, 863, 866. It also used the resulting OpenNap network to distribute copies of the Morpheus software and to encourage users to adopt it. Id., at 861, 867, 1039. Internal company documents indicate that StreamCast hoped to attract large numbers of former Napster users if that company was shut down by court order or otherwise, and that StreamCast planned to be the next Napster. Id., at 861. A kit developed by StreamCast to be delivered to advertisers, for example, contained press articles about StreamCast's potential to capture former Napster users, id., at 568-572, and it introduced itself to some potential advertisers as a company "which is similar to what Napster was," id., at 884. It broadcast banner advertisements to users of other Napster-compatible software, urging them to adopt its OpenNap. Id., at 586. An internal e-mail from a company executive stated: "`We have put this network in [545 U.S. 925] place so that when Napster pulls the plug on their free service . . . or if the Court orders them shut down prior to that . . . we will be positioned to capture the flood of their 32 million users that will be actively looking for an alternative.'" Id., at 588-589, 861.

Thus, StreamCast developed promotional materials to market its service as the best Napster alternative. One proposed advertisement read: "Napster Inc. has announced that it will soon begin charging you a fee. That's if the courts don't order it shut down first. What will you do to get around it?" Id., at 897. Another proposed ad touted StreamCast's software as the "#1 alternative to Napster" and asked "[w]hen the lights went off at Napster . . . where did the users go?" Id., at 836 (ellipsis in original).^[7] StreamCast even planned to flaunt the illegal uses of its software; when it launched the OpenNap network, the chief technology officer of the company averred that "[t]he goal is to get in trouble with the law and get sued. It's the best way to get in the new[s]." Id., at 916.

The evidence that Grokster sought to capture the market of former Napster users is sparser but revealing, for Grokster launched its own OpenNap system called Swaptor and inserted digital codes into its Web site so that computer users using Web search engines to look for "Napster" or "[f]ree file sharing" would be directed to the Grokster Web site, where they could download the Grokster software. Id., at 992-993. And Grokster's name is an apparent derivative of Napster.

StreamCast's executives monitored the number of songs by certain commercial artists available on their networks, and an internal communication indicates they aimed to have a larger number of copyrighted songs available on their networks [545 U.S. 926] than other file-sharing networks. Id., at 868. The point, of course, would be to attract users of a mind to infringe, just as it would be with their promotional materials developed showing copyrighted songs as examples of the kinds of files available through Morpheus. Id., at 848. Morpheus in fact allowed users to search specifically for "Top 40" songs, id., at 735, which were inevitably copyrighted. Similarly, Grokster sent users a newsletter promoting its ability to provide particular, popular copyrighted materials. Brief for Motion Picture Studio and Recording Company Petitioners 7-8.

In addition to this evidence of express promotion, marketing, and intent to promote further, the business models employed by Grokster and StreamCast confirm that their principal object was use of their software to download copyrighted works. Grokster and StreamCast receive no revenue from users, who obtain the software itself for nothing. Instead, both companies generate income by selling advertising space, and they stream the advertising to Grokster and Morpheus users while they are employing the programs. As the number of users of each program increases, advertising opportunities become worth more. Cf. App. 539, 804. While there is doubtless some demand for free Shakespeare, the evidence shows that substantive volume is a function of free access to copyrighted work. Users seeking Top 40 songs, for example, or the latest release by Modest Mouse, are certain to be far more numerous than those seeking a free Decameron, and Grokster and StreamCast translated that demand into dollars.

Finally, there is no evidence that either company made an effort to filter copyrighted material from users' downloads or otherwise impede the sharing of copyrighted files. Although Grokster appears to have sent e-mails warning users about infringing content when it received threatening notice from the copyright holders, it never blocked anyone from continuing to use its software to share copyrighted files. [545 U.S. 927] Id., at 75-76. StreamCast not only rejected another company's offer of help to monitor infringement, id., at 928-929, but blocked the Internet Protocol addresses of entities it believed were trying to engage in such monitoring on its networks, id., at 917-922.

After discovery, the parties on each side of the case crossmoved for summary judgment. The District Court limited its consideration to the asserted liability of Grokster and StreamCast for distributing the current versions of their software, leaving aside whether either was liable "for damages arising from past versions of their software, or from other past activities." 259 F. Supp. 2d 1029, 1033 (CD Cal. 2003). The District Court held that those who used the Grokster and Morpheus software to download copyrighted media files directly infringed MGM's copyrights, a conclusion not contested on appeal, but the court nonetheless granted summary judgment in favor of Grokster and StreamCast as to any liability arising from distribution of the then-current versions of their software. Distributing that software gave rise to no liability in the court's view, because its use did not provide the distributors with actual knowledge of specific acts of infringement. Case No. CV 01 08541 SVW (PJWx) (CD Cal., June 18, 2003), App. 1213.

The Court of Appeals affirmed. 380 F. 3d 1154 (CA9 2004). In the court's analysis, a defendant was liable as a contributory infringer when it had knowledge of direct infringement and materially contributed to the infringement. But the court read Sony Corp. of America v. Universal City Studios, Inc., 464 U. S. 417 (1984), as holding that distribution of a commercial product capable of substantial noninfringing uses could not give rise to contributory liability for infringement unless the distributor had actual knowledge of specific instances of infringement and failed to act on that knowledge. The fact that the software was capable of substantial noninfringing uses in the Ninth Circuit's view meant [545 U.S. 928] that Grokster and StreamCast were not liable, because they had no such actual knowledge, owing to the decentralized architecture of their software. The court also held that Grokster and StreamCast did not materially contribute to their users' infringement because it was the users themselves who searched for, retrieved, and stored the infringing files, with no involvement by the defendants beyond providing the software in the first place.

The Ninth Circuit also considered whether Grokster and StreamCast could be liable under a theory of vicarious infringement. The court held against liability because the defendants did not monitor or control the use of the software, had no agreed-upon right or current ability to supervise its use, and had no independent duty to police infringement. We granted certiorari. 543 U. S. 1032 (2004).

MGM and many of the amici fault the Court of Appeals's holding for upsetting a sound balance between the respective values of supporting creative pursuits through copyright protection and promoting innovation in new communication technologies by limiting the incidence of liability for copyright infringement. The more artistic protection is favored, the more technological innovation may be discouraged; the administration of copyright law is an exercise in managing the tradeoff. See Sony Corp. v. Universal City Studios, supra, at 442; see generally Ginsburg, Copyright and Control Over New Technologies of Dissemination, 101 Colum. L. Rev. 1613 (2001); Lichtman & Landes, Indirect Liability for Copyright Infringement: An Economic Perspective, 16 Harv. J. L. & Tech. 395 (2003).

The tension between the two values is the subject of this case, with its claim that digital distribution of copyrighted material threatens copyright holders as never before, because every copy is identical to the original, copying is easy, [545 U.S. 929] and many people (especially the young) use file-sharing software to download copyrighted works. This very breadth of the software's use may well draw the public directly into the debate over copyright policy, Peters, Brace Memorial Lecture: Copyright Enters the Public Domain, 51 J. Copyright Soc. 701, 705-717 (2004) (address by Register of Copyrights), and the indications are that the ease of copying songs or movies using software like Grokster's and Napster's is fostering disdain for copyright protection, Wu, When Code Isn't Law, 89 Va. L. Rev. 679, 724-726 (2003). As the case has been presented to us, these fears are said to be offset by the different concern that imposing liability, not only on infringers but on distributors of software based on its potential for unlawful use, could limit further development of beneficial technologies. See, e. g., Lemley & Reese, Reducing Digital Copyright Infringement Without Restricting Innovation, 56 Stan. L. Rev. 1345, 1386-1390 (2004); Brief for Innovation Scholars and Economists as Amici Curiae 15-20; Brief for Emerging Technology Companies as Amici Curiae 19-25; Brief for Intel Corporation as Amicus Curiae 20-22.^[8]

The argument for imposing indirect liability in this case is, however, a powerful one, given the number of infringing downloads that occur every day using StreamCast's and Grokster's software. When a widely shared service or product is used to commit infringement, it may be impossible to [545 U.S. 930] enforce rights in the protected work effectively against all direct infringers, the only practical alternative being to go against the distributor of the copying device for secondary liability on a theory of contributory or vicarious infringement. See In re Aimster Copyright Litigation, 334 F. 3d 643, 645-646 (CA7 2003).

One infringes contributorily by intentionally inducing or encouraging direct infringement, see Gershwin Pub. Corp. v. Columbia Artists Management, Inc., 443 F. 2d 1159, 1162 (CA2 1971), and infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it, Shapiro, Bernstein & Co. v. H. L. Green Co., 316 F. 2d 304, 307 (CA2 1963).^[9] Although "[t]he Copyright Act does not expressly render anyone liable for infringement committed by another," Sony Corp. v. Universal City Studios, 464 U. S., at 434, these doctrines of secondary liability emerged from common law principles and are well established in the law, id., at 486 (Blackmun, J., dissenting); Kalem Co. v. Harper Brothers, 222 U. S. 55, 62-63 (1911); Gershwin Pub. Corp. v. Columbia Artists Management, [545 U.S. 931] supra, at 1162; 3 M. Nimmer & D. Nimmer, Copyright § 12.04[A] (2005).

Despite the currency of these principles of secondary liability, this Court has dealt with secondary copyright infringement in only one recent case, and because MGM has tailored its principal claim to our opinion there, a look at our earlier holding is in order. In Sony Corp. v. Universal City Studios, supra, this Court addressed a claim that secondary liability for infringement can arise from the very distribution of a commercial product. There, the product, novel at the time, was what we know today as the videocassette recorder or VCR. 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. 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. Id., at 423-424. There was no evidence that Sony had expressed an object of bringing about taping in violation of copyright or had taken active steps to increase its profits from unlawful taping. Id., at 438. Although Sony's advertisements urged consumers to buy the VCR to "`record favorite shows'" or "`build a library'" of recorded programs, id., at 459 (Blackmun, J., dissenting), neither of these uses was necessarily infringing, id., at 424, 454-455.

On those facts, with no evidence of stated or indicated intent to promote infringing uses, the only conceivable basis for imposing liability was on a theory of contributory infringement arising from its sale of VCRs to consumers with knowledge that some would use them to infringe. Id., at 439. But because the VCR was "capable of commercially significant noninfringing uses," we held the manufacturer [545 U.S. 932] could not be faulted solely on the basis of its distribution. Id., at 442.

This analysis reflected patent law's traditional staple article of commerce doctrine, now codified, that distribution of a component of a patented device will not violate the patent if it is suitable for use in other ways. 35 U. S. C. § 271(c); Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U. S. 476, 485 (1964) (noting codification of cases); id., at 486, n. 6 (same). The doctrine was devised to identify instances in which it may be presumed from distribution of an article in commerce that the distributor intended the article to be used to infringe another's patent, and so may justly be held liable for that infringement. "One who makes and sells articles which are only adapted to be used in a patented combination will be presumed to intend the natural consequences of his acts; he will be presumed to intend that they shall be used in the combination of the patent." New York Scaffolding Co. v. Whitney, 224 F. 452, 459 (CA8 1915); see also James Heekin Co. v. Baker, 138 F. 63, 66 (CA8 1905); Canda v. Michigan Malleable Iron Co., 124 F. 486, 489 (CA6 1903); Thomson-Houston Electric Co. v. Ohio Brass Co., 80 F. 712, 720-721 (CA6 1897); Red Jacket Mfg. Co. v. Davis, 82 F. 432, 439 (CA7 1897); Holly v. Vergennes Machine Co., 4 F. 74, 82 (CC Vt. 1880); Renwick v. Pond, 20 F. Cas. 536, 541 (No. 11,702) (CC SDNY 1872).

In sum, where an article is "good for nothing else" but infringement, Canda v. Michigan Malleable Iron Co., supra, at 489, there is no legitimate public interest in its unlicensed availability, and there is no injustice in presuming or imputing an intent to infringe, see Henry v. A. B. Dick Co., 224 U. S. 1, 48 (1912), overruled on other grounds, Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U. S. 502 (1917). Conversely, the doctrine absolves the equivocal conduct of selling an item with substantial lawful as well as unlawful uses, and limits liability to instances of more acute [545 U.S. 933] fault than the mere understanding that some of one's products will be misused. It leaves breathing room for innovation and a vigorous commerce. See Sony Corp. v. Universal City Studios, 464 U. S., at 442; Dawson Chemical Co. v. Rohm & Haas Co., 448 U. S. 176, 221 (1980); Henry v. A. B. Dick Co., supra, at 48.

The parties and many of the amici in this case think the key to resolving it is the Sony rule and, in particular, what it means for a product to be "capable of commercially significant noninfringing uses." Sony Corp. v. Universal City Studios, supra, at 442. MGM advances the argument that granting summary judgment to Grokster and StreamCast as to their current activities gave too much weight to the value of innovative technology, and too little to the copyrights infringed by users of their software, given that 90% of works available on one of the networks was shown to be copyrighted. Assuming the remaining 10% to be its noninfringing use, MGM says this should not qualify as "substantial," and the Court should quantify Sony to the extent of holding that a product used "principally" for infringement does not qualify. See Brief for Motion Picture Studio and Recording Company Petitioners 31. As mentioned before, Grokster and StreamCast reply by citing evidence that their software can be used to reproduce public domain works, and they point to copyright holders who actually encourage copying. Even if infringement is the principal practice with their software today, they argue, the noninfringing uses are significant and will grow.

We agree with MGM that the Court of Appeals misapplied Sony, which it read as limiting secondary liability quite beyond the circumstances to which the case applied. Sony barred secondary liability based on presuming or imputing intent to cause infringement solely from the design or distribution of a product capable of substantial lawful use, which the distributor knows is in fact used for infringement. The [545 U.S. 934] 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 "specific knowledge of infringement at a time at which they contributed to the infringement, and failed to act upon that information." 380 F. 3d, at 1162 (internal quotation marks and brackets omitted). 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.

Sony's rule limits imputing culpable intent as a matter of law from the characteristics or uses of a distributed product. But nothing in Sony requires courts to ignore evidence of intent if there is such evidence, and the case was never meant to foreclose rules of fault-based liability derived from [545 U.S. 935] the common law.^[10] Sony Corp. v. Universal City Studios, supra, at 439 ("If vicarious liability is to be imposed on Sony in this case, it must rest on the fact that it has sold equipment with constructive knowledge" of the potential for infringement). Thus, where evidence goes beyond a product's characteristics or the knowledge that it may be put to infringing uses, and shows statements or actions directed to promoting infringement, Sony's staple-article rule will not preclude liability.

The classic case of direct evidence of unlawful purpose occurs when one induces commission of infringement by another, or "entic[es] or persuad[es] another" to infringe, Black's Law Dictionary 790 (8th ed. 2004), as by advertising. Thus at common law a copyright or patent defendant who "not only expected but invoked [infringing use] by advertisement" was liable for infringement "on principles recognized in every part of the law." Kalem Co. v. Harper Brothers, 222 U. S., at 62-63 (copyright infringement). See also Henry v. A. B. Dick Co., 224 U. S., at 48-49 (contributory liability for patent infringement may be found where a good's "most conspicuous use is one which will coöperate in an infringement when sale to such user is invoked by advertisement" of the infringing use); Thomson-Houston Electric Co. v. Kelsey Electric R. Specialty Co., 75 F. 1005, 1007-1008 (CA2 1896) (relying on advertisements and displays to find defendant's "willingness . . . to aid other persons in any attempts which they may be disposed to make towards [patent] infringement"); Rumford Chemical Works v. Hecker, 20 F. Cas. 1342, 1346 (No. 12,133) (CC NJ 1876) (demonstrations of infringing activity along with "avowals of the [infringing] purpose and use for which it was made" supported liability for patent infringement).

[545 U.S. 936] The rule on inducement of infringement as developed in the early cases is no different today.^[11] Evidence of "active steps . . . taken to encourage direct infringement," Oak Industries, Inc. v. Zenith Electronics Corp., 697 F. Supp. 988, 992 (ND Ill. 1988), such as advertising an infringing use or instructing how to engage in an infringing use, show an affirmative intent that the product be used to infringe, and a showing that infringement was encouraged overcomes the law's reluctance to find liability when a defendant merely sells a commercial product suitable for some lawful use, see, e. g., Water Technologies Corp. v. Calco, Ltd., 850 F. 2d 660, 668 (CA Fed. 1988) (liability for inducement where one "actively and knowingly aid[s] and abet[s] another's direct infringement" (emphasis deleted)); Fromberg, Inc. v. Thornhill, 315 F. 2d 407, 412-413 (CA5 1963) (demonstrations by sales staff of infringing uses supported liability for inducement); Haworth Inc. v. Herman Miller Inc., 37 USPQ 2d 1080, 1090 (WD Mich. 1994) (evidence that defendant "demonstrate[d] and recommend[ed] infringing configurations" of its product could support inducement liability); Sims v. Mack Trucks, Inc., 459 F. Supp. 1198, 1215 (ED Pa. 1978) (finding inducement where the use "depicted by the defendant in its promotional film and brochures infringes the . . . patent"), overruled on other grounds, 608 F. 2d 87 (CA3 1979). Cf. W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts 37 (5th ed. 1984) ("There is a definite tendency to impose greater responsibility upon a defendant whose conduct was intended to do harm, or was morally wrong").

For the same reasons that Sony took the staple-article doctrine of patent law as a model for its copyright safe-harbor rule, the inducement rule, too, is a sensible one for copyright. We adopt it here, holding that one who distributes a device with the object of promoting its use to infringe copyright, as [545 U.S. 937] shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties. We are, of course, mindful of the need to keep from trenching on regular commerce or discouraging the development of technologies with lawful and unlawful potential. Accordingly, just as Sony did not find intentional inducement despite the knowledge of the VCR manufacturer that its device could be used to infringe, 464 U. S., at 439, n. 19, mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor to liability. Nor would ordinary acts incident to product distribution, such as offering customers technical support or product updates, support liability in themselves. The inducement rule, instead, premises liability on purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate commerce or discourage innovation having a lawful promise.

The only apparent question about treating MGM's evidence as sufficient to withstand summary judgment under the theory of inducement goes to the need on MGM's part to adduce evidence that StreamCast and Grokster communicated an inducing message to their software users. The classic instance of inducement is by advertisement or solicitation that broadcasts a message designed to stimulate others to commit violations. MGM claims that such a message is shown here. It is undisputed that StreamCast beamed onto the computer screens of users of Napster-compatible programs ads urging the adoption of its OpenNap program, which was designed, as its name implied, to invite the custom of patrons of Napster, then under attack in the courts for facilitating massive infringement. Those who accepted StreamCast's OpenNap program were offered software to perform the same services, which a factfinder could conclude [545 U.S. 938] would readily have been understood in the Napster market as the ability to download copyrighted music files. Grokster distributed an electronic newsletter containing links to articles promoting its software's ability to access popular copyrighted music. And anyone whose Napster or free file-sharing searches turned up a link to Grokster would have understood Grokster to be offering the same file-sharing ability as Napster, and to the same people who probably used Napster for infringing downloads; that would also have been the understanding of anyone offered Grokster's suggestively named Swaptor software, its version of OpenNap. And both companies communicated a clear message by responding affirmatively to requests for help in locating and playing copyrighted materials.

In StreamCast's case, of course, the evidence just described was supplemented by other unequivocal indications of unlawful purpose in the internal communications and advertising designs aimed at Napster users ("When the lights went off at Napster . . . where did the users go?" App. 836 (ellipsis in original)). Whether the messages were communicated is not to the point on this record. The function of the message in the theory of inducement is to prove by a defendant's own statements that his unlawful purpose disqualifies him from claiming protection (and incidentally to point to actual violators likely to be found among those who hear or read the message). See supra, at 935-937. Proving that a message was sent out, then, is the preeminent but not exclusive way of showing that active steps were taken with the purpose of bringing about infringing acts, and of showing that infringing acts took place by using the device distributed. Here, the summary judgment record is replete with other evidence that Grokster and StreamCast, unlike the manufacturer and distributor in Sony, acted with a purpose to cause copyright violations by use of software suitable for illegal use. See supra, at 924-927.

[545 U.S. 939] Three features of this evidence of intent are particularly notable. First, each company showed itself to be aiming to satisfy a known source of demand for copyright infringement, the market comprising former Napster users. StreamCast's internal documents made constant reference to Napster, it initially distributed its Morpheus software through an OpenNap program compatible with Napster, it advertised its OpenNap program to Napster users, and its Morpheus software functions as Napster did except that it could be used to distribute more kinds of files, including copyrighted movies and software programs. Grokster's name is apparently derived from Napster, it too initially offered an OpenNap program, its software's function is likewise comparable to Napster's, and it attempted to divert queries for Napster onto its own Web site. Grokster and StreamCast's efforts to supply services to former Napster users, deprived of a mechanism to copy and distribute what were overwhelmingly infringing files, indicate a principal, if not exclusive, intent on the part of each to bring about infringement.

Second, this evidence of unlawful objective is given added significance by MGM's showing that neither company attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software. While the Ninth Circuit treated the defendants' failure to develop such tools as irrelevant because they lacked an independent duty to monitor their users' activity, we think this evidence underscores Grokster's and StreamCast's intentional facilitation of their users' infringement.^[12]

Third, there is a further complement to the direct evidence of unlawful objective. It is useful to recall that StreamCast [545 U.S. 940] and Grokster make money by selling advertising space, by directing ads to the screens of computers employing their software. As the record shows, the more the software is used, the more ads are sent out and the greater the advertising revenue becomes. Since the extent of the software's use determines the gain to the distributors, the commercial sense of their enterprise turns on high-volume use, which the record shows is infringing.^[13] This evidence alone would not justify an inference of unlawful intent, but viewed in the context of the entire record its import is clear.

The unlawful objective is unmistakable.

In addition to intent to bring about infringement and distribution of a device suitable for infringing use, the inducement theory of course requires evidence of actual infringement by recipients of the device, the software in this case. As the account of the facts indicates, there is evidence of infringement on a gigantic scale, and there is no serious issue of the adequacy of MGM's showing on this point in order to survive the companies' summary judgment requests. Although [545 U.S. 941] an exact calculation of infringing use, as a basis for a claim of damages, is subject to dispute, there is no question that the summary judgment evidence is at least adequate to entitle MGM to go forward with claims for damages and equitable relief.

* * *

In sum, this case is significantly different from Sony and reliance on that case to rule in favor of StreamCast and Grokster was error. Sony dealt with a claim of liability based solely on distributing a product with alternative lawful and unlawful uses, with knowledge that some users would follow the unlawful course. The case struck a balance between the interests of protection and innovation by holding that the product's capability of substantial lawful employment should bar the imputation of fault and consequent secondary liability for the unlawful acts of others.

MGM's evidence in this case most obviously addresses a different basis of liability for distributing a product open to alternative uses. Here, evidence of the distributors' words and deeds going beyond distribution as such shows a purpose to cause and profit from third-party acts of copyright infringement. If liability for inducing infringement is ultimately found, it will not be on the basis of presuming or imputing fault, but from inferring a patently illegal objective from statements and actions showing what that objective was.

There is substantial evidence in MGM's favor on all elements of inducement, and summary judgment in favor of Grokster and StreamCast was error. 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.

It is so ordered.

[545 U.S. 942] JUSTICE GINSBURG, with whom THE CHIEF JUSTICE and JUSTICE KENNEDY join, concurring.

I concur in the Court's decision, which vacates in full the judgment of the Court of Appeals for the Ninth Circuit, ante, at 941, and write separately to clarify why I conclude that the Court of Appeals misperceived, and hence misapplied, our holding in Sony Corp. of America v. Universal City Studios, Inc., 464 U. S. 417 (1984). There is here at least a "genuine issue as to [a] material fact," Fed. Rule Civ. Proc. 56(c), on the liability of Grokster or StreamCast, not only for actively inducing copyright infringement, but also, or alternatively, based on the distribution of their software products, for contributory copyright infringement. On neither score was summary judgment for Grokster and StreamCast warranted.

At bottom, however labeled, the question in this case is whether Grokster and StreamCast are liable for the direct infringing acts of others. Liability under our jurisprudence may be predicated on actively encouraging (or inducing) infringement through specific acts (as the Court's opinion develops) or on distributing a product distributees use to infringe copyrights, if the product is not capable of "substantial" or "commercially significant" noninfringing uses. Sony, 464 U. S., at 442; see also 3 M. Nimmer & D. Nimmer, Nimmer on Copyright § 12.04[A][2] (2005). While the two categories overlap, they capture different culpable behavior. Long coexisting, both are now codified in patent law. Compare 35 U. S. C. § 271(b) (active inducement liability) with § 271(c) (contributory liability for distribution of a product not "suitable for substantial noninfringing use").

In Sony, 464 U. S. 417, the Court considered Sony's liability for selling the Betamax videocassette recorder. It did so enlightened by a full trial record. Drawing an analogy to the staple article of commerce doctrine from patent law, [545 U.S. 943] the Sony Court observed that the "sale of an article . . . adapted to [a patent] infringing use" does not suffice "to make the seller a contributory infringer" if the article "is also adapted to other and lawful uses." Id., at 441 (quoting Henry v. A. B. Dick Co., 224 U. S. 1, 48 (1912), overruled on other grounds, Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U. S. 502, 517 (1917)).

"The staple article of commerce doctrine" applied to copyright, the Court stated, "must strike a balance between a copyright holder's legitimate demand for effective—not merely symbolic—protection of the statutory monopoly, and the rights of others freely to engage in substantially unrelated areas of commerce." Sony, 464 U. S., at 442. "Accordingly," the Court held, "the sale of copying equipment, like the sale of other articles of commerce, does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing uses." Ibid. Thus, to resolve the Sony case, the Court explained, it had to determine "whether the Betamax is capable of commercially significant noninfringing uses." Ibid.

To answer that question, the Court considered whether "a significant number of [potential uses of the Betamax were] noninfringing." Ibid. The Court homed in on one potential use—private, noncommercial time-shifting of television programs in the home (i. e., recording a broadcast TV program for later personal viewing). Time-shifting was noninfringing, the Court concluded, because in some cases trial testimony showed it was authorized by the copyright holder, id., at 443-447, and in others it qualified as legitimate fair use, id., at 447-455. Most purchasers used the Betamax principally to engage in time-shifting, id., at 421, 423, a use that "plainly satisfie[d]" the Court's standard, id., at 442. Thus, there was no need in Sony to "give precise content to the question of how much [actual or potential] use is commercially [545 U.S. 944] significant." Ibid.^[14] Further development was left for later days and cases.

The Ninth Circuit went astray, I will endeavor to explain, when that court granted summary judgment to Grokster and StreamCast on the charge of contributory liability based on distribution of their software products. Relying on its earlier opinion in A&M Records, Inc. v. Napster, Inc., 239 F. 3d 1004 (CA9 2001), the Court of Appeals held that "if substantial noninfringing use was shown, the copyright owner would be required to show that the defendant had reasonable knowledge of specific infringing files." 380 F. 3d 1154, 1161 (CA9 2004). "A careful examination of the record," the [545 U.S. 945] court concluded, "indicates that there is no genuine issue of material fact as to noninfringing use." Ibid. The appeals court pointed to the band Wilco, which made one of its albums available for free downloading, to other recording artists who may have authorized free distribution of their music through the Internet, and to public domain literary works and films available through Grokster's and StreamCast's software. Ibid. Although it acknowledged petitioners' (hereinafter MGM) assertion that "the vast majority of the software use is for copyright infringement," the court concluded that Grokster's and StreamCast's proffered evidence met Sony's requirement that "a product need only be capable of substantial noninfringing uses." 380 F. 3d, at 1162.^[15]

This case differs markedly from Sony. Cf. Peters, Brace Memorial Lecture: Copyright Enters the Public Domain, 51 J. Copyright Soc. 701, 724 (2004) ("The Grokster panel's reading of Sony is the broadest that any court has given it . . . ."). Here, there has been no finding of any fair use and little beyond anecdotal evidence of noninfringing uses. In finding the Grokster and StreamCast software products capable of substantial noninfringing uses, the District Court and the Court of Appeals appear to have relied largely on declarations submitted by the defendants. These declarations include assertions (some of them hearsay) that a number of copyright owners authorize distribution of their works on the Internet and that some public domain material is available through peer-to-peer networks including those accessed through Grokster's and StreamCast's software. 380 F. 3d, at 1161; 259 F. Supp. 2d 1029, 1035-1036 (CD Cal. 2003); App. 125-171.

[545 U.S. 946] The District Court declared it "undisputed that there are substantial noninfringing uses for Defendants' software," thus obviating the need for further proceedings. 259 F. Supp. 2d, at 1035. This conclusion appears to rest almost entirely on the collection of declarations submitted by Grokster and StreamCast. Ibid. Review of these declarations reveals mostly anecdotal evidence, sometimes obtained secondhand, of authorized copyrighted works or public domain works available online and shared through peer-to-peer networks, and general statements about the benefits of peer-to-peer technology. See, e. g., Decl. of Janis Ian ¶ 13, App. 128 ("P2P technologies offer musicians an alternative channel for promotion and distribution."); Decl. of Gregory Newby ¶ 12, id., at 136 ("Numerous authorized and public domain Project Gutenberg eBooks are made available on Morpheus, Kazaa, Gnutella, Grokster, and similar software products."); Decl. of Aram Sinnreich ¶ 6, id., at 151 ("file sharing seems to have a net positive impact on music sales"); Decl. of John Busher ¶ 8, id., at 166 ("I estimate that Acoustica generates sales of between $1,000 and $10,000 per month as a result of the distribution of its trialware software through the Gnutella and FastTrack Networks."); Decl. of Patricia D. Hoekman ¶¶ 3-4, id., at 169-170 (search on Morpheus for "President Bush speeches" found several video recordings, searches for "Declaration of Independence" and "Bible" found various documents and declarant was able to download a copy of the Declaration); Decl. of Sean L. Mayers ¶ 11, id., at 67 ("Existing open, decentralized peer-to-peer file-sharing networks . . . offer content owners distinct business advantages over alternate online distribution technologies."). Compare Decl. of Brewster Kahle ¶ 20, id., at 142 ("Those who download the Prelinger films . . . are entitled to redistribute those files, and the Archive welcomes their redistribution by the Morpheus-Grokster-KaZaa community of users."), with Deposition of Brewster Kahle (Sept. 18, [545 U.S. 947] 2002), id., at 396-403 (testifying that he has no knowledge of any person downloading a Prelinger film using Morpheus, Grokster, or KaZaA). Compare also Decl. of Richard Prelinger ¶ 17, id., at 147 ("[W]e welcome further redistribution of the Prelinger films . . . by individuals using peer-to-peer software products like Morpheus, KaZaA and Grokster."), with Deposition of Richard Prelinger (Oct. 1, 2002), id., at 410-411 ("Q. What is your understanding of Grokster? A. I have no understanding of Grokster. . . . Q. Do you know whether any user of the Grokster software has made available to share any Prelinger film? A. No."). See also Deposition of Aram Sinnreich (Sept. 25, 2002), id., at 390 (testimony about the band Wilco based on "[t]he press and industry news groups and scuttlebutt."). These declarations do not support summary judgment in the face of evidence, proffered by MGM, of overwhelming use of Grokster's and StreamCast's software for infringement.^[16]

[545 U.S. 948] Even if the absolute number of noninfringing files copied using the Grokster and StreamCast software is large, it does not follow that the products are therefore put to substantial noninfringing uses and are thus immune from liability. The number of noninfringing copies may be reflective of, and dwarfed by, the huge total volume of files shared. Further, the District Court and the Court of Appeals did not sharply distinguish between uses of Grokster's and StreamCast's software products (which this case is about) and uses of peer-to-peer technology generally (which this case is not about).

In sum, when the record in this case was developed, there was evidence that Grokster's and StreamCast's products were, and had been for some time, overwhelmingly used to infringe, ante, at 922-924; App. 434-439, 476-481, and that this infringement was the overwhelming source of revenue from the products, ante, at 925-926; 259 F. Supp. 2d, at 1043-1044. Fairly appraised, the evidence was insufficient to demonstrate, beyond genuine debate, a reasonable prospect that substantial or commercially significant noninfringing uses were likely to develop over time. On this record, the District Court should not have ruled dispositively on the contributory infringement charge by granting summary judgment to Grokster and StreamCast.^[17]

If, on remand, the case is not resolved on summary judgment in favor of MGM based on Grokster and StreamCast actively inducing infringement, the Court of Appeals, I [545 U.S. 949] would emphasize, should reconsider, on a fuller record, its interpretation of Sony's product distribution holding.

---------------

JUSTICE BREYER, with whom JUSTICE STEVENS and JUSTICE O'CONNOR join, concurring.

I agree with the Court that the distributor of a dual-use technology may be liable for the infringing activities of third parties where he or she actively seeks to advance the infringement. Ante, at 919. I further agree that, in light of our holding today, we need not now "revisit" Sony Corp. of America v. Universal City Studios, Inc., 464 U. S. 417 (1984). Ante, at 934. Other Members of the Court, however, take up the Sony question: whether Grokster's product is "capable of `substantial' or `commercially significant' noninfringing uses." Ante, at 942 (GINSBURG, J., concurring) (quoting Sony, supra, at 442). And they answer that question by stating that the Court of Appeals was wrong when it granted summary judgment on the issue in Grokster's favor. Ante, at 944. I write to explain why I disagree with them on this matter.

The Court's opinion in Sony and the record evidence (as described and analyzed in the many briefs before us) together convince me that the Court of Appeals' conclusion has adequate legal support.

I begin with Sony's standard. In Sony, the Court considered the potential copyright liability of a company that did not itself illegally copy protected material, but rather sold a machine—a videocassette recorder (VCR)—that could be used to do so. A buyer could use that machine for non-infringing purposes, such as recording for later viewing (sometimes called "`time-shifting,'" Sony, 464 U. S., at 421) uncopyrighted television programs or copyrighted programs with a copyright holder's permission. The buyer could use [545 U.S. 950] the machine for infringing purposes as well, such as building libraries of taped copyrighted programs. Or, the buyer might use the machine to record copyrighted programs under circumstances in which the legal status of the act of recording was uncertain (i. e., where the copying may, or may not, have constituted a "fair use," id., at 425-426). Sony knew many customers would use its VCRs to engage in unauthorized copying and "`library-building.'" Id., at 458-459 (Blackmun, J., dissenting). But that fact, said the Court, was insufficient to make Sony itself an infringer. And the Court ultimately held that Sony was not liable for its customers' acts of infringement.

In reaching this conclusion, the Court recognized the need for the law, in fixing secondary copyright liability, to "strike a balance between a copyright holder's legitimate demand for effective—not merely symbolic—protection of the statutory monopoly, and the rights of others freely to engage in substantially unrelated areas of commerce." Id., at 442. It pointed to patent law's "staple article of commerce" doctrine, ibid., under which a distributor of a product is not liable for patent infringement by its customers unless that product is "unsuited for any commercial noninfringing use." Dawson Chemical Co. v. Rohm & Haas Co., 448 U. S. 176, 198 (1980). The Court wrote that the sale of copying equipment, "like the sale of other articles of commerce, does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing uses." Sony, 464 U. S., at 442 (emphasis added). The Court ultimately characterized the legal "question" in the particular case as "whether [Sony's VCR] is capable of commercially significant noninfringing uses" (while declining to give "precise content" to these terms). Ibid. (emphasis added).

It then applied this standard. The Court had before it a survey (commissioned by the District Court and then prepared by the respondents) showing that roughly 9% of all [545 U.S. 951] VCR recordings were of the type—namely, religious, educational, and sports programming—owned by producers and distributors testifying on Sony's behalf who did not object to time-shifting. See Brief for Respondents, O. T. 1983, No. 81-1687, pp. 52-53; see also Sony, supra, at 424 (7.3% of all Sony VCR use is to record sports programs; representatives of the sports leagues do not object). A much higher percentage of VCR users had at one point taped an authorized program, in addition to taping unauthorized programs. And the plaintiffs—not a large class of content providers as in this case—owned only a small percentage of the total available unauthorized programming. See ante, at 947, n. 3 (GINSBURG, J., concurring). But of all the taping actually done by Sony's customers, only around 9% was of the sort the Court referred to as authorized.

The Court found that the magnitude of authorized programming was "significant," and it also noted the "significant potential for future authorized copying." 464 U. S., at 444. The Court supported this conclusion by referencing the trial testimony of professional sports league officials and a religious broadcasting representative. Id., at 444, and n. 24. It also discussed (1) a Los Angeles educational station affiliated with the Public Broadcasting Service that made many of its programs available for home taping, and (2) Mr. Rogers' Neighborhood, a widely watched children's program. Id., at 445. On the basis of this testimony and other similar evidence, the Court determined that producers of this kind had authorized duplication of their copyrighted programs "in significant enough numbers to create a substantial market for a noninfringing use of the" VCR. Id., at 447, n. 28 (emphasis added).

The Court, in using the key word "substantial," indicated that these circumstances alone constituted a sufficient basis for rejecting the imposition of secondary liability. See id., at 456 ("Sony demonstrated a significant likelihood that substantial numbers of copyright holders" would not object [545 U.S. 952] to time-shifting (emphasis added)). Nonetheless, the Court buttressed its conclusion by finding separately that, in any event, un-authorized time-shifting often constituted not infringement, but "fair use." Id., at 447-456.

When measured against Sony's underlying evidence and analysis, the evidence now before us shows that Grokster passes Sony's test—that is, whether the company's product is capable of substantial or commercially significant noninfringing uses. Id., at 442. For one thing, petitioners' (hereinafter MGM) own expert declared that 75% of current files available on Grokster are infringing and 15% are "likely infringing." See App. 436-439, ¶¶ 6-17 (Decl. of Dr. Ingram Olkin); cf. ante, at 922 (opinion of the Court). That leaves some number of files near 10% that apparently are noninfringing, a figure very similar to the 9% or so of authorized time-shifting uses of the VCR that the Court faced in Sony.

As in Sony, witnesses here explained the nature of the noninfringing files on Grokster's network without detailed quantification. Those files include:

—Authorized copies of music by artists such as Wilco, Janis Ian, Pearl Jam, Dave Matthews, John Mayer, and others. See App. 152-153, ¶¶ 9-13 (Decl. of Aram Sinnreich) (Wilco's "lesson has already been adopted by artists still signed to their major labels"); id., at 170, ¶¶ 5-7 (Decl. of Patricia D. Hoekman) (locating "numerous audio recordings" that were authorized for swapping); id., at 74, ¶ 10 (Decl. of Daniel B. Rung) (describing Grokster's partnership with a company that hosts music from thousands of independent artists)

—Free electronic books and other works from various online publishers, including Project Gutenberg. See id., at 136, ¶ 12 (Decl. of Gregory Newby) ("Numerous authorized and public domain Project Gutenberg eBooks are made available" on Grokster. Project Gutenberg "welcomes this widespread [545 U.S. 953] sharing . . . using these software products[,] since they assist us in meeting our objectives"); id., at 159-160, ¶ 32 (Decl. of Sinnreich)

—Public domain and authorized software, such as WinZip 8.1. Id., at 170, ¶ 8 (Decl. of Hoekman); id., at 165, ¶¶ 4-7 (Decl. of John Busher)

—Licensed music videos and television and movie segments distributed via digital video packaging with the permission of the copyright holder. Id., at 70, ¶ 24 (Decl. of Sean L. Mayers).

The nature of these and other lawfully swapped files is such that it is reasonable to infer quantities of current lawful use roughly approximate to those at issue in Sony. At least, MGM has offered no evidence sufficient to survive summary judgment that could plausibly demonstrate a significant quantitative difference. See ante, at 922 (opinion of the Court); see also Brief for Motion Picture Studio and Recording Company Petitioners i (referring to "at least 90% of the total use of the services"); but see ante, at 947, n. 3 (GINSBURG, J., concurring). To be sure, in quantitative terms these uses account for only a small percentage of the total number of uses of Grokster's product. But the same was true in Sony, which characterized the relatively limited authorized copying market as "substantial." (The Court made clear as well in Sony that the amount of material then presently available for lawful copying—if not actually copied— was significant, see 464 U. S., at 444, and the same is certainly true in this case.)

Importantly, Sony also used the word "capable," asking whether the product is "capable of" substantial noninfringing uses. Its language and analysis suggest that a figure like 10%, if fixed for all time, might well prove insufficient, but that such a figure serves as an adequate foundation where there is a reasonable prospect of expanded legitimate uses over time. See ibid. (noting a "significant potential for future authorized copying"). And its language also indicates [545 U.S. 954] the appropriateness of looking to potential future uses of the product to determine its "capability."

Here the record reveals a significant future market for noninfringing uses of Grokster-type peer-to-peer software. Such software permits the exchange of any sort of digital file—whether that file does, or does not, contain copyrighted material. As more and more uncopyrighted information is stored in swappable form, it seems a likely inference that lawful peer-to-peer sharing will become increasingly prevalent. See, e. g., App. 142, ¶ 20 (Decl. of Brewster Kahle) ("[T]he [Internet Archive] welcomes [the] redistribution [of authorized films] by the Morpheus-Grokster-KaZaa community of users"); id., at 166, ¶ 8 (Decl. of Busher) (sales figures of $1,000 to $10,000 per month through peer-to-peer networks "will increase in the future as Acoustica's trialware is more widely distributed through these networks"); id., at 156-163, ¶¶ 21-40 (Decl. of Sinnreich).

And that is just what is happening. Such legitimate noninfringing uses are coming to include the swapping of: research information (the initial purpose of many peer-to-peer networks); public domain films (e. g., those owned by the Prelinger Archive); historical recordings and digital educational materials (e. g., those stored on the Internet Archive); digital photos (OurPictures, for example, is starting a P2P photo-swapping service); "shareware" and "freeware" (e. g., Linux and certain Windows software); secure licensed music and movie files (Intent MediaWorks, for example, protects licensed content sent across P2P networks); news broadcasts past and present (the BBC Creative Archive lets users "rip, mix and share the BBC"); user-created audio and video files (including "podcasts" that may be distributed through P2P software); and all manner of free "open content" works collected by Creative Commons (one can search for Creative Commons material on StreamCast). See Brief for Distributed Computing Industry Association as Amicus Curiae 15-26; Merges, A New Dynamism in the Public Domain, 71 [545 U.S. 955] U. Chi. L. Rev. 183 (2004). I can find nothing in the record that suggests that this course of events will not continue to flow naturally as a consequence of the character of the software taken together with the foreseeable development of the Internet and of information technology. Cf. ante, at 920 (opinion of the Court) (discussing the significant benefits of peer-to-peer technology).

There may be other now-unforeseen noninfringing uses that develop for peer-to-peer software, just as the homevideo rental industry (unmentioned in Sony) developed for the VCR. But the foreseeable development of such uses, when taken together with an estimated 10% noninfringing material, is sufficient to meet Sony's standard. And while Sony considered the record following a trial, there are no facts asserted by MGM in its summary judgment filings that lead me to believe the outcome after a trial here could be any different. The lower courts reached the same conclusion.

Of course, Grokster itself may not want to develop these other noninfringing uses. But Sony's standard seeks to protect not the Groksters of this world (which in any event may well be liable under today's holding), but the development of technology more generally. And Grokster's desires in this respect are beside the point.

The real question here, I believe, is not whether the record evidence satisfies Sony. As I have interpreted the standard set forth in that case, it does. And of the Courts of Appeals that have considered the matter, only one has proposed interpreting Sony more strictly than I would do—in a case where the product might have failed under any standard. In re Aimster Copyright Litigation, 334 F. 3d 643, 653 (CA7 2003) (defendant "failed to show that its service is ever used for any purpose other than to infringe" copyrights (emphasis added)); see Matthew Bender & Co. v. West Pub. Co., 158 [545 U.S. 956] F. 3d 693, 706-707 (CA2 1998) (court did not require that noninfringing uses be "predominant," it merely found that they were predominant, and therefore provided no analysis of Sony's boundaries); but see ante, at 944, n. 1 (GINSBURG, J., concurring); see also A&M Records, Inc. v. Napster, Inc., 239 F. 3d 1004, 1020 (CA9 2001) (discussing Sony); Cable/Home Communication Corp. v. Network Productions, Inc., 902 F. 2d 829, 842-847 (CA11 1990) (same); Vault Corp. v. Quaid Software, Ltd., 847 F. 2d 255, 262 (CA5 1988) (same); cf. Dynacore Holdings Corp. v. U. S. Philips Corp., 363 F. 3d 1263, 1275 (CA Fed. 2004) (same); see also Doe v. GTE Corp., 347 F. 3d 655, 661 (CA7 2003) ("A person may be liable as a contributory infringer if the product or service it sells has no (or only slight) legal use").

Instead, the real question is whether we should modify the Sony standard, as MGM requests, or interpret Sony more strictly, as I believe JUSTICE GINSBURG'S approach would do in practice. Compare ante, at 944-948 (concurring opinion) (insufficient evidence in this case of both present lawful uses and of a reasonable prospect that substantial noninfringing uses would develop over time), with Sony, 464 U. S., at 442-447 (basing conclusion as to the likely existence of a substantial market for authorized copying upon general declarations, some survey data, and common sense).

As I have said, Sony itself sought to "strike a balance between a copyright holder's legitimate demand for effective— not merely symbolic—protection of the statutory monopoly, and the rights of others freely to engage in substantially unrelated areas of commerce." Id., at 442. Thus, to determine whether modification, or a strict interpretation, of Sony is needed, I would ask whether MGM has shown that Sony incorrectly balanced copyright and new-technology interests. In particular: (1) Has Sony (as I interpret it) worked to protect new technology? (2) If so, would modification or strict interpretation significantly weaken that protection? (3) If [545 U.S. 957] so, would new or necessary copyright-related benefits outweigh any such weakening?

The first question is the easiest to answer. Sony's rule, as I interpret it, has provided entrepreneurs with needed assurance that they will be shielded from copyright liability as they bring valuable new technologies to market.

Sony's rule is clear. That clarity allows those who develop new products that are capable of substantial noninfringing uses to know, ex ante, that distribution of their product will not yield massive monetary liability. At the same time, it helps deter them from distributing products that have no other real function than—or that are specifically intended for—copyright infringement, deterrence that the Court's holding today reinforces (by adding a weapon to the copyright holder's legal arsenal).

Sony's rule is strongly technology protecting. The rule deliberately makes it difficult for courts to find secondary liability where new technology is at issue. It establishes that the law will not impose copyright liability upon the distributors of dual-use technologies (who do not themselves engage in unauthorized copying) unless the product in question will be used almost exclusively to infringe copyrights (or unless they actively induce infringements as we today describe). Sony thereby recognizes that the copyright laws are not intended to discourage or to control the emergence of new technologies, including (perhaps especially) those that help disseminate information and ideas more broadly or more efficiently. Thus Sony's rule shelters VCRs, typewriters, tape recorders, photocopiers, computers, cassette players, compact disc burners, digital video recorders, MP3 players, Internet search engines, and peer-to-peer software. But Sony's rule does not shelter descramblers, even if one could theoretically use a descrambler in a noninfringing way. 464 [545 U.S. 958] U. S., at 441-442. Compare Cable/Home Communication Corp., supra, at 837-850 (developer liable for advertising television signal descrambler), with Vault Corp., supra, at 262 (primary use infringing but a substantial noninfringing use).

Sony's rule is forward looking. It does not confine its scope to a static snapshot of a product's current uses (thereby threatening technologies that have undeveloped future markets). Rather, as the VCR example makes clear, a product's market can evolve dramatically over time. And Sony—by referring to a capacity for substantial noninfringing uses—recognizes that fact. Sony's word "capable" refers to a plausible, not simply a theoretical, likelihood that such uses will come to pass, and that fact anchors Sony in practical reality. Cf. Aimster, 334 F. 3d, at 651.

Sony's rule is mindful of the limitations facing judges where matters of technology are concerned. Judges have no specialized technical ability to answer questions about present or future technological feasibilility or commercial viability where technology professionals, engineers, and venture capitalists themselves may radically disagree and where answers may differ depending upon whether one focuses upon the time of product development or the time of distribution. Consider, for example, the question whether devices can be added to Grokster's software that will filter out infringing files. MGM tells us this is easy enough to do, as do several amici that produce and sell the filtering technology. See, e. g., Brief for Motion Picture Studio and Recording Company Petitioners 11; Brief for Audible Magic Corp. et al. as Amici Curiae 3-10. Grokster says it is not at all easy to do, and not an efficient solution in any event, and several apparently disinterested computer science professors agree. See Brief for Respondents 31; Brief for Computer Science Professor Harold Abelson et al. as Amici Curiae 6-10, 14-18. Which account should a judge credit? Sony says that the judge will not necessarily have to decide.

[545 U.S. 959] Given the nature of the Sony rule, it is not surprising that in the last 20 years, there have been relatively few contributory infringement suits—based on a product distribution theory—brought against technology providers (a small handful of federal appellate court cases and perhaps fewer than two dozen District Court cases in the last 20 years). I have found nothing in the briefs or the record that shows that Sony has failed to achieve its innovation-protecting objective.

The second, more difficult, question is whether a modified Sony rule (or a strict interpretation) would significantly weaken the law's ability to protect new technology. JUSTICE GINSBURG'S approach would require defendants to produce considerably more concrete evidence—more than was presented here—to earn Sony's shelter. That heavier evidentiary demand, and especially the more dramatic (case-by-case balancing) modifications that MGM and the Government seek, would, I believe, undercut the protection that Sony now offers.

To require defendants to provide, for example, detailed evidence—say, business plans, profitability estimates, projected technological modifications, and so forth—would doubtless make life easier for copyright holder plaintiffs. But it would simultaneously increase the legal uncertainty that surrounds the creation or development of a new technology capable of being put to infringing uses. Inventors and entrepreneurs (in the garage, the dorm room, the corporate lab, or the boardroom) would have to fear (and in many cases endure) costly and extensive trials when they create, produce, or distribute the sort of information technology that can be used for copyright infringement. They would often be left guessing as to how a court, upon later review of the product and its uses, would decide when necessarily rough estimates amounted to sufficient evidence. They would have no way to predict how courts would weigh the respective [545 U.S. 960] values of infringing and noninfringing uses; determine the efficiency and advisability of technological changes; or assess a product's potential future markets. The price of a wrong guess—even if it involves a good-faith effort to assess technical and commercial viability—could be large statutory damages (not less than $750 and up to $30,000 per infringed work). 17 U. S. C. § 504(c)(1). The additional risk and uncertainty would mean a consequent additional chill of technological development.

The third question—whether a positive copyright impact would outweigh any technology-related loss—I find the most difficult of the three. I do not doubt that a more intrusive Sony test would generally provide greater revenue security for copyright holders. But it is harder to conclude that the gains on the copyright swings would exceed the losses on the technology roundabouts.

For one thing, the law disfavors equating the two different kinds of gain and loss; rather, it leans in favor of protecting technology. As Sony itself makes clear, the producer of a technology which permits unlawful copying does not himself engage in unlawful copying—a fact that makes the attachment of copyright liability to the creation, production, or distribution of the technology an exceptional thing. See 464 U. S., at 431 (courts "must be circumspect" in construing the copyright laws to preclude distribution of new technologies). Moreover, Sony has been the law for some time. And that fact imposes a serious burden upon copyright holders like MGM to show a need for change in the current rules of the game, including a more strict interpretation of the test. See, e. g., Brief for Motion Picture Studio and Recording Company Petitioners 31 (Sony should not protect products when the "primary or principal" use is infringing).

In any event, the evidence now available does not, in my view, make out a sufficiently strong case for change. To say [545 U.S. 961] this is not to doubt the basic need to protect copyrighted material from infringement. The Constitution itself stresses the vital role that copyright plays in advancing the "useful Arts." Art. I, § 8, cl. 8. No one disputes that "reward to the author or artist serves to induce release to the public of the products of his creative genius." United States v. Paramount Pictures, Inc., 334 U. S. 131, 158 (1948). And deliberate unlawful copying is no less an unlawful taking of property than garden-variety theft. See, e. g., 18 U. S. C. § 2319 (2000 ed. and Supp. II) (criminal copyright infringement); § 1961(1)(B) (2000 ed., Supp. II) (copyright infringement can be a predicate act under the Racketeer Influenced and Corrupt Organizations Act); § 1956(c)(7)(D) (2000 ed., Supp. II) (money laundering includes the receipt of proceeds from copyright infringement). But these highly general principles cannot by themselves tell us how to balance the interests at issue in Sony or whether Sony's standard needs modification. And at certain key points, information is lacking.

Will an unmodified Sony lead to a significant diminution in the amount or quality of creative work produced? Since copyright's basic objective is creation and its revenue objectives but a means to that end, this is the underlying copyright question. See Twentieth Century Music Corp. v. Aiken, 422 U. S. 151, 156 (1975) ("Creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad public availability of literature, music, and the other arts"). And its answer is far from clear.

Unauthorized copying likely diminishes industry revenue, though it is not clear by how much. Compare S. Liebowitz, Will MP3 Downloads Annihilate the Record Industry? The Evidence So Far 2 (June 2003), http://www.utdallas.edu/~liebowit/intprop/records.pdf (all Internet materials as visited June 24, 2005, and available in Clerk of Court's case file)

[545 U.S. 962] (file sharing has caused a decline in music sales), and Press Release, Informa Telecoms & Media, Steady Download Growth Defies P2P (Dec. 6, 2004), http://www.informatm.com (citing Informa Media Group Report, Music on the Internet (5th ed. 2004)) (estimating total lost sales to the music industry in the range of $2 billion annually), with F. Oberholzer & K. Strumpf, The Effect of File Sharing on Record Sales: An Empirical Analysis 24 (Mar. 2004), www.unc.edu/~cigar/papers/FileSharing_March2004.pdf (academic study concluding that "file sharing has no statistically significant effect on purchases of the average album"), and D. McGuire, Study: File-Sharing No Threat to Music Sales (Mar. 29, 2004), http://www.washingtonpost.com/ac2/wp-dyn/A34300-2004Mar29?language=printer (discussing mixed evidence).

The extent to which related production has actually and resultingly declined remains uncertain, though there is good reason to believe that the decline, if any, is not substantial. See, e. g., M. Madden, Pew Internet & American Life Project, Artists, Musicians, and the Internet 21 (Dec. 5, 2004), http://www.pewinternet.org/pdfs/PIP_Artists. Musicians_Report.pdf (nearly 70% of musicians believe that file sharing is a minor threat or no threat at all to creative industries); Benkler, Sharing Nicely: On Shareable Goods and the Emergence of Sharing as a Modality of Economic Production, 114 Yale L. J. 273, 351-352 (2004) ("Much of the actual flow of revenue to artists—from performances and other sources—is stable even assuming a complete displacement of the CD market by peer-to-peer distribution . . . . [I]t would be silly to think that music, a cultural form without which no human society has existed, will cease to be in our world [because of illegal file swapping]").

More importantly, copyright holders at least potentially have other tools available to reduce piracy and to abate whatever threat it poses to creative production. As today's opinion makes clear, a copyright holder may proceed against [545 U.S. 963] a technology provider where a provable specific intent to infringe (of the kind the Court describes) is present. Ante, at 941. Services like Grokster may well be liable under an inducement theory.

In addition, a copyright holder has always had the legal authority to bring a traditional infringement suit against one who wrongfully copies. Indeed, since September 2003, the Recording Industry Association of America (RIAA) has filed "thousands of suits against people for sharing copyrighted material." Walker, New Movement Hits Universities: Get Legal Music, Washington Post, Mar. 17, 2005, p. E1. These suits have provided copyright holders with damages; have served as a teaching tool, making clear that much file sharing, if done without permission, is unlawful; and apparently have had a real and significant deterrent effect. See, e. g., L. Rainie, M. Madden, D. Hess, & G. Mudd, Pew Internet Project and comScore Media Metrix Data Memo: The state of music downloading and file-sharing online 2, 4, 6, 10 (Apr. 2004), http://www.pewinternet.org/pdfs/PIP_Filesharing_April_04.pdf (number of people downloading files fell from a peak of roughly 35 million to roughly 23 million in the year following the first suits; 38% of current downloaders report downloading fewer files because of the suits); M. Madden & L. Rainie, Pew Internet Project Data Memo: Music and video downloading moves beyond P2P, p. 7 (Mar. 2005), http://www. pewinternet.org/pdfs/PIP_Filesharing_March05.pdf (number of downloaders has "inched up" but "continues to rest well below the peak level"); Note, Costs and Benefits of the Recording Industry's Litigation Against Individuals, 20 Berkeley Tech. L. J. 571 (2005); but see Evangelista, File Sharing; Downloading Music and Movie Files is as Popular as Ever, San Francisco Chronicle, Mar. 28, 2005, p. E1 (referring to the continuing "tide of rampant copyright infringement," while noting that the RIAA says it believes the "campaign of lawsuits and public education has at least contained the problem").

[545 U.S. 964] Further, copyright holders may develop new technological devices that will help curb unlawful infringement. Some new technology, called "digital `watermarking'" and "digital fingerprint[ing]," can encode within the file information about the author and the copyright scope and date, which "fingerprints" can help to expose infringers. RIAA Reveals Method to Madness, Wired News (Aug. 28, 2003), http:// www.wired.com/news/digiwood/0,1412,60222,00.html; Besek, Anti-Circumvention Laws and Copyright: A Report from the Kernochan Center for Law, Media and the Arts, 27 Colum. J. L. & Arts 385, 391, 451 (2004). Other technology can, through encryption, potentially restrict users' ability to make a digital copy. See J. Borland, Tripping the Rippers, C/net News.com (Sept. 28, 2001), http://news.com.com/ Tripping+the+rippers/2009-1023_3-273619.html; but see Brief for Bridgemar Services, Ltd. d/b/a iMesh.com as Amicus Curiae 5-8 (arguing that peer-to-peer service providers can more easily block unlawful swapping).

At the same time, advances in technology have discouraged unlawful copying by making lawful copying (e. g., downloading music with the copyright holder's permission) cheaper and easier to achieve. Several services now sell music for less than $1 per song. (Walmart.com, for example, charges $0.88 each.) Consequently, many consumers initially attracted to the convenience and flexibility of services like Grokster are now migrating to lawful paid services (services with copying permission) where they can enjoy at little cost even greater convenience and flexibility without engaging in unlawful swapping. See Wu, When Code Isn't Law, 89 Va. L. Rev. 679, 731-735 (2003) (noting the prevalence of technological problems on unpaid swapping sites); K. Dean, P2P Tilts Toward Legitimacy, Wired News (Nov. 24, 2004), http://www.wired.com/news/ digiwood/0,1412,65836,00.html; Madden & Rainie, March 2005 Data Memo, supra, at 6-8 (percentage of current downloaders who have used paid services rose from 24% to 43% in a year; number using free services fell from 58% to 41%).

[545 U.S. 965] Thus, lawful music downloading services—those that charge the customer for downloading music and pay royalties to the copyright holder—have continued to grow and to produce substantial revenue. See Brief for Internet Law Faculty as Amicus Curiae 5-20; Bruno, Digital Entertainment: Piracy Fight Shows Encouraging Signs (Mar. 5, 2005), available at LEXIS, News Library, Billboard File (in 2004, consumers worldwide purchased more than 10 times the number of digital tracks purchased in 2003; global digital music market of $330 million in 2004 expected to double in 2005); Press Release, Informa Telecoms & Media, Steady Download Growth Defies P2P (global digital revenues will likely exceed $3 billion in 2010); Ashton, [International Federation of the Phonographic Industry] Predicts Downloads Will Hit the Mainstream, Music Week, Jan. 29, 2005, p. 6 (legal music sites and portable MP3 players "are helping to transform the digital music market" into "an everyday consumer experience"). And more advanced types of non-music-oriented peer-to-peer networks have also started to develop, drawing in part on the lessons of Grokster.

Finally, as Sony recognized, the legislative option remains available. Courts are less well suited than Congress to the task of "accommodat[ing] fully the varied permutations of competing interests that are inevitably implicated by such new technology." Sony, 464 U. S., at 431; see, e. g., Audio Home Recording Act of 1992, 106 Stat. 4237 (adding 17 U. S. C., ch. 10); Protecting Innovation and Art While Preventing Piracy: Hearing before the Senate Committee on the Judiciary, 108th Cong., 2d Sess. (2004).

I do not know whether these developments and similar alternatives will prove sufficient, but I am reasonably certain that, given their existence, a strong demonstrated need for modifying Sony (or for interpreting Sony's standard more strictly) has not yet been shown. That fact, along with the added risks that modification (or strict interpretation) would impose upon technological innovation, leads me to the conclusion that we should maintain Sony, reading its standard as I [545 U.S. 966] have read it. As so read, it requires affirmance of the Ninth Circuit's determination of the relevant aspects of the Sony question.

* * *

For these reasons, I disagree with JUSTICE GINSBURG, but I agree with the Court and join its opinion.

Notes:

[*] Briefs of amici curiae urging reversal were filed for the State of Utah et al. by Mark Shurtleff, Attorney General of Utah, and by the Attorneys General for their respective jurisdictions as follows: Troy King of Alabama, Gregg Renkes of Alaska, Terry Goddard of Arizona, Mike Beebe of Arkansas, M. Jane Brady of Delaware, Charles J. Crist, Jr., of Florida, Thurbert E. Baker of Georgia, Douglas B. Moylan of Guam, Mark J. Bennett of Hawaii, Lawrence G. Wasden of Idaho, Lisa Madigan of Illinois, Steve Carter of Indiana, Phill Kline of Kansas, Gregory D. Stumbo of Kentucky, Charles C. Foti, Jr., of Louisiana, Thomas F. Reilly of Massachusetts, Michael A. Cox of Michigan, Mike Hatch of Minnesota, Jim Hood of Mississippi, Jeremiah W. (Jay) Nixon of Missouri, Mike McGrath of Montana, Jon Bruning of Nebraska, Brian Sandoval of Nevada, Peter C. Harvey of New Jersey, Patricia A. Madrid of New Mexico, Roy Cooper of North Carolina, Wayne Stenehjem of North Dakota, Jim Petro of Ohio, W. A. Drew Edmondson of Oklahoma, Thomas W. Corbett, Jr., of Pennsylvania, Patrick Lynch of Rhode Island, Henry McMaster of South Carolina, Lawrence E. Long of South Dakota, Paul G. Summers of Tennessee, Greg Abbott of Texas, William H. Sorrell of Vermont, Jerry Kilgore of Virginia, Darrell V. McGraw, Jr., of West Virginia, and Peg Lautenschlager of Wisconsin; for the American Federation of Musicians of the United States and Canada et al. by George H. Cohen, Patricia Polach, and Laurence Gold; for the American Society of Composers, Authors and Publishers et al. by I. Fred Koenigsberg, Michael E. Salzman, and Marvin L. Berenson; for Americans for Tax Reform by Carter G. Phillips, Alan Charles Raul, Jay T. Jorgensen, and Eric A. Shumsky; for the Commissioner of Baseball et al. by Robert Alan Garrett and Hadrian R. Katz; for Defenders of Property Rights by Theodore B. Olson, Thomas H. Dupree, Jr., Matthew D. McGill, Nancie G. Marzulla, and Roger Marzulla; for International Rights Owners by Christopher Wolf; for Kids First Coalition et al. by Viet D. Dinh; for Law Professors et al. by James Gibson; for Macrovision Corp. by Geoffrey L. Beauchamp, Kelly G. Huller, and James H. Salter; for Napster, LLC, et al. by Barry I. Slotnick; for the National Academy of Recording Arts & Sciences, Inc., et al. by Jon A. Baumgarten and Jay L. Cooper; for the National Association of Broadcasters by Marsha J. MacBride, Jane E. Mago, Benjamin F. P. Ivins, and Jerianne Timmerman; for the National Association of Recording Merchandisers by Alan R. Malasky and Melanie Martin-Jones; for the Progress & Freedom Foundation by James V. DeLong; for the Video Software Dealers Association by John T. Mitchell; and for Professor Peter S. Menell et al. by Mr. Menell, pro se.

Briefs of amici curiae urging affirmance were filed for Altnet, Inc., by Roderick G. Dorman; for the American Civil Liberties Union et al. by Christopher A. Hansen, Steven R. Shapiro, Sharon M. McGowan, Ann Brick, and Jordan C. Budd; for the American Conservative Union et al. by David Post; for the Cellular Telecommunications & Internet Association et al. by Andrew G. McBride, Joshua S. Turner, Michael Altschul, James W. Olson, Frank L. Politano, Laura Kaster, Jeffrey A. Rackow, Grier C. Raclin, Michael Standard, John Thorne, Sarah B. Deutsch, and Paul J. Larkin, Jr.; for the Consumer Electronics Association et al. by Bruce G. Joseph and Scott E. Bain; for the Consumer Federation of America et al. by Peter Jaszi; for the Distributed Computing Industry Association by Mr. Dorman; for the Eagle Forum Education & Legal Defense Fund by Andrew L. Schlafly and Karen B. Tripp; for the Free Software Foundation et al. by Eben Moglen; for Intel Corp. by James M. Burger and Jonathan D. Hart; for Internet Law Faculty by William W. Fisher III and Jonathan Zittrain; for Law Professors by J. Glynn Lunney, Jr.; for the National Association of Shareholder and Consumer Attorneys by Kevin P. Roddy and Matthew E. Van Tine; for Sixty Intellectual Property and Technology Law Professors et al. by Deirdre K. Mulligan and Pamela Samuelson; for Sovereign Artists et al. by James R. Wheaton; for Computer Science Professor Harold Abelson et al. by James S. Tyre; for Professor Edward Lee et al. by Mr. Lee, pro se; for Charles Nesson by Mr. Nesson, pro se; and for Malla Pollack et al. by Ms. Pollack, pro se.

Briefs of amici curiae were filed for the American Intellectual Property Law Association by Rick D. Nydegger and Melvin C. Garner; for Audible Magic Corp. et al. by Bruce V. Spiva and Jeremy H. Stern; for Bridgemar Services, Ltd. d/b/a iMesh.com by Jeffrey A. Kimmel; for the Business Software Alliance by E. Edward Bruce and Robert A. Long, Jr.; for Creative Commons by Lawrence Lessig; for the Digital Media Association et al. by Lawrence Robbins, Alan Untereiner, Markham C. Erickson, and Jerry Berman; for Emerging Technology Companies by Michael Traynor and Matthew D. Brown; for IEEE-USA by Matthew J. Conigliaro, Andrew C. Greenberg, Joseph H. Lang, Jr., and Daniel E. Fisher; for Innovation Scholars and Economists by Laurence F. Pulgram; for the Intellectual Property Owners Association by James H. Pooley; for Media Studies Professors by Roy I. Liebman; for the National Venture Capital Association by Michael K. Kellogg, Mark L. Evans, and David L. Schwarz; for Sharman Networks Limited by Mr. Dorman; for SNOCAP, Inc., by Joel W. Nomkin; for Kenneth J. Arrow et al. by David A. Strauss; for Lee A. Hollaar by Lloyd W. Sadler; for U. S. Senator Patrick Leahy et al. by Mr. Leahy, pro se, and Senator Orrin G. Hatch, pro se; and for Felix Oberholzer-Gee et al. by Carl H. Settlemyer III and Arnold P. Lutzker.

[1] Peer-to-peer networks have disadvantages as well. Searches on peer-to-peer networks may not reach and uncover all available files because search requests may not be transmitted to every computer on the network. There may be redundant copies of popular files. The creator of the software has no incentive to minimize storage or bandwidth consumption, the costs of which are borne by every user of the network. Most relevant here, it is more difficult to control the content of files available for retrieval and the behavior of users.

[2] The studios and recording companies and the songwriters and music publishers filed separate suits against the defendants that were consolidated by the District Court.

[3] Subsequent versions of Morpheus, released after the record was made in this case, apparently rely not on Gnutella but on a technology called Neonet. These developments are not before us.

[4] There is some evidence that both Grokster and StreamCast previously operated supernodes, which compiled indexes of files available on all of the nodes connected to them. This evidence, pertaining to previous versions of the defendants' software, is not before us and would not affect our conclusions in any event.

[5] By comparison, evidence introduced by the plaintiffs in A&M Records, Inc. v. Napster, Inc., 239 F. 3d 1004 (CA9 2001), showed that 87% of files available on the Napster file-sharing network were copyrighted, id., at 1013.

[6] The Grokster founder contends that in answering these e-mails he often did not read them fully. App. 77, 769.

[7] The record makes clear that StreamCast developed these promotional materials but not whether it released them to the public. Even if these advertisements were not released to the public and do not show encouragement to infringe, they illuminate StreamCast's purposes.

[8] The mutual exclusivity of these values should not be overstated, however. On the one hand technological innovators, including those writing file-sharing computer programs, may wish for effective copyright protections for their work. See, e. g., Wu, When Code Isn't Law, 89 Va. L. Rev. 679, 750 (2003). (StreamCast itself was urged by an associate to "get [its] technology written down and [its intellectual property] protected." App. 866.) On the other hand the widespread distribution of creative works through improved technologies may enable the synthesis of new works or generate audiences for emerging artists. See Eldred v. Ashcroft, 537 U. S. 186, 223-226 (2003) (Stevens, J., dissenting); Van Houweling, Distributive Values in Copyright, 83 Texas L. Rev. 1535, 1539-1540, 1562-1564 (2005); Brief for Sovereign Artists et al. as Amici Curiae 11.

[9] We stated in Sony Corp. of America v. Universal City Studios, Inc., 464 U. S. 417 (1984), that "`the lines between direct infringement, contributory infringement and vicarious liability are not clearly drawn' . . . . [R]easoned analysis of [the Sony plaintiffs' contributory infringement claim] necessarily entails consideration of arguments and case law which may also be forwarded under the other labels, and indeed the parties . . . rely upon such arguments and authority in support of their respective positions on the issue of contributory infringement," id., at 435, n. 17 (quoting Universal City Studios, Inc. v. Sony Corp. of America, 480 F. Supp. 429, 457-458 (CD Cal. 1979)). In the present case MGM has argued a vicarious liability theory, which allows imposition of liability when the defendant profits directly from the infringement and has a right and ability to supervise the direct infringer, even if the defendant initially lacks knowledge of the infringement. See, e. g., Shapiro, Bernstein & Co. v. H. L. Green Co., 316 F. 2d 304, 308 (CA2 1963); Dreamland Ball Room, Inc. v. Shapiro, Bernstein & Co., 36 F. 2d 354, 355 (CA7 1929). Because we resolve the case based on an inducement theory, there is no need to analyze separately MGM's vicarious liability theory.

[10] Nor does the Patent Act's exemption from liability for those who distribute a staple article of commerce, 35 U. S. C. § 271(c), extend to those who induce patent infringement, § 271(b).

[11] Inducement has been codified in patent law. Ibid.

[12] Of course, in the absence of other evidence of intent, a court would be unable to find contributory infringement liability merely based on a failure to take affirmative steps to prevent infringement, if the device otherwise was capable of substantial noninfringing uses. Such a holding would tread too close to the Sony safe harbor.

[13] Grokster and StreamCast contend that any theory of liability based on their conduct is not properly before this Court because the rulings in the trial and appellate courts dealt only with the present versions of their software, not "past acts . . . that allegedly encouraged infringement or assisted . . . known acts of infringement." Brief for Respondents 14; see also id., at 34. This contention misapprehends the basis for their potential liability. It is not only that encouraging a particular consumer to infringe a copyright can give rise to secondary liability for the infringement that results. Inducement liability goes beyond that, and the distribution of a product can itself give rise to liability where evidence shows that the distributor intended and encouraged the product to be used to infringe. In such a case, the culpable act is not merely the encouragement of infringement but also the distribution of the tool intended for infringing use. See Kalem Co. v. Harper Brothers, 222 U. S. 55, 62-63 (1911); Cable/Home Communication Corp. v. Network Productions, Inc., 902 F. 2d 829, 846 (CA11 1990); A&M Records, Inc. v. Abdallah, 948 F. Supp. 1449, 1456 (CD Cal. 1996).

---------------

[14] JUSTICE BREYER finds in Sony Corp. of America v. Universal City Studios, Inc., 464 U. S. 417 (1984), a "clear" rule permitting contributory liability for copyright infringement based on distribution of a product only when the product "will be used almost exclusively to infringe copyrights." Post, at 957. But cf. Sony, 464 U. S., at 442 (recognizing "copyright holder's legitimate demand for effective—not merely symbolic—protection"). Sony, as I read it, contains no clear, near-exclusivity test. Nor have Courts of Appeals unanimously recognized JUSTICE BREYER'S clear rule. Compare A&M Records, Inc. v. Napster, Inc., 239 F. 3d 1004, 1021 (CA9 2001) ("[E]vidence of actual knowledge of specific acts of infringement is required to hold a computer system operator liable for contributory copyright infringement."), with In re Aimster Copyright Litigation, 334 F. 3d 643, 649-650 (CA7 2003) ("[W]hen a supplier is offering a product or service that has noninfringing as well as infringing uses, some estimate of the respective magnitudes of these uses is necessary for a finding of contributory infringement. . . . But the balancing of costs and benefits is necessary only in a case in which substantial noninfringing uses, present or prospective, are demonstrated."). See also Matthew Bender & Co. v. West Pub. Co., 158 F. 3d 693, 707 (CA2 1998) ("The Supreme Court applied [the Sony] test to prevent copyright holders from leveraging the copyrights in their original work to control distribution of . . . products that might be used incidentally for infringement, but that had substantial noninfringing uses. . . . The same rationale applies here [to products] that have substantial, predominant and noninfringing uses as tools for research and citation."). All Members of the Court agree, moreover, that "the Court of Appeals misapplied Sony," at least to the extent it read that decision to limit "secondary liability" to a hardly ever category, "quite beyond the circumstances to which the case applied." Ante, at 933.

[15] Grokster and StreamCast, in the Court of Appeals' view, would be entitled to summary judgment unless MGM could show that the software companies had knowledge of specific acts of infringement and failed to act on that knowledge—a standard the court held MGM could not meet. 380 F. 3d, at 1162-1163.

[16] JUSTICE BREYER finds support for summary judgment in this motley collection of declarations and in a survey conducted by an expert retained by MGM. Post, at 952-955. That survey identified 75% of the files available through Grokster as copyrighted works owned or controlled by the plaintiffs, and 15% of the files as works likely copyrighted. App. 439. As to the remaining 10% of the files, "there was not enough information to form reasonable conclusions either as to what those files even consisted of, and/or whether they were infringing or non-infringing." Id., at 479. Even assuming, as JUSTICE BREYER does, that the Sony Court would have absolved Sony of contributory liability solely on the basis of the use of the Betamax for authorized time-shifting, post, at 950-951, summary judgment is not inevitably appropriate here. Sony stressed that the plaintiffs there owned "well below 10%" of copyrighted television programming, 464 U. S., at 443, and found, based on trial testimony from representatives of the four major sports leagues and other individuals authorized to consent to home recording of their copyrighted broadcasts, that a similar percentage of program copying was authorized, id., at 424. Here, the plaintiffs allegedly control copyrights for 70% or 75% of the material exchanged through the Grokster and StreamCast software, 380 F. 3d 1154, 1158 (CA9 2004); App. 439, and the District Court does not appear to have relied on comparable testimony about authorized copying from copyright holders.

[17] The District Court's conclusion that "[p]laintiffs do not dispute that [d]efendants' software is being used, and could be used, for substantial noninfringing purposes," 259 F. Supp. 2d 1029, 1036 (CD Cal. 2003); accord 380 F. 3d, at 1161, is, to say the least, dubious. In the courts below and in this Court, MGM has continuously disputed any such conclusion. Brief for Motion Picture Studio and Recording Company Petitioners 30-38; Brief for MGM Plaintiffs-Appellants in No. 03-55894 etc. (CA9), p. 41; App. 356-357, 361-365.

100 U.S.P.Q.2d 1161
2011 Copr.L.Dec. P 30,134
660 F.3d 487

SONY BMG MUSIC ENTERTAINMENT, et al., Plaintiffs, Appellants/Cross–Appellees,
v.
Joel TENENBAUM, Defendant, Appellee/Cross–Appellant.

Nos. 10–1883

10–1947

10–2052.

United States Court of Appeals, First Circuit.

Heard April 4, 2011. Decided Sept. 16, 2011.

[660 F.3d 489] Paul D. Clement, with whom Jeffrey S. Bucholtz, Erin E. Murphy, King & Spalding, LLP, Timothy M. Reynolds, Eve G. Burton, Holme, Roberts & Owen, LLP, Matthew J. Oppenheim, and Jennifer L. Pariser were on brief, for plaintiffs-appellants.

Jeffrey Clair, with whom Tony West, Assistant Attorney General, Carmen Ortiz, United States Attorney, and Scott R. McIntosh were on brief, for the United States as plaintiff-appellant.

Charles R. Nesson and Jason Harrow for defendant-appellee.Julie A. Ahrens, with whom Anthony T. Falzone, Stanford Law School Center for Internet & Society, Michael Barclay, Corynne McSherry, Electronic Frontier Foundation, Jason M. Schultz, Samuelson Law, Technology & Public Policy Clinic, were on brief for Electronic Frontier Foundation, amicus curiae.

Before LYNCH, Chief Judge, TORRUELLA and THOMPSON, Circuit Judges.

LYNCH, Chief Judge.

Plaintiffs, the recording companies Sony BMG Music Entertainment, Warner Brothers Records Inc., Arista Records LLC, Atlantic Recording Corporation, and UMG Recordings, Inc. (together, “Sony”), brought this action for statutory damages and injunctive relief under the Copyright Act, 17 U.S.C. § 101 et seq. Sony argued that the defendant, Joel Tenenbaum, willfully infringed the copyrights of thirty music recordings by using file-sharing software to download and distribute those recordings without authorization from the copyright owners.

The district court entered judgment against Tenenbaum as to liability. The jury found that Tenenbaum's infringement of the copyrights at issue was willful and awarded Sony statutory damages of $22,500 for each infringed recording, an award within the statutory range of $750 to $150,000 per infringement that Congress established for willful conduct. See 17 U.S.C. § 504(c).

Upon Tenenbaum's motion for a new trial or remittitur, the district court skipped over the question of remittitur and reached a constitutional issue. It reduced the damage award by a factor of ten, reasoning that the award was excessive in violation of Tenenbaum's due process rights. See Sony BMG Music Entm't v. Tenenbaum, 721 F.Supp.2d 85 (D.Mass.2010).

The parties have cross-appealed. Sony argues the district court erred, for a number of reasons, in reducing the jury's award of damages and seeks reinstatement of the full award. It defends the liability and willfulness determinations.

Tenenbaum challenges both liability and damages. He challenges the Copyright Act's constitutionality and the applicability of the Copyright Act and its statutory damages provision to his conduct. Tenenbaum also argues that the district court committed various errors that require a new trial, and that a further reduction of the damage award is required by the due process clause.

The United States, intervening to defend the constitutionality of the Copyright Act, argues that the district court erred in bypassing the question of common law remittitur to reach a constitutional issue.

We reject all of Tenenbaum's arguments and affirm the denial of Tenenbaum's motion for a new trial or remittitur based on claims of error as to the application of the Copyright Act and error as to the jury instructions. However, the court erred [660 F.3d 490] when it bypassed Tenenbaum's remittitur arguments based on excessiveness of the statutory damages award and reached the constitutional due process issue. We agree with the United States that the doctrine of constitutional avoidance requires consideration of common law remittitur before consideration of Tenenbaum's due process challenge to the jury's award. We reverse the reduction in damages, reinstate the original award, and remand for consideration of the common law remittitur question. We comment that this case raises concerns about application of the Copyright Act which Congress may wish to examine.

I. Background

A. District Court Proceedings

Sony brought this action against Tenenbaum in August 2007, seeking statutory damages and injunctive relief pursuant to the Copyright Act. Sony pursued copyright claims against Tenenbaum for only thirty copyrighted works, even though it presented evidence that Tenenbaum illegally downloaded and distributed thousands of copyrighted materials.

Sony's complaint elected to seek statutory, not actual damages, pursuant to 17 U.S.C. § 504(c). For each act of infringement, § 504(c) establishes an award range of $750 to $30,000 for non-willful infringements, and a range of $750 to $150,000 for willful infringements.

Tenenbaum filed several pre-trial motions, including a motion to dismiss Sony's complaint on the ground that the Copyright Act is unconstitutional.^[1] After the United States intervened to defend the constitutionality of the Act, the district court rejected Tenenbaum's motion without prejudice to allow Tenenbaum to challenge the constitutionality of any award ultimately issued by the jury. The district court also considered and rejected a fair use defense put forth by Tenenbaum.

A five-day jury trial was held from July 27 to July 31, 2009. Following the conclusion of testimony, the district court partially granted Sony's motion for judgment as a matter of law, holding that Sony owned the thirty copyrights at issue and that Tenenbaum infringed those copyrights through his downloading and distribution activities. The court left to the jury the questions of (1) whether Tenenbaum's infringement was willful and (2) the amount of statutory damages to be awarded. In instructing the jury, the court informed it of the statutory range Congress had established for willful and non-willful infringements and articulated a non-exhaustive list of factors it could consider in determining the damage award.

The jury found that Tenenbaum had willfully infringed each of Sony's thirty copyrighted works. The jury returned a damage award, within the statutory range, of $22,500 per infringement, which yielded a total award of $675,000.

Tenenbaum filed a post-trial motion seeking a new trial on various grounds^[2] or [660 F.3d 491] a reduction of the jury's award. Tenenbaum argued that although the jury's award fell within the statutory range prescribed by Congress, (1) common law remittitur was both available to the court and appropriate in this case, and (2) the award was excessive such that it violated due process. The court rejected Tenenbaum's arguments for a new trial.

Regarding the size of the award, the court declined to decide the common law remittitur issue, based on its assumption that Sony would not agree to a reduction of the award and that remittitur would only necessitate a new trial on the issue of damages, and that even after a new trial the same issue of constitutional excessiveness would arise, so, in its view decision on the issue was inevitable. The court itself then found that the award violated due process, over objections that it utilized an impermissible standard, and reduced the award from $22,500 per infringement to $2,250 per infringement for a total award of $67,500.

B. Factual Background

We recite the underlying facts in the light most favorable to the jury's verdict. Analysis Grp., Inc. v. Cent. Fl. Invs., Inc., 629 F.3d 18, 20 (1st Cir.2010).

1. The Music Recording Industry and Peer–to–Peer Networks

Plaintiffs are several of the largest recording companies in the United States, and engage in discovering, developing, and marketing music recording artists and distributing the musical works those artists record. They hold exclusive rights to copy and distribute various music recordings under United States copyright law, including the thirty recordings at issue in this case, and their primary source of revenue is the sale of those recordings.

Plaintiffs only sell copies of their copyrighted recordings for profit. They never sell licenses to their copyrighted works that include rights to upload recordings to the internet for public consumption. The value of such a blanket license would be enormous, as the grant of such a license would deprive the companies of their source of income and profits and essentially drive them out of business.^[3]

In the late 1990s, copyrighted music recordings, including those held by the plaintiffs, began to appear on file-sharing software called “peer-to-peer networks” without the authorization of the copyright holders.

Peer-to-peer networks enable individuals both to make digital files stored on their own computers available to other network users and to download such files from the computers of others. Files shared between users of these networks do not pass through a central computer, but are instead exchanged directly from one user's computer to another. Through the use of these peer-to-peer networks, the unauthorized and illegal downloading and distribution of copyrighted materials—especially music recordings—became commonplace. See Metro–Goldwyn–Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 919–20, 923, 125 S.Ct. 2764, 162 L.Ed.2d 781 (2005) (describing operation of peer-to-peer networks and noting that [660 F.3d 492] their advent has likely resulted in copyright infringement on a “staggering” scale). Because music recordings are loaded onto peer-to-peer networks in digital form, recordings downloaded from peer-to-peer networks are virtually indistinguishable from recordings purchased through lawful means, making enforcement difficult.

The proliferation of these networks from 1999 onward and the piracy they enable has had a significant negative impact on the recording industry. Between 1999 and 2008, the recording industry as a whole suffered a fifty percent drop in both sales and revenues, a figure plaintiffs attribute to the rise of illegal downloading. This reduction in revenues has, in turn, diminished recording companies' capacities to pursue, develop and market new recording artists. It also affected the companies' employees. The loss in revenues has resulted in a significant loss of industry jobs. Sony BMG Music Entertainment and Warner Music Group, for example, each have suffered a fifty percent reduction in workforce since 2000.

Shortly after peer-to-peer networks first appeared, plaintiffs acknowledged the threat they posed to their industry and initiated a broad campaign to address the illegal infringement of copyrighted materials. They started educating the public that downloading and distributing copyrighted songs over peer-to-peer networks constituted illegal copyright infringement. Plaintiffs also brought legal actions as part of their campaign, and initially targeted the proprietors of peer-to-peer networks, not the individuals who actually used those networks to illegally procure and distribute copyrighted materials. See, e.g., id. at 940, 125 S.Ct. 2764 (holding network may be held liable for copyright infringement undertaken by third party network users where network promotes such infringements even if network has other, legal uses). Although these litigation efforts succeeded at shutting down particular networks, individual infringers continued to engage in illegal conduct by finding new peer-to-peer networks through which to download copyrighted songs.

Consequently, record companies began to identify and pursue legal actions against individual infringers. The industry identified Internet Protocol (IP) addresses of users known to be engaged in a high volume of downloading and distributing copyrighted materials, and initiated lawsuits against those users. See Atl. Recording Corp. v. Heslep, No. 06–CV–132, 2007 WL 1435395 at *1–3 (N.D.Tex. May 16, 2007) (detailing recording industry's litigation efforts). These suits began in 2002 and were widely-publicized.^[4]

2. Tenenbaum's Conduct

Tenenbaum was an early and enthusiastic user of peer-to-peer networks to obtain and distribute copyrighted music recordings. He began downloading and distributing copyrighted works without authorization in 1999. In that year, he installed the Napster peer-to-peer network on his desktop computer at his family's home in Providence, Rhode Island. He used Napster both to download digital versions of copyrighted music recordings from other network users and to distribute to other users digital versions of copyrighted music recordings already saved on his own computer.

Because it enabled copyright infringement, see [660 F.3d 493] A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir.2001), the Napster network was shut down in 2001. This did not stop Tenenbaum from downloading and distributing copyrighted works; he instead began using other peer-to-peer networks for the same illegal purposes. These networks included AudioGalaxy, iMesh, Morpheus, Kazaa, and Limewire. Tenenbaum shifted to these other networks after Napster's termination despite his knowledge that Napster was forced to close on account of a lawsuit brought against it for copyright infringement.

Tenenbaum continued to download and distribute copyrighted materials through at least 2007. During that time span he accessed a panoply of peer-to-peer networks for these illegal purposes from several computers. From 1999 until 2002, he primarily downloaded and distributed copyrighted works to and from his desktop computer at his family's home in Providence. He left home to attend Goucher College in Baltimore, Maryland, in 2002, at which point he began using a laptop to download and distribute copyrighted works. Following his graduation from Goucher in 2006, he began using a second laptop for these purposes in tandem with his other computers. Over the duration of Tenenbaum's conduct, he intentionally downloaded thousands of songs to his own computers from other network users. He also purposefully made thousands of songs available to other network users. He did this in the period after lawsuits were brought, and publicized, against individuals who downloaded and distributed music without authorization. At one point in time in 2004 alone, Tenenbaum had 1153 songs on his “shared-directory” on the Kazaa network.^[5] Any of those files within Tenenbaum's shared directory could be easily downloaded by other Kazaa users. Although there was no way to determine the exact number of times other users had downloaded files from Tenenbaum's shared directory, it was frequent. Most of the networks Tenenbaum used had a “traffic tab” that informed him of the frequency with which other users were downloading his shared files. Tenenbaum regularly looked at the traffic tab, and he admitted it “definitely wasn't uncommon” for other users to be downloading materials from his computer.

Tenenbaum knew that his conduct, both his downloading and distribution, was illegal and received warnings the industry had started legal proceedings against individuals. He received several warnings regarding the potential liability his actions carried with them. While Tenenbaum was at Goucher College in 2002, his father, Dr. Arthur Tenenbaum, called him to warn him that his use of peer-to-peer networks to obtain and distribute music recordings was unlawful. Dr. Tenenbaum knew that his son was illegally downloading music because, prior to leaving for college, Tenenbaum had showed his father the array of songs that could be downloaded from the Kazaa network. After Dr. Tenenbaum became aware that lawsuits were being brought against individuals who used file-sharing programs to download and distribute music, he instructed Tenenbaum not to continue to engage in such conduct. Dr. Tenenbaum testified that, during their conversation, Tenenbaum did not appear [660 F.3d 494] concerned about the consequences of his actions. Despite his father's request, Tenenbaum continued his illegal activity.

Tenenbaum also received direct warnings from Goucher College. Each year Tenenbaum received a Goucher student handbook warning that using the college's network to download and distribute copyrighted materials was illegal, but he did so anyway. The handbook also warned that illegally downloading and distributing music files could subject the copyright infringer to up to $150,000 of liability per infringement, alerting Tenenbaum to his potential exposure for violating the law. The Fall 2003 handbook issued to Tenenbaum at the start of his sophomore year cautioned:

To avoid the risk of potential lawsuits due to copyright infringement, the college is advising students to carefully restrict the use of file sharing applications to material that is legal to share.... Persons found to be infringed may be held liable for substantial damages and attorneys fees. The law entitles a plaintiff to seek statutory damages of $150,000 for each act of willful infringement.... In addition, if you violate copyright law by engaging in file sharing, you may be subject to discipline and other applicable college policy.

Tenenbaum received handbooks containing similar language during each of his four years at Goucher, but was unfazed and continued.

Tenenbaum also knew the college took this seriously and had itself acted to stop this illegal activity. By the end of his undergraduate studies at Goucher, the school had implemented so many technological restrictions on its network—which he knew were designed to prevent illegal downloading of music files—that peer-to-peer programs “wouldn't work at all.”

The Tenenbaums' internet service provider at home in Providence, Cox Communications, also warned against using the internet to illegally infringe copyrighted materials. In 2003, for example, the terms of service they offered to their customers prohibited customers from using the internet service “to post, copy, transmit or disseminate any content that infringes the patents, copyrights, trade secrets, trademarks or proprietary rights of any party.” It further provided that “Cox assumes no responsibility, and you assume all risks regarding the determination of whether material is in the public domain or may otherwise be used by you for such purposes.”

In a September 2005 letter, plaintiffs themselves informed Tenenbaum that he had been detected infringing copyrighted materials and notified him that his conduct was illegal. The letter stated: “We are writing in advance of filing suit against you in the event that you have an interest in resolving these claims.”^[6] The letter urged Tenenbaum to consult with an attorney immediately, and explained that the recording companies were prepared to initiate a legal action against Tenenbaum because of the severe impact of his actions on the industry:

Copyright theft is not a victimless crime. People spend countless hours working hard to create music—not just recording artists and songwriters, but also session players, backup singers, sound engineers and other technicians. In addition, the music industry employ thousands of other people, such as CD-plant workers, warehouse personnel, record store clerks and developers of legitimate online music services. They all depend [660 F.3d 495] on sale of recordings to earn a living. So do record companies, which routinely invest millions of dollars to discover and sign promising artists, and then to produce and market their recordings. In addition, piracy eats away at the investment dollars available to fund new music and, in effect, erodes the future of music.The letter also instructed Tenenbaum to preserve any relevant evidence including “the entire library of recordings that you have made available for distribution as well as any recordings you have downloaded....”^[7]

The letter from Sony resulted in a conversation between Tenenbaum and his mother regarding his use of peer-to-peer networks. During that conversation, Tenenbaum claimed that it was “impossible ... to know” who was responsible for the infringements referenced in Sony's letter.

Despite these warnings and his knowledge that he was and had been engaging in illegal activity which could subject him to liability of up to $150,000 per infringement, Tenenbaum continued the illegal downloading and distribution of copyrighted materials until at least 2007—a full two years after receiving the letter from Sony. He stopped his activity only after this lawsuit was filed against him.

Strong evidence established that Tenenbaum lied in the course of these legal proceedings in a number of ways. In his initial responses to Sony's discovery requests, Tenenbaum represented he “had no knowledge or recollection of online media distribution systems used or any dates” of such use. He also denied creating or using the “sublimeguy 14@ kazaa” account name that he had used to access various peer-to-peer networks, and he denied any knowledge of whether a peer-to-peer network had been installed on his computer.

At trial, however, Tenenbaum admitted that each of these statements he had made was false. He made numerous admissions in his testimony as to the scope of his conduct from 1999 until 2007. He admitted to installing peer-to-peer networks on his computer, including Kazaa, Limewire, Audio Galaxy, iMesh, and Morpheus, so that he could download and upload music with “the least amount of wasted effort.” He admitted that he created the “sublimeguy 14@ kazaa” user account, downloaded songs from the networks using that account, and placed materials in shared folders on those networks so that other users could download the materials onto their own computers. On some occasions, he believed he was the first person to upload a particular music recording onto the network. He testified that he placed between 600 and 5,000 songs on the Goucher College peer-to-peer network for others to download. He further testified that he also copied illegally downloaded songs onto CDs and USB drives, both for personal use and to give to other individuals. He also explicitly admitted liability for downloading and distributing the thirty sound recordings at issue in the case.

Before the trial, Tenenbaum also attempted to shift responsibility for his conduct to other individuals by claiming they could have used his computer in order to illegally download and distribute the copyrighted works. These individuals included a foster child living in his family's home, burglars who had broken into the home, [660 F.3d 496] his family's house guest, and his own sisters. His sisters and others he blamed testified that they had never illegally downloaded music and had no knowledge of who installed the file sharing software on Tenenbaum's computer.

Finally, when asked at trial about his efforts to attribute the blame for his actions to others, Tenenbaum admitted his own responsibility: “I used the computer, I uploaded, I downloaded music, this is what I did, that's how it is, I did it.”

II. Tenenbaum's Challenges to the Constitutionality and Applicability of the Copyright Act

Tenenbaum presents three arguments that he is not subject to the Copyright Act. First, Tenenbaum argues that the Copyright Act is unconstitutional under Feltner v. Columbia Pictures Television, Inc., 523 U.S. 340, 118 S.Ct. 1279, 140 L.Ed.2d 438 (1998). Feltner held that the Seventh Amendment entitles a defendant to have a jury determine the amount of statutory damages under § 504(c), although Congress had provided that judges, not juries, would render statutory damage awards. He argues that Feltner somehow renders the statutory damages provision unconstitutional until Congress chooses to amend the statute.

Second, Tenenbaum argues that Congress did not intend the Act to impose either liability or statutory damages where the copyright infringements at issue amount to what he calls “consumer copying.”

Third, Tenenbaum argues that statutory damages are unavailable to Sony because, in his view, statutory damages, as a matter of Congressional intent, cannot be awarded absent a showing of actual harm, and he claims there was no harm.

We review such legal and constitutional questions de novo. United States v. S. Union Co., 630 F.3d 17, 24 (1st Cir.2010). None of these arguments has merit.

A. Constitutionality of the Copyright Act After Feltner

Tenenbaum did not clearly make the argument that Feltner renders 504(c) unconstitutional to the district court, and so it is waived. See Dillon v. Select Portfolio Servicing, 630 F.3d 75, 82 (1st Cir.2011).

Even were the argument not waived, it is both wrong and foreclosed by our circuit precedent. In Segrets, Inc. v. Gillman Knitwear Co., 207 F.3d 56 (1st Cir.2000), we considered Feltner's impact on a claim for statutory damages under § 504(c). We held that Feltner required remand to the district court so that a jury could determine both whether the infringements at issue were willful and the proper measure of statutory damages, necessarily rejecting any notion that statutory damages under § 504(c) were no longer available after Feltner. Id. at 63. We followed the same reasoning in Venegas–Hernandez v. Sonolux Records, 370 F.3d 183, 191–94 (1st Cir.2004) (interpreting and applying § 504(c) after Feltner ).

Our sister circuits have likewise concluded that Feltner did not render § 504(c) unconstitutional. See, e.g., BMG Music v. Gonzalez, 430 F.3d 888, 892–93 (7th Cir.2005) (upholding statutory damages award under § 504(c) despite claim that Feltner rendered such an award unconstitutional); Columbia Pictures Television, Inc. v. Krypton Broad. of Birmingham, Inc., 259 F.3d 1186, 1192 (9th Cir.2001) (rejecting argument that Feltner rendered “statutory damages provision of the Copyright Act ... unconstitutional in its entirety” and concluding Feltner “in no way implies that [660 F.3d 497] copyright plaintiffs are no longer able to seek statutory damages under the Copyright Act”).

This conclusion is also required by Supreme Court precedent. Where the Court has found a particular federal statute to deprive defendants of jury rights in violation of the Seventh Amendment,^[8] the Court has deemed the offending portions of the statute inoperative while leaving the statute otherwise intact. See, e.g., Tull v. United States, 481 U.S. 412, 417 n. 3, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987) (upholding enforceability of Clean Water Act even though “[n]othing in the language of the ... Act or its legislative history implies any congressional intent to grant defendants the right to a jury trial” and the Seventh Amendment required that defendants be given such a jury trial right).

B. The Copyright Act and “Consumer–Copier” and Publisher–Copier Copyright Infringement

Tenenbaum argues to us that Congress never intended for the Copyright Act to impose liability or statutory damages against what he calls “consumer copiers.” That argument was not presented to the district court and is waived.^[9]

Even were the argument not waived, it must fail. We start with the inaccuracy of the labels that Tenenbaum's argument uses. Tenenbaum is not a “consumer-copier,” a term he never clearly defines. He is not a consumer whose infringement was merely that he failed to pay for copies of music recordings which he downloaded for his own personal use. Rather, he widely and repeatedly copied works belonging to Sony and then illegally distributed those works to others, who also did not pay Sony. Further, he received, in turn, other copyrighted works for which he did not pay. Nor can Tenenbaum assert that his was merely a “non-commercial” use and distribution of copyrighted works as those terms are used elsewhere in the Act.^[10] His use and distribution was for private gain and involved repeated and exploitative copying. [660 F.3d 498] Our analysis begins with the language of the Act, which we “construe ... in its context and in light of the terms surrounding it.” Succar v. Ashcroft, 394 F.3d 8, 23 (1st Cir.2005) (quoting Leocal v. Ashcroft, 543 U.S. 1, 9, 125 S.Ct. 377, 160 L.Ed.2d 271 (2004)) (internal quotation marks omitted). “It is well established that, when the statutory language is plain, we must enforce it according to its terms.” Jimenez v. Quarterman, 555 U.S. 113, 118, 129 S.Ct. 681, 172 L.Ed.2d 475 (2009).

In addition to the factual inaccuracy of his labels, Tenenbaum's argument that the Copyright Act immunizes his conduct from liability is contradicted by the plain language of the statute. The Copyright Act does not make the distinctions he urges between “consumer” and “non-consumer” infringement of copyrighted materials by copying and distribution. Instead, the Act renders those, like Tenenbaum, who use or distribute a copyrighted work without authorization liable in copyright. Indeed, the Act does not use the term “consumer” at all, much less as a term excluded from the category of infringers. Rather, the statute refers to “anyone” as potential infringers. 17 U.S.C. § 501(a).

The Act explicitly grants owners of “works of authorship”^[11] exclusive rights to, inter alia, “reproduce the copyrighted work in copies or phonorecords” and “distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.” 17 U.S.C. § 106. By the plain language of § 106, copyright owners, like Sony, have the exclusive right to reproduce copyrighted works in copies or phonorecords and to distribute those copies or phonorecords.

The Copyright Act contains no provision that could be interpreted as precluding a copyright owner from bringing an action against an infringer solely because the infringer was a consumer of the infringed products or acted with a so-called noncommercial purpose in his distribution of the works to others. Apart from the reality that the facts of record support neither characterization, 17 U.S.C. § 501(a) provides that “ anyone who violates any of the exclusive rights of the copyright owner as provided by sections 106 through 122 ... is an infringer of the copyright.” (Emphasis added). Further, under 17 U.S.C. § 501(b), “the legal or beneficial owner of an exclusive right under a copyright is entitled ... to institute an action for any infringement of that particular right committed while he or she is the owner of it.” (Emphasis added). Had Congress intended to limit copyright actions against so-called “consumer infringers” as Tenenbaum hypothesizes, it easily could have done so. See Ali v. Fed. Bureau of Prisons, 552 U.S. 214, 227–28, 128 S.Ct. 831, 169 L.Ed.2d 680 (2008). Instead, subject to exceptions not relevant here, it extended liability to “ anyone ” who violates a copyright owner's exclusive rights and allowed those owners to pursue actions against “ any infringement.” 17 U.S.C. § 501 (emphasis added).

Moving from liability to damages, Tenenbaum's argument that statutory damages [660 F.3d 499] are not available here is also refuted by the plain statutory language. Section 504 provides that “ an infringer of copyright is liable for either ... the copyright owner's actual damages and any additional profits of the infringer ... or statutory damages.” (Emphasis added). The statute does not condition the availability of either set of damage calculations on whether the offending use was by a consumer or for commercial purposes or not.

Congress drew distinctions in the Copyright Act where it meant to do so. For example, it distinguished between willful and non-willful infringements, subjecting willful infringers to a higher cap on statutory damage awards. See 17 U.S.C. § 504(c).

Where Congress wanted the Act to draw distinctions based on the nature of the use it also did so explicitly, such as with the fair use defense. See 17 U.S.C. § 107 (providing for fair use limitation on owner's exclusive rights and identifying the “purpose and character of the use” including “whether such use is of a commercial nature or is for nonprofit educational purposes” as a factor to consider in determining applicability of fair use limitation).^[12]

Further, where Congress intended to create other exceptions for solely personal or non-commercial use, it did so expressly. In two amendments which do not apply here, it drew such distinctions: (1) the Sound Recording Act of 1971, Pub. L. No. 92–140, 85 Stat. 391, which fully extended federal copyright protections to sound recordings but exempted certain reproductions of sound recordings made for personal use, and (2) the Audio Home Recording Act of 1992 (AHRA), Pub. L. No. 102–563, 106 Stat. 4237, codified at 17 U.S.C. § 1001 et seq., which provided some exemptions in other situations from copyright liability for infringements “based on the noncommercial use by a consumer.”^[13] 17 U.S.C. § 1008.^[14] These statutes refute Tenenbaum's argument.

Because Congress has enumerated a set of express exceptions, rules of statutory interpretation instruct that Congress intended to make no other exceptions than those specified. See Tenn. Valley Auth. v. Hill, 437 U.S. 153, 188, 98 S.Ct. 2279, 57 L.Ed.2d 117 (1978) (finding under maxim expressio unius est exclusio alterius that enumerated exceptions are the sole exceptions intended within the Endangered Species Act); see also Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983) (“[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”) (quoting United States v. Wong Kim Bo, 472 F.2d 720, 722 (5th Cir.1972)) (internal quotation marks omitted).

[660 F.3d 500] The clarity of the statutory text compels the rejection of Tenenbaum's arguments. When a statute speaks with clarity to an issue, “judicial inquiry into the statute's meaning, in all but the most extraordinary circumstance, is finished.” Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 475, 112 S.Ct. 2589, 120 L.Ed.2d 379 (1992). It is not within the province of the courts to rewrite Congressional statutes: that task is “for Congress to accomplish by further legislation.” United States v. Harriss, 347 U.S. 612, 620, 74 S.Ct. 808, 98 L.Ed. 989 (1954); see also Logan v. United States, 552 U.S. 23, 26–27, 128 S.Ct. 475, 169 L.Ed.2d 432 (2007) (refusing to stray from statutory text).

Asking us to ignore the text and the plain meaning of the statute, Tenenbaum argues Congress was unaware that suits like this could be brought and so could not have intended the statute to apply here. The argument is wrong both on the law and on the facts.

Congress did contemplate that suits like this were within the Act. Congress last amended the Copyright Act in 1999 to increase the minimum and maximum awards available under § 504(c). See Digital Theft Deterrence and Copyright Damages Improvement Act of 1999, Pub. L. No. 106–160, 113 Stat. 1774. At the time, Congress specifically acknowledged that consumer-based, noncommercial use of copyrighted materials constituted actionable copyright infringement. Congress found that “copyright piracy of intellectual property flourishes, assisted in large part by today's world of advanced technologies,” and cautioned that “the potential for this problem to worsen is great.” H.R. Rep. No. 106–216, at 3 (1999), 1999 WL 446444, at *2. Indeed, the legislative history directly addresses this concern:

By the turn of the century the Internet is projected to have more than 200 million users, and the development of new technology will create additional incentive for copyright thieves to steal protected works. The advent of digital video discs, for example, will enable individuals to store far more material than on conventional discs and, at the same time, produce perfect secondhand copies.... Many computer users are either ignorant that copyright laws apply to Internet activity, or they simply believe that they will not be caught or prosecuted for their conduct. Also, many infringers do not consider the current copyright infringement penalties a real threat and continue infringing, even after a copyright owner puts them on notice that their actions constitute infringement and that they should stop the activity or face legal action. In light of this disturbing trend, it is manifest that Congress respond appropriately with updated penalties to dissuade such conduct. H.R. 1761 increases copyright penalties to have a significant deterrent effect on copyright infringement.

Id.^[15]

Even earlier, in 1997, Congress had explicitly amended the criminal component of [660 F.3d 501] the Copyright Act to make clear that criminal liability for copyright infringement can be imposed even if an infringer's use of a copyrighted material is noncommercial. See No Electronic Theft Act (NET Act), Pub. L. No. 105–147, 111 Stat. 2678. The NET Act was enacted in response to United States v. LaMacchia, 871 F.Supp. 535 (D.Mass.1994), in which a court had barred prosecution of a student charged with wire fraud because even though he enabled others to download copyrighted software applications at no cost, he received no commercial gain from his activities and the criminal statute precluded prosecution where there was no commercial benefit conferred.

Congress made clear that it enacted the NET Act to “criminalize[ ] computer theft of copyrighted works, whether or not the defendant derives a direct financial benefit from the act(s) of misappropriation, thereby preventing such willful conduct from destroying businesses, especially small businesses, that depend on licensing agreements and royalties for survival.” H.R. Rep. 105–339, at 5 (1997), 1997 WL 664424, at *5.

Tenenbaum's argument that we may ignore the plain language of the statute and Congressional intent because relatively few lawsuits were brought against those in his position also goes nowhere. Again, both the factual and legal contentions are wrong.

Even if we assume that copyright owners have historically chosen first to litigate against the providers of new technologies of reproduction and dissemination rather than the users of those new technologies, see Tussey, Technology Matters: The Courts, Media Neutrality, and New Technologies, 12 J. Intell. Prop. L. 427 (2005), that may best be explained by the owners using a cost-benefit analysis, and says nothing about Congressional intent. Historically, the costs of prosecuting infringement actions against individual users could be thought by owners to have exceeded the benefits. That the copyright owners have turned to litigation against individual infringers only underscores that the balance of the copyright holder's cost-benefit analysis has been altered as peer-to-peer networks and digital media become more prevalent.

In any event, the argument is legally irrelevant. The Supreme Court has expressly instructed that courts apply the Copyright Act to new technologies. In Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984), the Court instructed that courts must “[a]pply[ ] the copyright statute, as it now reads, to the facts as they have been developed” even though Congress might ultimately “take a fresh look at this new technology, just as it so often has examined other innovations in the past.” Id. at 456, 104 S.Ct. 774.

The Supreme Court has made clear that it is particularly important for courts to take this tack when faced with novel Copyright Act issues. “[F]rom its beginning, the law of copyright has developed in response to significant changes in technology,” and as “new developments have occurred in this country, it has been the Congress that has fashioned the new rules that new technology made necessary.” Id. at 430–31, 104 S.Ct. 774. We reject Tenenbaum's invitation to usurp Congress's legislative authority and to disregard binding Supreme Court precedent.

[660 F.3d 502] C. Statutory Damages under 17 U.S.C. § 504 and Actual Harm

Tenenbaum next argues that the statutory damages provision is nonetheless inapplicable because, in his view, as a matter of law there can be no statutory damages where “harm caused by a particular defendant has not been proved.” Again, he is wrong both as a matter of law and on the facts of record.

The district court properly rejected Tenenbaum's proffered interpretation of § 504. Section 504 clearly sets forth two alternative damage calculations a plaintiff can elect: actual damages and statutory damages. See 17 U.S.C. § 504(a) (providing that “an infringer of copyright is liable for either ... the copyright owner's actual damages and any additional profits of the infringer ... or statutory damages”) (emphasis added).

Under § 504(b), a plaintiff may elect to receive “the actual damages suffered by him or her as a result of the infringement, and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages.”

Alternatively, under § 504(c), “the copyright owner may elect, at any time before final judgment is rendered, to recover, instead of actual damages and profits, an award of statutory damages for all infringements involved in the action, with respect to any one work.” (Emphasis added). The statute makes clear that statutory damages are an independent and alternative remedy that a plaintiff may elect “instead of actual damages.”

Section 504's text reflects Congress's intent “to give the owner of a copyright some recompense for injury done him, in a case where the rules of law render difficult or impossible proof of damages or discovery of profits.” Douglas v. Cunningham, 294 U.S. 207, 209, 55 S.Ct. 365, 79 L.Ed. 862 (1935). The Supreme Court explained that before statutory damages were available, plaintiffs, “though proving infringement,” would often be able to recover only nominal damages and the “ineffectiveness of the remedy encouraged willful and deliberate infringement.” Id. The Supreme Court has since reaffirmed that “[e]ven for uninjurious and unprofitable invasions of copyright the court may, if it deems it just, impose a liability within statutory limits to sanction and vindicate the statutory policy.” F.W. Woolworth Co. v. Contemporary Arts, 344 U.S. 228, 233, 73 S.Ct. 222, 97 L.Ed. 276 (1952) (upholding statutory damage award of $5,000 for infringement even when actual damages of only $900 were demonstrated); see also L.A. Westermann Co. v. Dispatch Printing Co., 249 U.S. 100, 106, 39 S.Ct. 194, 63 L.Ed. 499 (1919) (finding the language chosen by Congress “shows that something other than actual damages is intended—that another measure is to be applied in making the assessment”).^[16]

Tenenbaum's argument also rests on the faulty assertion that Sony did not offer evidence of the harm it suffered as a result of Tenenbaum's conduct. Tenenbaum downloaded the thirty copyrighted works at issue and distributed those works to innumerable network users. Sony presented extensive testimony regarding the loss in value of the copyrights at issue that resulted from Tenenbaum's conduct, and the harm of Tenenbaum's actions to itself and the recording industry, including reduced [660 F.3d 503] income and profits, and consequent job loss to employees.

III.Tenenbaum's Challenges to the Jury Instructions

Tenenbaum challenges the district court's jury instructions on several grounds, all but one of which were not preserved for appeal, and all of which fail.

We review preserved challenges to jury instructions de novo, and “look to the challenged instructions in relation to the charge as a whole, ‘asking whether the charge in its entirety—and in the context of the evidence—presented the relevant issues to the jury fairly and adequately.’ ” Kennedy v. Town of Billerica, 617 F.3d 520, 529 (1st Cir.2010) (quoting Goodman v. Bowdoin Coll., 380 F.3d 33, 47 (1st Cir.2004)). Even if the instructions were erroneous, we reverse only if the error “is determined to have been prejudicial based on a review of the record as a whole.” Mass. Eye & Ear Infirmary v. QLT Phototherapeutics, Inc., 552 F.3d 47, 72 (1st Cir.2009).

Absent adequate objections to the instructions, our review is for plain error, which requires that Tenenbaum show (1) that there was error, (2) that it was plain, (3) that it likely altered the outcome, and (4) that it was sufficiently fundamental to threaten the fairness, integrity or public reputation of the judicial proceedings. Gray v. Genlyte Grp., Inc., 289 F.3d 128, 134 (1st Cir.2002); Estate of Keatinge v. Biddle, 316 F.3d 7, 16 (1st Cir.2002). “The standard is high, and ‘it is rare indeed for a panel to find plain error in a civil case.’ ” Diaz–Fonseca v. Puerto Rico, 451 F.3d 13, 36 (1st Cir.2006) (quoting Chestnut v. City of Lowell, 305 F.3d 18, 20 (1st Cir.2002) (en banc) (per curiam)).

A. Tenenbaum's Preserved Challenge to the District Court's Instruction as to the Statutory Damage Range Under § 504(c)

Tenenbaum's only preserved instructional challenge is that the district court erred by instructing the jury about the range of statutory damages available to Sony under § 504(c).^[17] The district court instructed the jury that “[t]he Copyright Act entitles a plaintiff to a sum of not less than $750 and not more than $30,000 per act of infringement (that is, per sound recording downloaded or distributed without license) as you consider just.” The court further instructed: “If you find that the defendant's infringement of a copyrighted work was willful, the Copyright Act entitles a plaintiff to a sum of not less than $750 and not more than $150,000 per act of infringement (that is, per sound recording downloaded or distributed without license), as you consider just.” The court then instructed as to a set of non-exhaustive factors that the jury might wish to consider in issuing its award, including:

the nature of the infringement; the defendant's purpose and intent, the profit that the defendant reaped, if any, and/or the expense that the defendant saved; the revenue lost by the plaintiff as a result of the infringement; the value of the copyright; the duration of the infringement; [660 F.3d 504] the defendant's continuation of infringement after notice or knowledge of copyright claims; and the need to deter this defendant and other potential infringers.Tenenbaum does not object to that portion of the instructions.

Tenenbaum argues that the statutory damage range should not have been disclosed to the jury and that the instructions presented the statutory damage range “unmoored from the overall statutory scheme and the context of other cases.” Tenenbaum proposes that instead the district court should only have instructed the jury to return an award the jury deemed “just” and then the court should have adjusted the award to fall within the statutory range after the jury made its determination. This argument is, of course, at considerable tension with Tenenbaum's argument that damages within the statutory range are unconstitutional.

The instruction given as to the statutory damage range was an accurate statement of the law and clearly informed the jury of the range of damages it could award under § 504(c). As such there was no error. See United States v. Mardirosian, 602 F.3d 1, 10 (1st Cir.2010) (upholding jury instructions because they “provided a clear, accurate description of the substantive law”).

It is commonplace for courts to explicitly instruct juries of the maximum and minimum statutory damage awards permitted under § 504(c). See, e.g., In re Frye, No. 08–1055, 2008 WL 8444822, at *3 (B.A.P. 9th Cir. Aug. 19, 2008) (noting jury awarded the statutory maximum under § 504(c)); Yurman Design, Inc. v. PAJ, Inc., 93 F.Supp.2d 449, 462 (S.D.N.Y.2000) (noting plaintiff elected to seek statutory damages, “and the jury was provided instructions concerning such damages”), rev'd in part on other grounds, 262 F.3d 101 (2d Cir.2001). Several model federal jury instructions also explicitly enumerate the range of statutory damages under 504(c). See, e.g., 3B K. O'Malley, J. Grenig & W. Lee, Federal Jury Practice and Instructions—Civil § 160.93 (5th ed. 2011) (including within model the instruction that “plaintiff ... has elected to recover ‘statutory damages' instead of plaintiff's actual damages and profits” and that “[u]nder the Copyright Act, plaintiff ... is entitled to a sum of not less than $750 or more than $30,000 as you consider just”); Ninth Circuit Manual of Model Civil Jury Instructions § 17.25 (including within model the instruction that the “amount you may award as statutory damages is not less than $750, nor more than $30,000 for each work you conclude was infringed”); Holbrook & Harris, ABA Model Jury Instructions: Copyright, Trademark, and Trade Dress Litigation § 1.7.7 (2008) (same). Each set of model jury instructions also notes that the maximum statutory damage award under § 504(c) is increased if the defendant's copyright infringement is determined to be willful. Cf. Fraser v. Major League Soccer, L.L.C., 284 F.3d 47, 62 (1st Cir.2002) (noting that district court's instructions tracked ABA model jury instructions in rejecting objection to instructions).

There is no viable argument that the instruction violated Congressional intent. Where Congress has sought to prevent juries from knowing that their awards will be reduced to be within statutory caps, it has explicitly said so in the relevant statute. See, e.g., 42 U.S.C. § 1981a(c)(2) (providing that “the court shall not inform the jury of the limitations” on awards of damages in intentional employment discrimination cases under Title VII). There is no such prohibition here.

Tenenbaum nonetheless argues that because Congress initially enacted the statute on the understanding that judges, not juries, would award statutory damages, it [660 F.3d 505] must be error to tell the jury what the limits are.^[18] He also argues that the Supreme Court “failed to provide any structure for guiding the jury's use of the wide power shifted to it” within its holding in Feltner that the Seventh Amendment entitles a defendant to have a jury determine the amount of § 504(c) damages. Feltner, however, raises no objection to a jury's being informed of the statutory range. In any case, this argument is simply a variant of Tenenbaum's claim that Feltner somehow renders § 504(c) inoperable, which we have already rejected.

Moreover, after Feltner, had Congress wished to prevent juries from being informed of the bottom and top ranges of permissible statutory damages, it easily could have done so. Instead, Congress amended the statute after Feltner to expand the range of damages, and did so without placing any limitation as to how courts should instruct juries in such cases. See Digital Theft Deterrence and Copyright Damages Improvement Act of 1999, Pub. L. No. 106–160, 113 Stat. 1774.

The district court's instructions on the range of statutory damages were not erroneous, let alone prejudicial.

B. Tenenbaum's Remaining Challenges to the Jury Instructions

Tenenbaum raises a series of unpreserved additional objections to the jury instructions which we review for plain error.

1. The Unpreserved Challenge that the District Court Should Have First Determined then Instructed the Jury on the Court's Assessment of Constitutional Limits on the Award

Tenenbaum argues that the district court erred by only instructing the jury as to the statutory boundaries for the damages award and failing, sua sponte, to inform the jury of the constitutional boundaries for the award. Tenenbaum asked for no such instruction, and the argument is waived. Even had the argument not been waived, there was no error.

Inherent in his argument is the proposition that before a case goes to the jury, the trial court must make its own assessment of the constitutional limits on damages and so instruct the jury. That is exactly backwards. See St. Louis, I.M. & S. Ry. Co. v. Williams, 251 U.S. 63, 66–67, 40 S.Ct. 71, 64 L.Ed. 139 (1919) (considering constitutional limits on statutory damage award after jury issued award). Tenenbaum's proposal itself could raise Seventh Amendment concerns about judicial usurpation of the jury's function. There was no error.

2. The Unpreserved Argument that the District Court Was Required to Instruct the Jury Not to Consider Injury Suffered by Other Recording Companies or Injuries Caused by Copyright Infringers Other Than Tenenbaum

The district court properly instructed the jury on Tenenbaum's conduct and the plaintiffs' harms the jury could consider in making its determination. It specifically listed the nature of Tenenbaum's infringement, Tenenbaum's purpose and intent, the “revenue lost by the plaintiff as a result of the infringement,” the duration of the infringement, and the defendant's continuation of infringement after learning of the copyright claims.

Tenenbaum argues that the district court sua sponte should have provided additional [660 F.3d 506] instruction to focus the jury. Again, the argument is waived. Even were it not waived, the court did not err. Tenenbaum appears to be arguing that the jury also had to be told it could not consider damages resulting from the illegal downloading and distribution of copyrighted materials suffered by other recording companies besides the named plaintiffs or from other unrelated filesharing by others.^[19] This is a hypothetical concern, not a real one in this case.

Tenenbaum purports to rely on language in Philip Morris USA v. Williams, 549 U.S. 346, 357, 127 S.Ct. 1057, 166 L.Ed.2d 940 (2007), that where there is a significant risk that the jury might take into account harm caused to non-party victims by the defendant, “a court, upon request, must protect against that risk.” (Emphasis added). Tenenbaum made no such request to the trial court.^[20] Nor does he point to any authority that requires a court to provide a Philip Morris-type instruction sua sponte.

Philip Morris does not help him, in any event. There was not a substantial risk of the jury's going astray. The court's entirely correct instruction foreclosed that risk. The jury was never urged to consider damages (1) caused by other copyright infringers or (2) suffered by other recording companies. Indeed, in his closing argument, Tenenbaum's counsel made clear that “it's what Joel did that is here in issue and [the question is] what's appropriate in response to what Joel did,” and Sony's counsel likewise stated that applying damages for “what Joel did” was “exactly what we want you to do.” The court's jury instructions as a whole focused exclusively on Tenenbaum's actions and the resulting harm to the plaintiffs.

3. The Unpreserved Argument that the District Court Was Sua Sponte Required to Additionally Instruct that Statutory Damages Could Not Be Awarded Unless They Were Related to Actual Damages

The district court did instruct the jury to issue an award within the statutory range that it deemed to be just, and highlighted a number of factors it could use for guidance. Tenenbaum argues that the district court erred by failing, sua sponte, to add an additional instruction that as a matter of law statutory damages cannot be awarded unless reasonably related to actual damages.

[660 F.3d 507] Tenenbaum's argument fails the first step of the plain error analysis. His proposed instruction itself would have been error. In § 504, Congress drew a plain distinction between actual and statutory damages, making it clear that the availability of statutory damages is not contingent on the demonstration of actual damages. See 17 U.S.C. § 504. Statutory damages are available even for “uninjurious and unprofitable invasions of copyright.” F.W. Woolworth Co., 344 U.S. at 233, 73 S.Ct. 222.

We join our sister circuits, who have rejected similar objections to jury instructions. See New Form, Inc. v. Tekila Films, Inc., 357 Fed.Appx. 10, 11–12 (9th Cir.2009) (“There is no required nexus between actual and statutory damages under 17 U.S.C. § 504(c).”); Superior Form Builders, Inc. v. Dan Chase Taxidermy Supply Co., 74 F.3d 488, 496–97 (4th Cir.1996); see also Lowry's Reports, Inc. v. Legg Mason, Inc., 302 F.Supp.2d 455, 460 (D.Md.2004) (rejecting argument that court should have instructed the jury “that the amount of statutory damages should bear a reasonable relationship to actual damages”).

4. The Unpreserved Argument that the District Court Erred in Instructing the Jury that Finding Willful Infringement Under § 504 Only Requires a Finding that a Defendant Knowingly Infringed Copyrighted Materials

Finally, Tenenbaum challenges the district court's instruction that “willful infringement” “means that a defendant had knowledge that his actions constituted copyright infringement or acted with reckless disregard for the copyright holder's rights.” The argument is wrong and is based on a misreading of the statute.

Tenenbaum argues that, as used in § 504, a “willful infringement” must require more than a showing that the defendant had knowledge his actions constituted copyright infringement. He argues this must be so because non-willful infringement itself requires the defendant to have had such knowledge. As a result, merely requiring that an infringement be “knowing” to be “willful” would eliminate the distinction between non-willful and willful infringements that Congress sought to create in enacting § 504.

Tenenbaum's argument rests on the false premise that knowledge is an element of non-willful copyright infringement under the Copyright Act. To the contrary, the Act contains no requirement that a particular violation of copyright be knowing to constitute a non-willful infringement.^[21] See 17 U.S.C. § 501; see also Fitzgerald Publ'g Co. v. Baylor Publ'g Co., 807 F.2d 1110, 1113 (2d Cir.1986) (“Under § 501(a) intent or knowledge is not an element of infringement.”).

We join our sister circuits who have unanimously and routinely found that an infringement is willful under § 504 if it is “knowing.” See, e.g., [660 F.3d 508] Bridgeport Music, Inc. v. UMG Recordings, Inc., 585 F.3d 267, 278 (6th Cir.2009) (rejecting challenge to jury instruction that, under § 504(c), “[a]n infringement is willful when a defendant engaged in acts that infringed a copyright and knew that those actions may infringe the copyright”) (alteration in original); Zomba Enters., Inc. v. Panorama Records, Inc., 491 F.3d 574, 584 (6th Cir.2007); Lyons P'ship, L.P. v. Morris Costumes, Inc., 243 F.3d 789, 799–800 (4th Cir.2001). Cf. Yurman Design, Inc., 262 F.3d at 111 (finding plaintiff is “not required to show that the defendant had knowledge that its actions constitute[d] an infringement” for infringement to be willful under § 504(c) so long as defendant recklessly disregarded the risk of infringement) (citation omitted) (internal quotation marks omitted).

The district court correctly instructed the jury. There was no error as to the finding of liability against Tenenbaum.

IV.The District Court's Bypassing of Common Law Remittitur and Reducing the Award on Disputed Constitutional Grounds

After handling the trial with great skill, the district court committed reversible error when, after the jury awarded statutory damages, it bypassed the issue of common law remittitur, and instead resolved a disputed question of whether the jury's award of $22,500 per infringement violated due process, and decided itself to reduce the award. The court declined to adhere to the doctrine of constitutional avoidance on the ground that it felt resolution of a constitutional due process question was inevitable in the case before it. A decision on a constitutional due process question was not necessary, was not inevitable, had considerable impermissible consequences, and contravened the rule of constitutional avoidance. That rule had more than its usual import in this case because there were a number of difficult constitutional issues which should have been avoided but were engaged.

Facing the constitutional question of whether the award violated due process was not inevitable. The district court should first have considered the non-constitutional issue of remittitur, which may have obviated any constitutional due process issue and attendant issues. Had the court ordered remittitur of a particular amount, Sony would have then had a choice. It could have accepted the reduced award. Or, it could have rejected the remittitur, in which case a new trial would have ensued. See 11 Wright, Miller & Kane, Federal Practice and Procedure § 2815, at 160 (2d ed. 1995).

In reaching and deciding that due process constitutional question, the district court also unnecessarily decided several related constitutional issues. The court determined that the statutory damage award was effectively a punitive damage award for due process purposes and applied the factors set forth in BMW v. Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996), to assess its constitutionality. The court declined to apply the Williams standard the Supreme Court had previously applied to statutory damage awards. See Tenenbaum, 721 F.Supp.2d at 103. The district court's tack also led to unnecessary resolution of Seventh Amendment issues. The decision to reduce the jury's award without offering Sony a new trial implicitly presupposed that, in reducing a statutory damage award issued by a jury, a court need not offer plaintiffs the option of a new jury trial in order to comport with the Seventh Amendment.

The United States, concerned with defending the constitutionality of the Copyright Act and its statutory damage provision, [660 F.3d 509] argues that the district court erred by unnecessarily reaching Tenenbaum's constitutional challenge to the award and bypassing the question of common law remittitur.^[22] The United States alternatively argues that, if the due process issue were reached, the district court was required to apply the Williams due process standard. The United States points out an inferior federal court may not displace the Supreme Court's on point holding. The United States also raises Seventh Amendment concerns.

We agree with the position of the United States that the district court erred when it prematurely reached a constitutional question of whether the jury's award was excessive so as to violate due process. We reverse the reduction of the award, reinstate the original jury verdict and award, and remand for consideration of the common law remittitur question.

A. District Court Damages Proceedings

We provide a more detailed review of the relevant district court proceedings.

After the jury verdict awarding Sony $22,500 per infringement, Tenenbaum filed a motion for a new trial or remittitur pursuant to Federal Rule of Civil Procedure 59. Absent a grant of a new trial, he sought remittitur to the statutory minimum. Tenenbaum argued the court should use the standard that remittitur is appropriate where the result of the award is “grossly excessive, inordinate, shocking to the conscience of the court, or so high that it would be a denial of justice to permit it to stand.” Correa v. Hosp. S.F., 69 F.3d 1184, 1197 (1st Cir.1995) (quoting Segal v. Gilbert Color Sys., Inc., 746 F.2d 78, 81 (1st Cir.1984)) (internal quotation marks omitted). Tenenbaum separately argued the award was unconstitutionally excessive under the standard for reviewing punitive damage awards articulated in Gore.

Sony opposed, arguing there was no factual basis for a remittitur given both the evidence and that the evidence had to be taken in the light most favorable to the prevailing party. See E. Mountain Platform Tennis, Inc. v. Sherwin–Williams Co., 40 F.3d 492, 502 (1st Cir.1994). It also argued that the district court lacked authority to displace a jury verdict which was in the statutory range set by Congress and that to hold otherwise would violate the Seventh Amendment. With regard to Tenenbaum's due process arguments, Sony argued that Williams set forth the proper standard, and not Gore. Sony also argued that under either the Williams or Gore standards, the award was not unconstitutionally excessive.

The United States took a different approach. It took no position on whether Tenenbaum had met the standard for remittitur (or a new trial). Rather, the United States stated that the canon of constitutional avoidance required the district court to first consider the question of common law remittitur, regardless of whether the award merited remittitur or not. If the court did address the constitutional question, the United States argued that the standard set forth in Williams was appropriate [660 F.3d 510] and that the court should reject the Gore guideposts for assessing punitive damages because punitive damages are a distinct remedy from statutory damages. The United States also took the position that an award within the Copyright Act's statutory damage range comported with due process.

At the hearing on Tenenbaum's motion, the court asked counsel for plaintiffs to hypothesize as to what his clients' position would be if the court were to order a reduction or remittitur of the award. Understandably, plaintiffs' counsel did not take a firm position; he said his clients would have to consider the amount and other factors but thought it unlikely such a remittitur would be acceptable. If there were a remittitur, then, he said, the court could not reach the due process question of an excessive award because to do so would deprive plaintiffs of their Seventh Amendment right to a jury trial. Plaintiffs also argued that on the evidence, there was no basis for remittitur.

At that hearing, the United States repeated its position that the court was required to decide the remittitur question first in order to avoid any constitutional issues and that if plaintiffs rejected remittitur, the remedy was a new trial; the court could not go on to decide a constitutional due process issue as to the award. If the court did decide a constitutional due process issue as to the excessiveness of the award, the government argued, it was required to apply Williams, which had not been overruled.

Rejecting the position of the United States, the court bypassed remittitur, reached a constitutional due process issue, and ruled the award excessive under Gore. It reduced the award from $675,000 to $67,500 and did not give plaintiffs the option of a new trial.

The court stated its reason for bypassing the decision on common law remittitur. It treated plaintiffs' statements at the hearing as foreclosing any possibility of plaintiffs accepting remittitur, regardless of what amount the court might set for the award and despite plaintiffs' stated and careful reservations on the point. See Tenenbaum, 721 F.Supp.2d at 88. From this, the court reasoned that a new trial was inevitable; it then assumed that a jury would inevitably award a damages sum which would lead Tenenbaum to again raise a constitutional excessiveness challenge, and that the court which heard the new trial would then have to consider those and other objections again.^[23] Id. From these assumptions, the court reasoned it might as well decide those issues then and there.^[24] Id.

B. The District Court Erred by Unnecessarily Reaching and Deciding the Question of Whether the Jury's Award Was Unconstitutionally Excessive

The principle of constitutional avoidance, rooted in Article III as well as in principles of judicial restraint, and in this case implicating the Due Process Clause and [660 F.3d 511] the Seventh Amendment right to jury trial, governs both this court and the district court and requires that we vacate and remand.

It is bedrock that the “long-standing principle of judicial restraint requires that courts avoid reaching constitutional questions in advance of the necessity of deciding them.” Lyng v. Nw. Indian Cemetery Protective Ass'n, 485 U.S. 439, 445, 108 S.Ct. 1319, 99 L.Ed.2d 534 (1988); see also Camreta v. Greene, ––– U.S. ––––, 131 S.Ct. 2020, 2031, 179 L.Ed.2d 1118 (2011) (noting rule that courts must avoid resolving constitutional questions unnecessarily). “[P]rior to reaching any constitutional questions, federal courts must consider nonconstitutional grounds for decision.” Buchanan v. Maine, 469 F.3d 158, 172 (1st Cir.2006) (quoting Gulf Oil Co. v. Bernard, 452 U.S. 89, 99, 101 S.Ct. 2193, 68 L.Ed.2d 693 (1981)) (internal quotation marks omitted). No valid reason justified abandonment of this doctrine in this case. The abandonment of the rule instead thrust the case into a thicket of constitutional issues it was not necessary to enter.

It was not necessary for the district court to reach the constitutional question of whether the jury's award of $22,500 per infringement was so excessive as to violate due process. If the district court had ordered remittitur, there would have been a number of possible outcomes that would have eliminated the constitutional due process issue altogether, or at the very least materially reshaped that issue.

The issue of whether the award violated due process and the Seventh Amendment issue would both have been eliminated if remittitur had been ordered and Sony had accepted the remitted award. Alternatively, if remittitur had been ordered but Sony had declined the remitted award, a new trial would have ensued. The jury could have issued an award that would not have led Tenenbaum to again seek a reduction on either common law remittitur or due process grounds.

Even if Sony had declined any remitted award given and opted for a new trial, even if a different jury issued a comparable award, and even if Tenenbaum once again moved to reduce the award on constitutional grounds, it was still premature for the court to reach the constitutional question before that process had been carried out. A new trial could have materially reshaped the nature of the constitutional issue by altering the amount of the award at issue or even the evidence on which to evaluate whether a particular award was excessive.

In this way, reaching the constitutional question before ordering remittitur not only contravened the doctrine of constitutional avoidance, it also led the court to address questions that had not yet been fully developed. Federal courts do not answer such hypothetical questions. See Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 241, 57 S.Ct. 461, 81 L.Ed. 617 (1937) (Under Article III, judicial power is constrained to “real and substantial controvers[ies] admitting of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts”); see also Bisbal–Ramos v. City of Mayaguez, 467 F.3d 16, 27 (1st Cir.2006) (vacating district court's reduction of compensatory damages, remanding so that court may issue remittitur, and refusing to address constitutionality of punitive damage award because, upon remand, plaintiff might opt for a new trial and “it would be premature ... to approve a punitive damages award based on the compensatory award from the first trial”).

[660 F.3d 512] The path the court chose unnecessarily embroiled it in several issues of a constitutional dimension. The first was whether the due process standard for statutory damage awards articulated by the Supreme Court in Williams was applicable. The next was whether, if there was leeway and reason to bypass the Williams standard, the Gore standard, some combination of Williams and Gore, or some other standard should be used to evaluate whether the statutory damage award violated due process. We briefly describe the two due process standards to demonstrate the nature of the question to be avoided.

In Williams, the Supreme Court considered a challenge to an Arkansas statute that subjected railroads to penalties of “not less than fifty dollars, nor more than three hundred dollars and costs of suit,” for each offense of charging passengers fares that exceeded legal limits. See Williams, 251 U.S. at 64, 40 S.Ct. 71 (quoting Act April 4, 1887 (Laws 1887, p. 227; Kirby's Digest, 1904, § 6620); Act March 4, 1915 (Laws 1915, p. 365; Kirby & Castle's Digest, 1916, § 8094)) (internal quotation marks omitted). After the St. Louis, I.M. & S. Railroad collected a fare from two passengers of 66 cents more than the law allowed, the passengers brought suit pursuant to the statute. Id. at 63, 40 S.Ct. 71. Each passenger obtained a judgment of 75 dollars plus fees—an award, like the jury's award at issue here, well within the statutory range. Id. The railroad challenged the statutory award as unconstitutionally excessive under the Due Process Clause. Id.

The Court acknowledged that the Due Process Clause “places a limitation upon the power of the states to prescribe penalties for violations of their laws,” but noted that “States still possess a wide latitude of discretion in the matter.” Id. at 66, 40 S.Ct. 71. This is so, the court reasoned, because “the power of the State to impose fines and penalties for a violation of its statutory requirements is coeval with government; and the mode in which they shall be enforced, whether at the suit of a private party, or at the suit of the public, and what disposition shall be made of the amounts collected, are merely matters of legislative discretion.” Id. (quoting Mo. Pac. Ry. Co. v. Humes, 115 U.S. 512, 523, 6 S.Ct. 110, 29 L.Ed. 463 (1885)) (internal quotation marks omitted).

Given the latitude conferred upon legislatures to impose statutory penalties, the Court rejected the railroad's due process argument. The Court articulated that a statutory damage award violates due process only “where the penalty prescribed is so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.” Id. at 66–67, 40 S.Ct. 71.

Gore and its progeny address the related but distinct issue of when a jury's punitive damage award is so excessive as to violate due process. See Gore, 517 U.S. at 574, 116 S.Ct. 1589. The Court, animated by the principle that due process requires that civil defendants receive fair notice of the severity of the penalties their conduct might subject them to, id., identified three factors to guide a court's consideration of whether a punitive damage award is so excessive as to deprive a defendant of due process: (1) the degree of reprehensibility of the defendant's conduct, id. at 575–80, 116 S.Ct. 1589, (2) the ratio of the punitive award to the actual or potential harm suffered by the plaintiff, id. at 580–83, 116 S.Ct. 1589, and (3) the disparity between the punitive award issued by the jury and the civil or criminal penalties authorized in comparable cases, id. at 583–85, 116 S.Ct. 1589.

In Copyright Act award cases, there are many questions regarding the relationship [660 F.3d 513] between Gore's guideposts for reviewing punitive damage awards and the Williams standard for reviewing statutory damage awards. One is the relationship between the purposes of statutory damages under the Copyright Act as opposed to the purpose of punitive damages. Another concerns the limits or contours of possible ranges of awards under the different standards. Further, both Williams and Gore concerned limitations on state-authorized awards of damages, and did not concern Congressionally set awards of damages, which Congress is authorized to do under its Article I powers. This fact in turn raises concerns about intrusion into Congress's power under Article 1, Section 8 of the Constitution.

We note that in Gore, the Supreme Court did not overrule Williams. See Rivers v. Roadway Express, Inc., 511 U.S. 298, 312, 114 S.Ct. 1510, 128 L.Ed.2d 274 (1994) (hierarchical relationship of Supreme Court to lower courts mandates that where “the Court has spoken, it is the duty of other courts to respect that understanding of the governing rule of law”). Nor has the Supreme Court to date suggested that the Gore guideposts should extend to constitutional review of statutory damage awards. The concerns regarding fair notice to the parties of the range of possible punitive damage awards present in Gore are simply not present in a statutory damages case where the statute itself provides notice of the scope of the potential award. And the only circuit court of which we are aware to directly address the issue declined to apply Gore in this context and instead applied the Williams test. See Zomba Enters., Inc. v. Panorama Records, Inc., 491 F.3d 574, 587 (6th Cir.2007). Cf. Parker v. Time Warner Entm't Co., 331 F.3d 13, 22 (2d Cir.2003) (suggesting, in dicta, that Gore might govern due process review of statutory damage awards).

Had the district court ordered remittitur and not reached the constitutional question, it would not have needed to consider these issues or determine the relevant standard for assessing the constitutionality of a Copyright Act statutory damage award.

A decision based on remittitur, under which a new trial must be granted if plaintiffs do not accept the remitted award, also would have avoided another complicated constitutional question, which we describe briefly.

That issue arises under the Seventh Amendment, and is whether a statutory damage award under the Copyright Act may be reduced without offering the plaintiffs a new trial.^[25] Neither this court nor the Supreme Court has directly addressed the issue, but the Court's Feltner decision must be taken into account.

The usual rule for a general damage award is that a court may not reduce a jury's verdict and effectively impose a remittitur without affording a plaintiff “the option of a new trial when it enter[s] judgment for the reduced damages.” Hetzel v. Prince William Cnty., 523 U.S. 208, 211, 118 S.Ct. 1210, 140 L.Ed.2d 336 (1998); see also Dimick v. Schiedt, 293 U.S. 474, 486–87, 55 S.Ct. 296, 79 L.Ed. 603 (1935) (affirming remittitur power of courts but noting that where a verdict is set aside, the parties retain their right to have a jury determine the measure of damages); Kennon v. Gilmer, 131 U.S. 22, 29, 9 S.Ct. 696, 33 L.Ed. 110 (1889) (finding that under the [660 F.3d 514] Seventh Amendment a court has no authority to reexamine facts determined by a jury, or to enter “according to its own estimate of the amount of damages which the plaintiff ought to have recovered ... an absolute judgment for any other sum than that assessed by the jury”). Citing Hetzel, we have held a trial court's reduction in compensatory damages must, to avoid Seventh Amendment error, allow the plaintiff a new trial. Bisbal–Ramos, 467 F.3d at 26 (reversing and remanding for consideration of remittitur where trial court had reduced compensatory damages without offering plaintiffs new trial).

By contrast, there is law indicating that a punitive damage award may be reduced on due process grounds (without offering plaintiffs a new trial) without running afoul of the Seventh Amendment. The Supreme Court's punitive damages jurisprudence suggests as much, but the question has not been directly addressed by the Court. See State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003) (finding punitive damage award violated due process); Gore, 517 U.S. 559, 116 S.Ct. 1589 (same). Some circuits, including our own, have found that “a court may reduce an excessive award of punitive damages without giving the plaintiff the option of a new trial.” Bisbal–Ramos, 467 F.3d at 27 (collecting cases); see also Mendez–Matos v. Municipality of Guaynabo, 557 F.3d 36, 52 (1st Cir.2009) ( “If we find an award ‘grossly excessive,’ we may ascertain the amount of punitive award that is appropriate and order the district court to enter judgment in such amount.”). But neither Bisbal–Ramos nor Mendez–Matos decided the question as to a statutory damages award.^[26]

In bypassing remittitur and reducing the jury's award without offering Sony a new trial, the district court assumed that statutory damage awards should be treated largely as punitive, not compensatory, awards for Seventh Amendment purposes. But statutory damages, unlike punitive damages, have both a compensatory and punitive element. See 17 U.S.C. § 504(c); Feltner, 523 U.S. at 352, 118 S.Ct. 1279 (“[A]n award of statutory damages [under § 504(c) ] may serve purposes traditionally associated with legal relief, such as compensation and punishment.”); F.W. Woolworth Co., 344 U.S. at 233, 73 S.Ct. 222 (“The statutory rule, formulated after long experience, not merely compels restitution of profit and reparation for injury but also is designed to discourage wrongful conduct.”).

Further, the Supreme Court's analysis of a different Seventh Amendment issue in Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 437, 121 S.Ct. 1678, 149 L.Ed.2d 674 (2001) suggests that punitive damage awards do not implicate the Seventh Amendment for reasons that do not apply to statutory damage awards. In Cooper, the Court observed that the Seventh Amendment provides only that “no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law,” U.S. Const. amend. VII (emphasis added), and reasoned that “the level of punitive damages is not really a ‘fact’ ‘tried’ by the jury,” Cooper Indus., 532 U.S. at 437, 121 S.Ct. 1678 (quoting Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 459, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996) (Scalia, J., dissenting)) (internal quotation mark omitted). But statutory damage awards are different. In Feltner, [660 F.3d 515] the Supreme Court determined that “the Seventh Amendment provides a right to a jury trial on all issues pertinent to an award of statutory damages under § 504(c) of the Copyright Act, including the amount itself.” Feltner, 523 U.S. at 355, 118 S.Ct. 1279.

The point here is not for us to decide these issues, but merely to describe them to show the importance of adherence to the doctrine of constitutional avoidance. The courts of appeals are likewise bound by that doctrine, and we are required to apply it here.^[27]

V. Conclusion

This was a difficult and contentious case and the parties received a fair trial from an admirably patient and able district judge.

We affirm the finding of liability against Tenenbaum and in favor of plaintiffs. We affirm the injunctive relief. We have, inter alia, rejected Tenenbaum's arguments that the Copyright Act is unconstitutional under Feltner, 523 U.S. 340, 118 S.Ct. 1279, that the Act exempts so-called “consumer copying” infringement from liability and damages, that statutory damages under the Act are unavailable without a showing of actual harm, that the jury's instructions were in error, and his various trial error claims.

We vacate the district court's due process damages ruling and reverse the reduction of the jury's statutory damages award. We reinstate the jury's award of damages and remand for consideration of defendant's motion for common law remittitur based on excessiveness.^[28]

If, on remand, the court allows any reduction through remittitur, then plaintiffs must be given the choice of a new trial or acceptance of remittitur.

So ordered.

Costs are awarded to plaintiffs.

[1] Tenenbaum argued that the statutory damages available under 17 U.S.C. § 504(c) are excessive so as to violate due process, and that the Copyright Act effectively creates an unconstitutional delegation of prosecutorial functions by creating a private right of action to enforce copyright protections. The second argument is not made on appeal.

[2] He argued a new trial should be granted on the grounds that the court had erred in rejecting Tenenbaum's fair use defense; that the court erred in its evidentiary ruling to exclude portions of a November 2005 letter from Tenenbaum in which he offered to destroy any illegally downloaded files as part of settlement negotiations; that the court's jury instructions were improper, primarily because they informed the jury of the statutory range for damages; and that statutory damages should not be available to Sony because Sony never offered evidence that they suffered more than nominal damages.

[3] A representative of Universal Music Group testified, “If the suggestion is that we could somehow give these [recordings] to people and tell them, do with them what you will, we lose complete control over our assets, we cannot make money off those assets, and that defeats the whole purpose of our existence.”

[4] We are aware of only one other action against an individual that has proceeded to trial. See Capitol Records, Inc. v. Thomas–Rasset, No. 06–1497, 799 F.Supp.2d 999, 2011 WL 3211362 (D.Minn. July 22, 2011).

[5] MediaSentry, the third party firm that Sony retained to identify individuals engaged in the illegal downloading and distribution of copyrighted recordings, discovered the 1153 songs in Tenenbaum's Kazaa shared-directory on August 10, 2004. MediaSentry then downloaded portions of 1148 of the 1153 files and verified that the files were the actual songs identified in each file's title, and that Tenenbaum had actually made copyrighted materials available for unauthorized copying.

[6] Tenenbaum contacted Sony as a result of the letter. While there were some settlement discussions, the parties were unable to resolve the matter.

[7] After receiving this letter, Tenenbaum nonetheless took his laptop computer for repairs and had its operating system reinstalled and its hard drive reformatted. At trial, Tenenbaum maintained that he only had work done on the computer because “the thing wouldn't run,” and that he instructed the computer repairman not to tamper with the music files stored on his computer.

[8] It is also clear that Congress continues to intend that the Copyright Act be fully operational as to statutory damages after Feltner. Congress amended § 504(c) after the Supreme Court had decided Feltner. See Digital Theft Deterrence and Copyright Damages Improvement Act of 1999, Pub. L. No. 106–160, 113 Stat. 1774 (amendment increasing the statutory damage boundaries). “Congress is presumed to be aware of ... [a] judicial interpretation of a statute and to adopt that interpretation if it re-enacts a statute without change.” Forest Grove Sch. Dist. v. T.A., 557 U.S. 230, 129 S.Ct. 2484, 2492, 174 L.Ed.2d 168 (2009) (quoting Lorillard v. Pons, 434 U.S. 575, 580, 98 S.Ct. 866, 55 L.Ed.2d 40 (1978)).

[9] Although in the district court Tenenbaum raised the argument that the Copyright Act does not extend to consumer conduct as a reason why the jury's statutory damage award should be reduced, he did not present the argument, as he does here, as a basis to exempt his actions from liability altogether.

[10] In the criminal infringement context, Congress has extended liability to, inter alia, those who infringe “for purposes of commercial advantage or private financial gain.” 17 U.S.C. § 506. Congress has made it clear, however, that this designation applies even absent direct monetary profit. See 17 U.S.C. § 101. It has defined “financial gain” to include “receipt, or expectation of receipt, of anything of value, including the receipt of other copyrighted works.” Id.

Under the “fair use” exception, which is not available to Tenenbaum, what constitutes a commercial use has also been interpreted broadly. See A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1015 (9th Cir.2001) ( “Direct economic benefit is not required to demonstrate a commercial use. Rather, repeated and exploitative copying of copyrighted works, even if the copies are not offered for sale, may constitute a commercial use.”).

[11] Sound recordings constitute “works of authorship” that receive copyright protection. See 17 U.S.C. § 102(a)(7).

Tenenbaum implies that digital media should be treated differently than conventional music recordings. However, 17 U.S.C. § 102(a) makes no such distinction, and in fact explicitly provides that copyright protection exists “in original works of authorship fixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” (Emphasis added).

[12] Tenenbaum does not claim on appeal that his conduct falls under the fair use doctrine.

[13] See Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 430 n. 11, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984) (declining to express an opinion on scope of 1971 Act's exceptions for noncommercial uses).

[14] To take the point further, although the AHRA created immunity for some unauthorized, noncommercial uses of copyrighted materials, Congress explicitly declined to extend immunity to individuals who use home computers to copy copyrighted materials. See 17 U.S.C. § 1001(3); see also Recording Indus. Ass'n of Am. v. Diamond Multimedia Sys., Inc., 180 F.3d 1072, 1078 (9th Cir.1999) (“Under the plain meaning of the [AHRA's] definition of digital audio recording devices, computers (and their hard drives) are not digital audio recording devices because their ‘primary purpose’ is not to make digital audio copied recordings.”).

[15] Tenenbaum argues that the 1999 Amendment pre-dated the widespread use of peer-to-peer networking sites, and observes that the 1999 Digital Theft Deterrence Act was first introduced in May 1999, a full month before the launch of Napster's file sharing network. Again, the factual premise is wrong. The Act was not signed into law until December 1999, at which point Napster was itself operational.

Moreover, Congress had in 1997 already acknowledged the advent of “audio-compression” technologies that “permit[ ] infringers to transmit large volumes of CD-quality music over the internet” in enacting the No Electronic Theft Act, Pub. L. No. 105–147, 111 Stat. 2678. See H.R.Rep. No. 105–339, at 4 (1997), 1997 WL 664424, at *4.

[16] The statute at issue in L.A. Westermann Co. v. Dispatch Printing Co., 249 U.S. 100, 39 S.Ct. 194, 63 L.Ed. 499 (1919), contained the phrase “in lieu of actual damages.” By contrast, 17 U.S.C. § 504(c) provides that statutory damages are available “instead of actual damages and profits.” The point is the same.

[17] The statutory damage range was also set forth on the jury verdict form. “District courts have ‘considerable discretion about the formulation, nature, and scope of the issues' on a special verdict form.” Uphoff Figueroa v. Alejandro, 597 F.3d 423, 434 (1st Cir.2010) (quoting 9B Wright, Miller & Kane, Federal Practice and Procedure § 2506, at 119 (2d ed.1995)). Because we conclude that the district court did not err in instructing the jury of the statutory damage range under § 504(c), Tenenbaum's like challenge to the jury verdict form also fails.

[18] Citing psychological studies but not law, Tenenbaum argues that informing the jury of the statutory damage range was reasonably likely to have had an “anchoring effect” that erroneously skewed the jury's award determination.

[19] He argues that because Sony offered testimony regarding the harmful effects all filesharing, not just Tenenbaum's infringements, has had on the recording industry at large, and not only the named plaintiffs, the court was required to instruct the jury sua sponte to “consider only harms by the named defendant that flowed to the named plaintiffs.”

[20] Tenenbaum has twice waived this argument. First, we reject his assertion that he preserved it by offering the following proposed jury instructions: “While there may be evidence relating to other downloading and sharing, the only issue of infringement or fair use that is before you concerns these ... songs.... [Y]ou may only award damages, if any, as to those ... songs.” This did not inform the court that Tenenbaum sought an instruction regarding harm done by other infringers or suffered by other recording companies given that Tenenbaum engaged in other downloading and sharing beyond the thirty songs at issue. See Linn v. Andover Newton Theological Sch., Inc., 874 F.2d 1, 5 (1st Cir.1989) (“If there is a problem with the instructions, the judge must be told precisely what the problem is, and as importantly, what the attorney would consider a satisfactory cure.”)

Moreover, after the court gave the jury its instructions, Tenenbaum raised no objection on these grounds whatsoever. “[E]ven if the initial request is made in detail, the party who seeks but did not get the instruction must object again after the instructions are given but before the jury retires for deliberations.” Gray v. Genlyte Grp., Inc., 289 F.3d 128, 134 (1st Cir.2002).

[21] 17 U.S.C. § 504(c)(2)'s so-called “innocent infringement” provision does not lend support to Tenenbaum's theory that knowledge is an element for non-willful infringement under the Act. A defendant cannot prove that he or she qualifies for a reduction of damages under § 504(c)(2) merely by showing that he or she lacked knowledge that his or her actions constituted copyright infringement. Rather, a plaintiff may still recover the full measure of statutory damages available for non-willful infringement even against an unknowing infringer if the infringer had “ reason to believe that his or her acts constituted an infringement of copyright.” 17 U.S.C. § 504(c)(2) (emphasis added).

[22] On appeal, both Tenenbaum and Sony argue error, but neither challenges the district court's decision to bypass the question of common law remittitur. They instead focus on whether the court chose the correct due process standard to evaluate whether the award was so excessive as to violate the constitution. Tenenbaum argues the Gore factors provide the correct due process analysis and that even the reduced award violates due process under that standard. Sony argues that the Williams due process standard must apply, that under it the original award issued by the jury never violated due process, and that the district court erred in reducing the award.

[23] These reasons are based on assumptions, not facts. Sony could not have decided its course of action if remittitur were allowed unless it knew the amount. Further, if Sony chose a new trial on damages, no one knows what sum a new jury would award, or whether that award would be challenged as excessive.

[24] The district court also attempted to justify its decision to bypass remittitur by making certain rulings on the merits of the constitutional issue. For example, the district court reasoned that the “differences between the [ Gore and Williams ] approaches are, in practice, minimal[,]” a disputed issue. Sony BMG Music Entm't v. Tenenbaum, 721 F.Supp.2d 85, 101 (D.Mass.2010).

[25] The Seventh Amendment provides that, “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.” U.S. Const. amend. VII.

[26] Additionally, some courts have suggested that even under Gore, a court must give plaintiff the option of a new trial when it reduces a punitive damages award on due process grounds. See S. Union Co. v. Irvin, 563 F.3d 788, 790 (9th Cir.2009); Lee v. Edwards, 101 F.3d 805, 813 (2d Cir.1996).

[27] Sony rather weakly asserts remittitur is not available where, as here, an award falls within a prescribed statutory range. We do not take as given the questionable proposition that in enacting the Copyright Act, Congress intended to eliminate the common law power of the courts to consider remittitur. Common law remittitur has roots deep in English and American jurisprudence. See Honda Motor Co. v. Oberg, 512 U.S. 415, 424–26, 114 S.Ct. 2331, 129 L.Ed.2d 336 (1994); Dimick v. Schiedt, 293 U.S. 474, 482–83, 55 S.Ct. 296, 79 L.Ed. 603 (1935) (citing Blunt v. Little, Fed.Cas. No. 1,578, 3 Mason 102 (1822) (Story, J.)). We see no reason to think Congress meant to override this aspect of the common law.

In the post-Feltner amendment of the Copyright Act, Congress said nothing evidencing an intent to eliminate remittitur. See Digital Theft Deterrence and Copyright Damages Improvement Act of 1999, Pub. L. No. 106–1060, 113 Stat. 1774. Congress is presumed to legislate incorporating background principles of common law unless it indicates to the contrary. See Bd. of Trs. of Leland Stanford Junior Univ. v. Roche Molecular Sys., Inc., ––– U.S. ––––, 131 S.Ct. 2188, 2196, 180 L.Ed.2d 1 (2011) (rejecting statutory interpretation that conflicts with “two centuries of patent law”); Astoria Fed. Sav. & Loan Ass'n v. Solimino, 501 U.S. 104, 109, 111 S.Ct. 2166, 115 L.Ed.2d 96 (1991) (“Congress is understood to legislate against a background of common-law adjudicatory principles.”). Further, the principle of remittitur is embodied in Federal Rule of Civil Procedure 59. Thus, the district court's decision not to consider remittitur as requested appears to be contrary to Congressional intent.

[28] If the district court determines that the jury's award does not merit common law remittitur, the court and the parties will have to address the relationship between the remittitur standard and the due process standard for statutory damage awards, should the issue continue to be raised.

715 F.Supp.2d 481

ARISTA RECORDS LLC; Atlantic Recording Corporation; BMG Music; Capitol Records, Inc; Elektra Entertainment Group Inc; Interscope Records; Laface Records LLC; Motown Record Company, L.P.; Priority Records LLC; Sony BMG Music Entertainment; UMG Recordings, Inc; Virgin Records America, Inc.; and Warner Bros. Records Inc., Plaintiffs,
v.
LIME GROUP LLC; Lime Wire LLC; Mark Gorton; Greg Bildson; and M.J.G. Lime Wire Family Limited Partnership, Defendants.

No. 06 CV 5936(KMW).

United States District Court,S.D. New York.

May 25, 2010.

[715 F.Supp.2d 491] [715 F.Supp.2d 492]

Glenn D. Pomerantz, Kelly M. Klaus, Munger, Tolles & Olson, Los Angeles, CA, Jennifer L. Pariser, Sony Corporation of America, Robert William Clarida, Cowan, Liebowitz & Latman, P.C., New York, NY, Jonathan H. Blavin, Munger, Tolles & Olson LLP, San Francisco, CA, Karyn Annise Temple, Kenneth Lewinn Doroshow, Recording Industry Association of America, Washington, DC, for Plaintiffs.

Joseph Maddaloni, Jr., Porzio, Bromberg & Newman, P.C., Morristown, NJ, Chul Pak, Michael S. Sommer, Tonia Maria Ouellette Klausner, Wilson, Sonsini, Goodrich & Rosati P.C., New York, NY, for Defendants.

AMENDED OPINION & ORDER 

KIMBA M. WOOD, District Judge:

I. Introduction

Plaintiffs are thirteen major record companies that collectively produce, manufacture, distribute, sell, and license “the vast majority of copyrighted sound recordings sold in the United States.” (First Am. Compl. ¶ 1.) Plaintiffs raise various federal and state law claims of secondary copyright infringement against Lime Wire LLC (LW); Mark Gorton, the Chairman and sole Director of LW; Lime Group LLC (“Lime Group”); and the M.J.G. Lime Wire Family Limited Partnership (“Lime Wire FLP”) (collectively, “Defendants”) for their role in distribution of the LimeWire software program (“LimeWire”). LimeWire permits users of the program to share digital files over the Internet. Plaintiffs allege that LimeWire users employ LimeWire to obtain and share unauthorized copies of Plaintiffs' sound recordings, and that Defendants facilitate this infringement by distributing and maintaining LimeWire.^[1]

Plaintiffs raise the following claims against LW, Lime Group, and Gorton (1) inducement of copyright infringement; (2) contributory copyright infringement; (3) vicarious copyright infringement; and (4) state common law copyright infringement and unfair competition.^[2] Plaintiffs also raise a state law fraudulent conveyance claim against Gorton and Lime Wire FLP, and a claim for unjust enrichment against Lime Wire FLP.

The parties now move for summary judgment. Plaintiffs move for partial summary judgment on their claims of (1) inducement of infringement; (2) contributory [715 F.Supp.2d 493] infringement; and (3) common law infringement and unfair competition. LW, Gorton, and Lime Group move for summary judgment on each of these claims, and on Plaintiffs' claim of vicarious copyright infringement.^[3] Gorton and Lime Wire FLP move for summary judgment on Plaintiffs' fraudulent conveyance and unjust enrichment claims. Defendants also have submitted a number of motions to exclude evidence submitted by Plaintiffs in support of their motion for summary judgment.

For the reasons stated below, the Court: (1) DENIES Defendants' motions to exclude evidence;^[4] (2) GRANTS Plaintiffs' motion for summary judgment on the claim against LW of inducement of copyright infringement, and DENIES LW's motion for summary judgment on the claim; (3) DENIES the parties' cross-motions for summary judgment on the claim against LW of contributory copyright infringement; (4) DENIES LW's motion for summary judgment on the claim of vicarious copyright infringement; (5) GRANTS Plaintiffs' motion for summary judgment on their claims against LW for common law copyright infringement and unfair competition, and DENIES Defendants' motion for summary judgment on these claims; (6) GRANTS Plaintiffs' motions for summary judgment on the claims against Gorton and Lime Group for inducement of copyright infringement, common law infringement, and unfair competition, and DENIES Defendants' motions for summary judgment on these claims; (7) DENIES the parties' motions for summary judgment on the claims against Gorton and Lime Group for contributory copyright infringement and vicarious copyright infringement; and (8) DENIES Gorton's and Lime Wire FLP's motion for summary judgment on the fraudulent conveyance and unjust enrichment claims.

II. Factual Background

Unless otherwise noted, the following facts are undisputed by the parties:

A. File-Sharing Programs

Over the last several years, technologies have developed that make it inexpensive and easy to record, distribute, and share music via the Internet. Many artists now digitally record songs to sell through online music retailers. Individuals who purchase digital recordings often share them with others by using free or low-cost software or Internet programs, known as “file-sharing programs.” File-sharing programs allow users to exchange digital files, including digital recordings, with each other through the Internet. Most digital recordings released in the United States, however, are copyright protected, and the copyright owners do not authorize sharing through file-sharing programs. A number of companies that have distributed file-sharing programs, including the distributors of the programs Napster, Kazaa, Morpheus, and Grokster, have faced liability for copyright infringement, on the ground that they facilitated infringement committed by users of their programs. See e.g., [715 F.Supp.2d 494] A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir.2001).^[5]

B. Creation and Design of LimeWire

LW was founded in June 2000. The company released LimeWire in August 2000. LimeWire is a file-sharing program that utilizes “peer-to-peer” (“P2P”) technology. By employing P2P technology, LimeWire permits its users to share digital files via an Internet-based network known as the “Gnutella network.” LimeWire users can share almost all files stored on their computers with other LimeWire users.^[6] When a LimeWire user wishes to locate digital files available through the network, she enters search criteria into the search function on LimeWire's user interface. LimeWire then scans the computers of other LimeWire users, to locate files that match the search criteria. The LimeWire user can download any files that LimeWire locates. When the user downloads a file, LimeWire transfers a digital copy of the file from the computer on which it is located to the LimeWire user's computer.

C. Plaintiffs' Copyrighted Recordings

Plaintiffs sell and distribute the vast majority of all recorded music in the United States. They allege that they own the copyrights or exclusive rights to more than 3000 sound recordings, which are listed in exhibits to the First Amended Complaint. (First Am. Compl., Exs. A & B (as revised, Jan. 31, 2008).) In this litigation, Plaintiffs have provided documentation establishing that they own the copyrights to thirty popular recordings (the “Recordings”).^[7] Plaintiffs allege that LimeWire users share and download unauthorized digital copies of the Recordings via LimeWire, and that Defendants are secondarily liable for this infringement because they distribute and maintain LimeWire.

III. Evidentiary Motions

Defendants have filed a number of motions challenging the admissibility of evidence submitted by Plaintiffs (the “Evidentiary Motions”). The Court considers each of the Evidentiary Motions in turn. The Court determines the admissibility of the challenged evidence based on the same [715 F.Supp.2d 495] principles as would apply at trial. See Raskin v. Wyatt Co., 125 F.3d 55, 66 (2d Cir.1997). The Court finds that, except with respect to certain limited issues discussed below, Defendants' evidentiary objections are without merit.

A. Motions to Exclude Reports and Testimony of Plaintiffs' Experts

Defendants move to exclude the reports and testimony of two expert witnesses retained by Plaintiffs, Dr. Richard P. Waterman and Dr. Ellis Horowitz. The Court denies Defendants' motion.

1. Legal Standard

A court may admit expert testimony once it has determined that such testimony is reliable. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993); Nimely v. City of New York, 414 F.3d 381, 396-97 (2d Cir.2005). Reliability is analyzed under Rule 702 of the Federal Rules of Evidence, which provides that a witness who is qualified as an expert by knowledge, skill, experience, training, or education may provide testimony that is (1) based upon sufficient facts or data; (2) the product of reliable principles and methods; and (3) based on reliable application of the principles and methods to the facts of the case. Fed.R.Evid. 702. There must be “ ‘a sufficiently rigorous analytical connection between [the expert's] methodology and the expert's conclusions ... and ... the scientific principles and methods [must] have been reliably applied by the expert to the facts of the case.’ ” In re Zyprexa Prods. Liab. Litig., 489 F.Supp.2d 230, 284 (E.D.N.Y.2007) (quoting Nimely, 414 F.3d at 397). The party seeking to rely on expert testimony bears the burden of establishing, by a preponderance of the evidence, that all requirements have been met. See Daubert, 509 U.S. at 593 n. 10, 113 S.Ct. 2786 (1993); United States v. Williams, 506 F.3d 151, 160 (2d Cir.2007).

2. Applicationa. Dr. Richard P. Waterman

Dr. Waterman is an Adjunct Associate Professor of Statistics at The Wharton School at the University of Pennsylvania, and the President and Co-Founder of Analytic Business Services, Inc., a consulting company that provides expert advice and opinions in the field of statistical analysis.

Plaintiffs hired Dr. Waterman to conduct a study of LimeWire that estimates the percentage of digital files (1) available through LimeWire that are authorized for free distribution; and (2) requested for download by LimeWire users that are authorized for free distribution.^[8] For the study, Dr. Waterman analyzed a random sample of 1800 files available through LimeWire. He determined that 93% of files in the sample (1644 files) were protected or highly likely to be protected by copyright, and thus not authorized for free distribution through LimeWire. (Waterman Report, 2-3.) He found that 43.6% of the files were digital recordings with copyrights owned by Plaintiffs. ( Id.) Dr. Waterman next logged the number of times LimeWire users sought to download each of the files in the sample. Based on these results, Dr. Waterman estimated that 98.8% of the files requested for download [715 F.Supp.2d 496] through LimeWire are copyright protected or highly likely copyright protected, and thus not authorized for free distribution. ( Id. at 7-8.)

Defendants attack the reliability of Dr. Waterman's study and expert opinion, arguing that Dr. Waterman's methodology was deficient because (1) Dr. Waterman collaborated with Plaintiffs in designing and implementing the study; (2) the categories that Dr. Waterman used to classify the sample files were improper; and (3) the study improperly excluded certain files from the statistical analysis.^[9] The Court finds that Defendants' objections are without merit. Dr. Waterman's expert report and testimony are admissible.

First, there is no support for the contention that Dr. Waterman's study is flawed because of his collaboration with Plaintiffs. Plaintiffs assisted Dr. Waterman in a variety of ways, including obtaining the sample of files, categorizing the files in the sample, and implementing the statistical protocol that Dr. Waterman developed. Plaintiffs' assistance in developing and implementing the study was entirely appropriate. See Fed.R.Civ.P. 26(a)(2)(B) advisory committee's note (1993) (stating that counsel may provide “assistance to experts in preparing [expert] reports, and indeed ... this assistance may be needed”); Inline Connection Corp. v. AOL Time Warner Inc., 470 F.Supp.2d 435, 442-43 (D.Del.2007) (noting that experts may rely upon information provided by the client, other experts, or counsel). The Court finds that Dr. Waterman applied his expert knowledge to develop a reliable methodology. Dr. Waterman's methodology obtained a suitably random and representative sample of files available through LimeWire. Moreover, the limitations of Dr. Waterman's study are well defined. Defendants can-and do-challenge the study's probative value, and the Court has sufficient information to properly weigh Dr. Waterman's findings and conclusions.

Second, the Court finds that the categories of downloaded files used in Dr. Waterman's analysis are appropriate.^[10] Similar studies using nearly identical file classifications have been considered and approved by other courts. See, e.g., Metro-Goldwyn-Mayer Studios Inc. v. Grokster, 545 U.S. 913, 952, 125 S.Ct. 2764, 162 L.Ed.2d 781 (2005) (Breyer, J., concurring) (considering findings of statistical study as to proportion of files available on file-sharing network that were “infringing” and “likely infringing”); A & M Records, Inc. v. Napster, Inc., 114 F.Supp.2d 896, 903 n. 6 (N.D.Cal.2000) (considering expert report that applied digital file categories (1) confirmed as infringing, (2) likely to be infringing, and (3) confirmed as not infringing); Arista Records LLC v. Usenet.com, Inc., 633 F.Supp.2d 124, 145 (S.D.N.Y.2009) (denying motion to exclude similar study by Dr. Waterman that utilized the same classifications of copyright status).

Third, the Court rejects Defendants' contention that the exclusion of twenty-six files identified as “spam, spoofs, and pornography” from Dr. Waterman's sample renders his findings unreliable. Dr. Waterman has provided sufficient reasoning [715 F.Supp.2d 497] for these files' exclusion from his analysis. ( See Waterman Depo. at 230-78.) In any event, given the small number of files classified as “spam, spoofs, and pornography,” their exclusion from the sample size of 1800 files had an inconsequential effect on Dr. Waterman's statistical findings and conclusions.

The Court finds that Dr. Waterman's expert report and testimony are based on reliable methodology and are therefore admissible.

b. Dr. Ellis Horowitz

Dr. Horowitz is a professor of Computer Science and Electrical Engineering at the University of Southern California. He possesses substantial knowledge and experience in software engineering and development. Dr. Horowitz has provided an expert report and testimony on how LimeWire functions and what infringement-reducing technologies are available to prevent or mitigate the distribution of unauthorized files through LimeWire.

Defendants seek to exclude Dr. Horowitz's report and testimony on the grounds that he improperly opines on (1) the intent or state of mind of Defendants and LimeWire users; and (2) the relative efficacy of various infringement-reducing technologies.^[11] The Court rejects both arguments and finds that Dr. Horowitz's expert opinion is admissible.

First, Dr. Horowitz has not opined on the parties' state of mind, but rather has provided information on the design and functionality of the LimeWire program. See, e.g., Horowitz Report ¶ 56 (“Although Lime Wire LLC professes to be agnostic about what files are transferred using LimeWire, LimeWire's feature set is optimized for downloading popular audio files.”); id. ¶ 57 (noting that the design of LW's “user interface” supports the download of music files); id. ¶ 66 (opining that the use of a “Classic Rock” genre category has the effect of generating search results containing unauthorized works); id. ¶ 70 (discussing that some of LimeWire's features are “potentially confusing” to users). Such expert opinion is proper and aids the finder-of-fact in understanding LimeWire's features. Dr. Horowitz does not make any impermissible legal conclusions, such as stating that LW actually intended to facilitate copyright infringement. He also does not cross the line into unreliable speculation about the intended purpose of various LimeWire design features.^[12] See Nimely v. City of New York, 414 F.3d at 396 n. 11 (noting that an expert witness is permitted substantially more leeway than a lay witness in testifying as to opinions that go beyond on his or her immediate perception) (citing United States v. Garcia, 291 F.3d 127, 139 & n. 8 (2d Cir.2002)); In re Zyprexa Prods. Liab. Litig., 489 F.Supp.2d at 283-84 (noting that an expert is “permitted wide latitude to offer opinions,” so long as they rely upon expert knowledge and experience).

[715 F.Supp.2d 498] Second, the Court finds that Dr. Horowitz's expert opinions on the effectiveness of various infringement-reducing technologies are reliable and satisfy the requirements of Rule 702 and Daubert. Dr. Horowitz has substantial expertise in computer software design and engineering. His expert report makes clear that his opinions are based upon his observation and collection of relevant information about existing infringement-reducing technologies.

The Court has found that Dr. Waterman's and Dr. Horowitz's expert reports and testimony are reliable and admissible. The Court thus DENIES Defendants' motion to exclude the evidence.

B. Bildson Declaration

Defendants move (1) to strike the declaration of Greg Bildson (“Bildson”), submitted by Plaintiffs on September 26, 2008 (the “Bildson Declaration”); and (2) for a protective order enjoining Bildson from speaking further with Plaintiffs' attorneys.^[13] The Court denies Defendants' motion, except that the Court places certain limited conditions on Plaintiffs' future contacts with Bildson.

When Plaintiffs filed this action in 2006, they named Bildson, LW's Chief Technology Officer (“CTO”) and Chief Operating Officer (“COO”), as a defendant. On July 22, 2008, Bildson's attorney, Michael Page (“Page”), contacted Plaintiffs to make a settlement proposal, whereby Plaintiffs would drop the claims against Bildson in exchange for Bildson providing Plaintiffs with factual information about LW and LimeWire and paying a nominal settlement amount. On July 28, 2008, Page contacted Charles Baker (“Baker”), LW's attorney, and asked whether he consented to Bildson meeting with Plaintiffs' attorneys to “speak substantively with [Bildson] ... as a[LW] employee.” Baker consented.

On September 4, 2008, Bildson and Page met with Plaintiffs' attorney, Katherine Forrest (“Forrest”), to discuss settlement. Forrest proposed a settlement agreement that included a cooperation clause, under which Bildson would cooperate with Plaintiffs' investigation of Defendants and provide information and, if necessary, testimony on LW's infringing activities. Following the meeting, Bildson set forth his knowledge of LimeWire and of LW's infringing activities in the Bildson Declaration. On September 9, 2008, Bildson voluntarily resigned from LW. On September 10, 2008, he executed the Bildson Declaration and the settlement agreement.

Defendants move to strike the Bildson Declaration, on the grounds that it arose from improper ex parte communications between Bildson and Plaintiffs' attorneys and that it contains information subject to the attorney-client privilege. Defendants seek a protective order purportedly to prevent Bildson from disclosing privileged information to Plaintiffs.

1. Legal Standard

In New York, attorneys are prohibited from soliciting information about an opposing party that is protected by attorney-client privilege. See [715 F.Supp.2d 499] Muriel Siebert & Co. v. Intuit Inc., 8 N.Y.3d 506, 836 N.Y.S.2d 527, 868 N.E.2d 208, 210-11 (2007); Merrill v. City of New York, 2005 WL 2923520, at *1 (S.D.N.Y. Nov. 4, 2005); Wright v. Stern, 2003 WL 23095571, at *1 (S.D.N.Y. Dec. 30, 2003). The party invoking the attorney-client privilege bears the burden of establishing that the information at issue is privileged. To do this, the party must show that there was “(1) a communication between client and counsel, which (2) was intended to be and was in fact kept confidential, and (3) made for the purpose of obtaining or providing legal advice.” United States v. Constr. Prods. Research, Inc., 73 F.3d 464, 473 (2d Cir.1996). The attorney-client privilege “only protects disclosure of communications; it does not protect disclosure of the underlying facts.” Upjohn Co. v. United States, 449 U.S. 383, 395-96, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981). The Second Circuit “construe[s] the privilege narrowly because it renders relevant information undiscoverable; [it applies] only where necessary to achieve its purpose.” In re County of Erie, 473 F.3d 413, 418 (2d Cir.2007) (internal citation omitted).

The New York Rules of Professional Conduct provide that a lawyer representing a client may not have ex parte communications with an opposing party who the lawyer knows is represented by counsel, unless the lawyer has the consent of that party's counsel. N.Y. Rules Prof. Conduct 4.2 (2009). The New York Court of Appeals has defined a “party” in this context to include “corporate employees whose acts or omissions in the matter under inquiry are binding on the corporation (in effect, the corporation's ‘alter egos').” Niesig v. Team I, 76 N.Y.2d 363, 559 N.Y.S.2d 493, 558 N.E.2d 1030, 1035 (1990); Estes v. City of New York, 2006 WL 2299350, at *1 (E.D.N.Y. Apr. 11, 2006). A lawyer may have ex parte contact with the opposing party's former employees. See Polycast Tech. Corp. v. Uniroyal, Inc., 129 F.R.D. 621, 628 (S.D.N.Y.1990). If the former employee had access to privileged information while employed with the opposing party, however, a court may enter a protective order placing conditions on such contact, in order to prevent sharing of any privileged information. See Lyondell-Citgo Refining, LP v. Petroleos de Venezuela, S.A., No. 02 Civ. 0795, 2003 WL 22990099, at *2-3 (S.D.N.Y. Dec. 19, 2003).

2. Application

The Court will not strike the entire Bildson Declaration. The Declaration does not arise out of improper ex parte communication between Bildson and Plaintiffs' counsel, Forrest. Prior to meeting with Bildson, Forrest received consent from Defendants' counsel for Forrest to “speak substantively with [Bildson] ... as a [LW] employee.”^[14]

Defendants argue that, because Bildson received privileged information while working at LW, the Court should conclude that the Bildson Declaration reflects confidential information and strike the entire document. Defendants, however, cite to no decision in which a court has struck an entire factual declaration, without any evidence that the entire declaration [715 F.Supp.2d 500] was privileged.^[15] Rather, when presented with a declaration from a party with access to privileged information, courts strike only those portions of the declaration that actually contain privileged information. See Major League Baseball Properties, Inc. v. Opening Day Productions, 1997 WL 525482, at *6 (S.D.N.Y. Aug. 22, 1997) (striking only one phrase from party's testimony, because only that phrase reflected privileged information). This approach is consistent with the Second Circuit's mandate that the attorney-client privilege be applied narrowly, so as not to exclude discoverable information. See In re County of Erie, 473 F.3d at 418.

Defendants have provided two declarations that indicate that three statements in the Bildson Declaration may reflect privileged communications: (1) in the second line of paragraph 11 of the Declaration, the words following the comma; (2) in the second-to-last line of paragraph 12 of the Declaration, the words following the word “feature;” and (3) in the first sentence of paragraph 21 of the Declaration, the words from “also” through “evidence.” The Court does not rely on these statements in deciding the instant motions. Accordingly, there is no reason for the Court to rule on their status at this time.

The Court will not issue a protective order prohibiting Plaintiffs from speaking with Bildson. Plaintiffs have made a good faith effort to avoid learning privileged information from Bildson. Forrest and Page, Bildson's attorney, have submitted affidavits stating that Forrest met with Bildson only once, and that she never sought privileged information from him. Forrest and Page both state that they repeatedly warned Bildson not to provide them with such information. Defendants have presented no evidence that Bildson disclosed privileged communications to Plaintiffs, other than the two declarations discussed above.

Because Bildson had access to privileged information while at LW, however, the Court believes that it is sensible and fair to order additional precautions to ensure that Bildson does not reveal privileged information to Plaintiffs in the future. Accordingly, the Court orders Plaintiffs: (1) not to request privileged information from Bildson; (2) to stop Bildson from revealing privileged information, if Plaintiffs become aware that he is doing so; and (3) to promptly provide Bildson and his attorney with a copy of this order, and to ensure that Bildson's attorney discusses with Bildson his obligation not to disclose privileged information.

Accordingly, the Court DENIES Defendants' motion to exclude the Bildson Declaration and for a protective order, except to the extent that the Court places conditions on any future contacts between Plaintiffs and Bildson.

C. Declarations of Sehested, Kempe, and Coggon

Defendants move to strike the declarations of Thomas Sehested, Andrew Kempe, and Katheryn Coggon, on the ground that Plaintiffs failed to identify the three individuals as potential witnesses. The Court denies Defendants' motion.

[715 F.Supp.2d 501] [19] Rule 26 requires parties to disclose the identity of individuals “likely to have discoverable information that the disclosing party may use to support its claims or defense.” Fed. R. Civ. Pro. 26(a). Parties must update and supplement their disclosures and other discovery responses in “a timely manner.” Fed.R.Civ.P. 26(e). If a party fails to disclose a witness as required by Rule 26, a court may exclude evidence obtained from that witness, unless the failure to disclose was substantially justified or harmless. Fed.R.Civ.P. 37(c). A court has discretion to exclude evidence because of a party's failure to disclose. See Semi-Tech Litig. LLC v. Bankers Trust Co., 219 F.R.D. 324, 325 (S.D.N.Y.2004). Because “ ‘refusing to admit evidence that was not disclosed during discovery is a drastic remedy,’ courts will resort to preclusion only ‘in those rare cases where a party's conduct represents flagrant bad faith and callous disregard of the Federal Rules of Civil Procedure.’ ” Ward v. The Nat'l Geographic Soc'y, No. 99 Civ. 12385, 2002 WL 27777 (S.D.N.Y. Jan. 11, 2002) (quoting Grdinich v. Bradlees, 187 F.R.D. 77, 79 (S.D.N.Y.1999)).

Here, there is no evidence that Plaintiffs' alleged failure to disclose Kempe, Coggon, and Sehested prejudiced Defendants.

The information provided by Kempe is no different from that possessed by a witness whose identity was timely disclosed, Thomas Carpenter. Plaintiffs were not required to update their disclosure to state that they would speak with Kempe instead of Carpenter. See Haritatos v. Hasbro, Inc., No. 6:05-CV-930, 2007 WL 3124626, at *3 (N.D.N.Y. Oct. 23, 2007).^[16]

Defendants claim that they have been prejudiced because they have not had an opportunity to cross-examine Coggon and Sehested. After Plaintiffs submitted the declarations, however, Defendants could have moved to depose the two witnesses, which would have remedied any prejudice Defendants claim to have suffered. Defendants' failure to request depositions undercuts their argument of prejudice.

The Court thus DENIES Defendants' motion to exclude the declarations of Kempe, Coggon, and Sehested.

D. Exhibits Purportedly Relating to Settlement Negotiations

Defendants move to exclude thirty-three of Plaintiffs' exhibits and related deposition testimony that they claim are inadmissible pursuant to Rule 408(a)(2) of the Federal Rules of Evidence. Rule 408 provides that “conduct or statements made in compromise negotiations regarding the claim” may not be admitted in evidence when offered to prove a party's liability. Fed.R.Evid. 408(a)(2). In determining whether to exclude evidence under Rule 408, a court must weigh the need for evidence against the “potentiality of discouraging future settlement negotiations.” Trebor Sportswear Co. v. Limited Stores, Inc., 865 F.2d 506, 510-11 (2d Cir.1989) (citing 2 J. Weinstein & M. Berger, Weinstein's [715 F.Supp.2d 502] Evidence, ¶ 408[05], at 408-31 (1988)).

Defendants argue that the documents they seek to exclude were created for the purpose of, or in the course of, settlement negotiations. The challenged documents relate to a proposal by LW to implement various digital file filtering systems, and LW's “Plan for Digital Market Growth.” The documents include internal LW communications; external LW communications with non-parties, such as online content providers; and LW's business plans.

The Court finds that exclusion pursuant to Rule 408 is not warranted. The disputed documents were created primarily to promote the growth and profitability of LW, and not for the purpose of settlement negotiations. Rule 408 does not shield business plans and communications with non-parties. See Union Carbide Corp. v. Montell N.V., 28 F.Supp.2d 833, 841 (S.D.N.Y.1998).

Accordingly, the Court DENIES Defendants' motion to exclude the evidence.

E. Evidence of Defendants' Conduct Outside of Limitations Period

Defendants move to exclude documentary and testamentary evidence that predates August 3, 2003. Defendants argue that any evidence relating to activity prior to that date falls outside the three-year statute of limitations applicable to Plaintiffs' copyright infringement claims.

The Court finds that evidence of Defendants pre-August 2003 conduct is relevant, probative, and admissible. Although Plaintiffs may not recover for conduct that occurred outside the limitations period, “evidence of such conduct may be admissible to shed light on the motives with which acts within the limitations period were performed.”^[17] Cooper v. Parsky, 140 F.3d 433, 440-41 (2d Cir.1998); see also Sir Speedy, Inc. v. L & P Graphics, Inc., 957 F.2d 1033, 1038 (2d Cir.1992) (noting that the statute of limitations does not “operate to bar the use of a document that predates the commencement of the limitations period but that is relevant to events during the period”). The disputed evidence is relevant to the determination of Defendants' state of mind, including whether they were aware of LimeWire users' infringing activities and whether they intended to facilitate those activities within the limitations period. Accordingly, the Court DENIES Defendants' motion to exclude evidence that predates August 3, 2003.

F. Objections Based on Relevance, Authentication, and Hearsay

Defendants move to exclude a number of Plaintiffs' exhibits on the grounds that they are either (1) not relevant; (2) unauthenticated; or (3) inadmissible hearsay. The Court considers each objection in turn. With the exception of certain exhibits discussed below, the Court finds that Defendants' objections are without merit.

1. Relevance

Evidence must be relevant in order to be admissible. Fed.R.Evid. 402. At trial or on a motion for summary judgment, evidence is relevant if it has “any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.” Fed.R.Evid. 401. Determinations of relevance are entrusted to the sound discretion of the district court. See [715 F.Supp.2d 503] United States v. Amuso, 21 F.3d 1251, 1263 (2d Cir.1994). The standard for determining relevance is a liberal one. See Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. at 587, 113 S.Ct. 2786; Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d 918, 927 (2d Cir.1977). On a motion for summary judgment, barring substantial cause for excluding evidence on relevance grounds, a court should admit and consider the challenged exhibits and testimony. See Presbyterian Church of Sudan v. Talisman Energy, Inc., 582 F.3d 244, 264 (2d Cir.2009).

Although the probative weight of each of the contested exhibits varies, each is related to Defendants' alleged state of mind and intent, and provides context for the alleged conduct. The exhibits, therefore, are relevant, and the Court DENIES Defendants' motion to exclude them.

2. Authentication

Rule 901 of the Federal Rules of Evidence requires evidence to be authenticated or identified before it is admitted. Fed.R.Evid. 901(a). To authenticate evidence, the party seeking to admit the evidence must present “evidence sufficient to support a finding that the matter in question is what its proponent claims.” Id.; see also United States v. Ruggiero, 928 F.2d 1289, 1303 (2d Cir.1991). The standard for authentication is not rigorous. See United States v. Dhinsa, 243 F.3d 635, 658 (2d Cir.2001). Authenticity may be established through a variety of means, including the testimony of a witness with knowledge of the document's authenticity, see Fed.R.Evid. 901(b)(1), or based upon “[a]ppearance, contents, substance, internal patterns, or other distinctive characteristics, taken in conjunction with circumstances.” Fed.R.Evid. 901(b)(4). “[T]he standard for authentication, and hence for admissibility, is one of reasonable likelihood.” United States v. Pluta, 176 F.3d 43, 49 (2d Cir.1999) (quoting United States v. Holmquist, 36 F.3d 154, 168 (1st Cir.1994)).

Having reviewed the disputed exhibits and the related deposition testimony, the Court finds the “appearance, contents, substance,” and other contextual indicators satisfy the authentication requirement. Accordingly, the Court DENIES Defendants' motion to exclude the evidence on authentication grounds.

3. Hearsay

Defendants object to seventy-six exhibits offered by Plaintiffs on the ground that they constitute inadmissible hearsay. Hearsay is an out-of-court statement offered to “prove the truth of the matter asserted.” See Fed.R.Evid. 801(c). Such a statement is not admissible unless it qualifies as nonhearsay, see, e.g., Rule 801(d), or satisfies a hearsay exception as set forth in Rules 803, 804 or 807.

The Court finds that the disputed exhibits are admissible on the grounds that they: (1) constitute nonhearsay as admissions of a party-opponent; (2) constitute nonhearsay as evidence of LW's knowledge or intent; or (3) satisfy the business record exception to the hearsay rule.

a. Admissions of a Party-Opponent

A statement is not hearsay if it is offered against a party and is the party's own statement, in either an individual capacity or a representative capacity. See Fed.R.Evid. 801(d)(2)(A). An admission made by a party's employee is admissible against the party if it was made during the course of the employee relationship and relates to a matter within the scope of the person's employment. See Fed.R.Evid. 801(d)(2)(D); United States v. Lauersen, 348 F.3d 329, 340 (2d Cir.2003), vacated on other grounds, 543 U.S. 1097, 125 S.Ct. 1109, 160 L.Ed.2d 988 (2005); Pappas v. Middle Earth Condo. Ass'n, 963 F.2d 534, 537 (2d Cir.1992). Where a statement is [715 F.Supp.2d 504] deemed admissible as an admission by a party-opponent under Rule 801(d)(2), the surrounding statements providing essential context may also be considered. See United States v. Dupre, 462 F.3d 131, 136-137 (2d Cir.2006) (email messages sent by third parties to defendants were admissible to provide context for email messages sent by defendants in response); see, e.g., Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 454 F.Supp.2d 966, 974 (C.D.Cal.2006) (“ Grokster Remand ”) (email chains and online exchanges deemed admissible as nonhearsay on the ground that the messages were offered to establish defendant's knowledge and state of mind as to the activities of its software users).

A number of the challenged exhibits contain email chains and internet forum postings that were written in whole or in part by LW employees, during the course of their employment with LW. The emails and postings pertain to infringement being committed by LimeWire users, and thus relate directly to matters within the scope of the employees' employment with LW. The exhibits therefore constitute direct or vicarious admissions by Defendants, and are not hearsay. The portions of the emails and postings written by LimeWire users and other non-parties provide essential context to the statements by LW employees, and are also admissible.

The Court finds that certain forum postings and email messages written by Adam Fisk, a former LW employee, are inadmissible hearsay, because they were written after Fink's employment with LW had ended.

Accordingly, the Court DENIES Defendants' motion to exclude the exhibits containing the email chains and forum postings, except that the Court excludes exhibits containing emails and postings written by Fisk after his term of employment at LW ended.

b. Evidence of Knowledge and Intent

Out-of-court statements are not hearsay if offered to show the context within which parties were acting, or to show a party's motive or intent for behavior. See 5 Weinstein's Federal Evidence, § 801.11[5]; see also United States v. Salameh, 152 F.3d 88, 112 (2d Cir.1998). Out-of-court statements are also not considered hearsay if used to prove notice or knowledge. See Cameron v. Cmty. Aid for Retarded Children, 335 F.3d 60, 65-66 (2d Cir.2003).

Defendants challenge the admissibility of exhibits that contain (1) screenshots of software programs and related websites, (2) statements about LimeWire quoted in newspaper articles, and (3) strategy memos and talking points provided by LW's public relations firm. The Court finds that these documents are admissible as probative of LW's knowledge of infringing activity by LimeWire users or of LW's intent to induce infringement. The Court DENIES Defendants' motion to exclude the evidence.

c. Business Records

Rule 803(6) contains an exception to the hearsay rule for business records.^[18] The business records exception has been construed generously in favor of admissibility, [715 F.Supp.2d 505] due to the general trustworthiness of regularly kept records and the need for this type of evidence in many cases. See Conoco Inc. v. Department of Energy, 99 F.3d 387, 391 (Fed.Cir.1996); see also Health Alliance Network, Inc. v. Continental Cas. Co., 245 F.R.D. 121 (S.D.N.Y.2007).

Defendants object to documents created by Google Inc., which contain details of an advertising campaign that LW conducted through Google from 2002 through 2006. The documents include the specific keyword and search terms that LW purchased from Google for the campaign. Defendants argue that Plaintiffs have failed to lay a proper foundation to establish that these documents constitute admissible business records. Plaintiffs offered the testimony of a Google employee and former AdWords account manager, Jill T. Randell, who stated that the documents were “business records” and that the exhibits were “a copy of what someone from Google would see when logging into our internal [advertising system.]” Randell stated that the records were prepared in the normal course of business at Google. (Randell Tr. 11:12-11:15).

The Court finds that Randell's testimony is sufficient to establish that the Google documents are business records. Further, the Court finds that the documents possess “sufficient indicia of trustworthiness to be considered reliable,” and to warrant admissibility as business records. See Potamkin Cadillac Corp. v. B.R.I. Coverage Corp., 38 F.3d 627, 632-33 (2d Cir.1994) (quoting Saks Int'l, Inc. v. M/V “Export Champion”, 817 F.2d 1011, 1013 (2d Cir.1987)). The Court DENIES Defendants' motion to exclude the Google documents.

In conclusion, the Court DENIES Defendants' Evidentiary Motions, except that, as discussed above, the Court places conditions on Plaintiffs' future meetings and conversations with Bildson and excludes the emails and forum postings written by Adam Fisk after his employment with LW ended.^[19] The Court now turns to the parties' motions for summary judgment.

IV. Summary Judgment Standard

Summary judgment is appropriate only if the record before the court establishes that there is no “genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). The Court must construe the evidence in the light most favorable to the non-moving party and must draw all reasonable inferences in the non-moving party's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); In re “Agent Orange” Prod. Liab. Litig., 517 F.3d 76, 87 (2d Cir.2008). A motion for summary judgment should be denied “if the evidence is such that a reasonable jury could return a verdict in favor of the nonmoving party.” NetJets Aviation, Inc. v. LHC Commc'ns, LLC, 537 F.3d 168, 178-79 (2d Cir.2008); see also Brown v. Henderson, 257 F.3d 246, 252 (2d Cir.2001); Fed.R.Civ.P. 56(e). Summary judgment is warranted if a party “fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

The non-moving party may not rely on “conclusory allegations or unsubstantiated speculation,” [715 F.Supp.2d 506] Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir.1998), or on mere denials or unsupported alternative explanations of its conduct. See S.E.C. v. Grotto, No. 05-5880, 2006 WL 3025878, at *7 (S.D.N.Y. Oct. 24, 2006). The non-moving party “must do more than simply show that there is some metaphysical doubt as to the material facts,” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986), and must set forth “significant, probative evidence” on which a reasonable factfinder could decide in its favor. Anderson, 477 U.S. at 249, 106 S.Ct. 2505.

V. Infringement Claims Against LWA. Direct Infringement

Plaintiffs' infringement claims against LW are based on theories of secondary liability. To establish their secondary liability claims, Plaintiffs first must establish that LimeWire users directly infringed Plaintiffs' copyrights. There are no genuine issues of material fact as to direct infringement. The evidence in the record establishes that LimeWire users infringed Plaintiffs' copyrights by sharing unauthorized digital copies of the Recordings through LimeWire.

1. Legal Standard

Secondary liability for copyright infringement may be imposed on a party that has not directly infringed a copyright, but has played a significant role in direct infringement committed by others, for example by providing direct infringers with a product that enables infringement. See Grokster, 545 U.S. at 929-30, 125 S.Ct. 2764; Sony Corp. v. Universal City Studios, 464 U.S. 417, 434-35, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984). The rationale for secondary liability is that a party who distributes infringement-enabling products or services may facilitate direct infringement on a massive scale, making it “impossible to enforce [copyright protection] effectively against all direct infringers.” In such circumstances, “the only practical alternative is to go against the distributor of the copying device for secondary liability.” Id. at 930, 125 S.Ct. 2764 (citing In re Aimster Copyright Litig., 334 F.3d 643, 645-646 (7th Cir.2003)).^[20]

To recover on a claim based on secondary liability, a plaintiff first must establish direct infringement by the relevant third party, i.e. the party that received the infringement-enabling device. See Grokster, 545 U.S. at 930, 940, 125 S.Ct. 2764 (holding that liability based on an inducement theory “requires evidence of actual infringement by recipients of the [715 F.Supp.2d 507] device,” and noting that vicarious infringement occurs where one “profit[s] from direct infringement while declining to exercise a right to stop or limit it”); Faulkner v. Nat'l Geographic Enters. Inc., 409 F.3d 26, 40 (2d Cir.2005) (“[T]here can be no contributory infringement absent actual infringement.”).

To establish direct infringement, a plaintiff must show that (1) the plaintiff owns the copyright or copyrights at issue; and (2) the third party infringed the copyrights by unauthorized copying or distribution. See Island Software & Computer Serv., Inc. v. Microsoft Corp., 413 F.3d 257, 260 (2d Cir.2005).

2. Application

The evidence establishes that LimeWire users have infringed Plaintiffs' copyrights. First, Plaintiffs have proven that they own the copyrights for the Recordings. (Pl. SUF ¶¶ 98-102.) Second, the evidence demonstrates that LimeWire users employed LimeWire to share and download the Recordings without authorization. Plaintiffs have submitted documentation and electronic storage media data showing that LimeWire users share and download unauthorized digital copies of the Recordings through LimeWire. Plaintiffs have provided hard drives that contain digital copies of the Recordings, with electronic evidence that establishes that the Recordings were downloaded by LimeWire users without authorization.^[21] (Exs. 466, 487.)

The report from Plaintiffs' expert, Dr. Richard Waterman, also supports a finding of direct infringement. Dr. Waterman analyzed a random sample of files available on LimeWire, and determined that 93% of those files were protected or highly likely to be protected by copyright, and thus not authorized for free distribution through LimeWire. (Waterman Report, 2-3.) Dr. Waterman also analyzed the rate at which the sample files were requested for download by LimeWire users. Based on this analysis, he estimated that 98.8% of the files requested for download through LimeWire are copyright protected and not authorized for free distribution. ( Id., 7-8.)

LW argues that statistical evidence of the “availability” of copyright-protected files and of download “requests” is insufficient to establish actual infringing activity by LimeWire users. Some courts have held that “request” evidence, on its own, does not suffice to establish direct infringement. See, e.g., Arista Records, Inc. v. Mp3Board, Inc., No 00-4660, 2002 WL 1997918, at *4 (S.D.N.Y. Aug. 29, 2002) (finding that availability of infringing material on a web site did not sufficiently establish unlawful distribution or dissemination); London-Sire Records, Inc. v. Doe 1, 542 F.Supp.2d 153, 176 (D.Mass.2008) (“[M]erely exposing music files to the internet is not copyright infringement.”). Plaintiffs, however, do not rely solely on evidence of “requests” and “availability” of the Recordings. Rather, they have submitted substantial direct and circumstantial evidence showing infringement by LimeWire users. Dr. Waterman's report supports this evidence, and provides context as to the scope of infringement.

[715 F.Supp.2d 508] The Court therefore finds that LimeWire users have directly infringed Plaintiffs' copyrights.^[22] The Court turns to the merits of the parties' motions for summary judgment.

B. Inducement of Copyright Infringement

The evidence establishes that LW, by distributing and maintaining LimeWire, intentionally encouraged direct infringement by LimeWire users. Plaintiffs, therefore, are entitled to summary judgment on their claim against LW of inducement of copyright infringement.

1. Legal Standard

In Grokster, the Supreme Court confirmed that inducement of copyright infringement constitutes a distinct cause of action. The Court held that the Grokster defendants “induced” copyright infringement by distributing a device with the “object of promoting its use to infringe copyright, as shown by a clear expression or other affirmative steps taken to foster infringement.” Grokster, 545 U.S. at 936-37, 125 S.Ct. 2764.^[23]

To establish a claim for inducement, a plaintiff must show that the defendant (1) engaged in purposeful conduct that encouraged copyright infringement, with (2) the intent to encourage such infringement. See id. at 937, 125 S.Ct. 2764 (“The inducement rule ... premises liability on purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate commerce or discourage [lawful] innovation ....”); id. at 940 n. 13, 125 S.Ct. 2764 (“[T]he distribution of a product can ... give rise to liability where evidence shows that the distributor intended and encouraged the product to be used to infringe.”) (emphasis added); Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146, 1170 n. 11 (9th Cir.2007) ( “Google's activities do not meet the ‘inducement’ test explained in Grokster because Google has not promoted the use of its search engine specifically to infringe copyrights.”).

A defendant's intent to foster infringement can be established by evidence of the defendant's “clear expression” of such an intent, or of “affirmative steps [the defendant has] taken to foster infringement.” Grokster, 545 U.S. at 936-37, 125 S.Ct. 2764. Direct evidence of inducement is an “advertisement or solicitation that broadcasts a message designed to stimulate others to commit violations.” Id. at 937, 125 S.Ct. 2764. Such evidence, however, is “not [the] exclusive way of” proving inducement liability. Id. at 938, 125 S.Ct. 2764. In Grokster, the Supreme Court found that three specific kinds of evidence, considered in the context of the record as a whole, supported a finding that [715 F.Supp.2d 509] the defendants intended to induce infringement: (1) defendants' internal communications and advertising efforts, which evidenced a clear intent to target users of Napster, a population well-known for committing copyright infringement through file-sharing programs; (2) defendants' failure to develop and implement filtering tools or other means of limiting infringement; and (3) defendants' reliance on infringing activity for the success of their business (including evidence that defendants' advertising revenue depended on Grokster having a high volume of users, which in turn depended overwhelmingly on users' ability to engage in infringing activities through the program). Id. at 938-39, 125 S.Ct. 2764. After making these findings, the Supreme Court remanded the case to the district court to determine whether to grant Plaintiffs' motion for summary judgment on the inducement claim.

On remand, the Grokster district court found that the evidence established defendants' unlawful intent as a matter of law, and granted plaintiffs' motion for summary judgment. The district court based its decision on evidence that: (1) the Grokster file-sharing program was used “overwhelmingly for infringement”; (2) defendants marketed Grokster to Napster users (who were known for their infringing activities), as evidenced in defendants' internal communications and advertising and marketing efforts; (3) defendants provided technical assistance to users seeking to infringe; (4) defendants ensured that Grokster would be capable of infringing use; (5) defendants relied on revenue that depended on users' ability to commit infringement through the program; and (6) defendants failed to take meaningful affirmative steps to prevent or mitigate the infringement facilitated by Grokster. Grokster Remand, 454 F.Supp.2d at 984-92.

2. Application

The evidence before the Court establishes that LW is liable for inducement of copyright infringement.

First, there is overwhelming evidence that LW engaged in purposeful conduct that fostered infringement: LW created and distributes LimeWire, which users employ to commit a substantial amount of infringement.

Second, the following factors, taken together, establish that LW intended to encourage infringement by distributing LimeWire: (1) LW's awareness of substantial infringement by users; (2) LW's efforts to attract infringing users; (3) LW's efforts to enable and assist users to commit infringement; (4) LW's dependence on infringing use for the success of its business; and (5) LW's failure to mitigate infringing activities.

a. LW's awareness of substantial infringement by LimeWire users

Plaintiffs have presented evidence showing that LimeWire is used overwhelmingly for infringement. Dr. Waterman's report establishes that nearly all of the files shared and downloaded by LimeWire users are copyrighted, and not authorized for free distribution through LimeWire. According to the report, the overwhelming majority of download requests through LimeWire are for copyright-protected files, which makes it nearly certain that most actual downloads involve unauthorized content.^[24] [715 F.Supp.2d 510] Plaintiffs also have presented evidence establishing that LW was aware of the substantial infringement being committed by LimeWire users. In internal communications, LW regularly discussed the fact that LimeWire users downloaded copyrighted digital recordings through the program. For example, a draft of a LW Offering Memorandum, created in 2001, states that LimeWire “allows people to exchange copyrighted mp3 files.”^[25] (Ex. 52.) (emphasis added). A September 2002 statement of LW's goals acknowledges that: “Currently, the most common use of the Gnutella Network is the sharing of music files, many of them copyrighted.” (Pl. SUF ¶ 130; Ex. 54.) Other LW documents state that “the only information being shared on peer networks are media files,” a category composed primarily of copyrighted digital recordings, and that the “[s]haring [of] media files is bringing the initial user base” to LimeWire. (Pl. SUF ¶¶ 126-128; Ex. 53.)

In 2006, LW developed a strategic plan to “convert” LimeWire users who were sharing unauthorized digital recordings into customers of LW's online music store, which would sell authorized music (the “Conversion Plan”). In the Conversion Plan, LW openly acknowledged that the majority of LimeWire's users were infringers. The Plan stated that (1) 25% of LimeWire's users were “hardcore pirates;” (2) 25% of users were “morally persuadable;” (3) 20% of users were legally aware; and (4) 30% of users were “samplers and convenience users.” The Plan provided that over time LW would introduce features to LimeWire to block users from downloading infringing recordings, and to direct them to LW's online store.^[26] (Ex. 273, Catillaz Tr. 350; Pl. SUF ¶¶ 524-529.)

Further evidence that LW knew that LimeWire users were committing copyright infringement is contained in (1) emails sent to the company by LimeWire users (Exs. 296, 303, 304, 305, 307); (2) a collection of articles maintained by LW employees in a file labeled “Knowledge of Infringement” (Ex. 197); and (3) the numerous mainstream news articles about widespread infringing activities through LimeWire and similar peer-to-peer networking program (Ex. 302).

The massive scale of infringement committed by LimeWire users, and LW's knowledge of that infringement, supports a finding that LW intended to induce infringement. See Grokster Remand, 454 F.Supp.2d at 985, 992.

b. LW's efforts to attract infringing users

Plaintiffs have presented significant evidence showing that LW purposefully marketed LimeWire to individuals who were known to use file-sharing programs to share copyrighted recordings, or who expressed an interest in doing so.

In February 2001, a court-ordered injunction shut down Napster, after Napster Inc. (the company that distributed the Napster program) was found liable for copyright infringement on the ground that it had facilitated copyright infringement committed by Napster users. Following Napster's demise, LW announced that it expected thirty percent, “[w]ith possibly up to 100 percent,” of Napster users to switch to using LimeWire and similar programs, such as Kazaa and Morpheus. (Ex. 75.) LW developed plans to attract Napster users to LimeWire. Internal email correspondence, often involving LW's CEO and Director Mark Gorton, reveal that LW contemplated a number of strategies to promote LimeWire to Napster users, including initiating press campaigns on college [715 F.Supp.2d 511] campuses relating to “file-sharing and getting free MP3's”; hiring “campus reps” at “Napster-banned colleges”; running a “Napster Independence Day” promotion; and publicizing features of LimeWire that make “finding your favorite artist or album ... easier.” (Exs. 72, 73, 77, 148.).

From 2002 to 2006, LW conducted a marketing campaign through Google AdWords, whereby Google users who entered certain search queries, such as “replacement napster,” “napster mp3,” “napster download,” “kazaa morpheus,” “mp3 free download,” and dozens of other phrases containing the words “napster,” “kazaa,” or “morpheus,” would see an advertisement leading them to the LimeWire website. (Pl. SUF ¶ 162-167, Ex. 82.). LW's Google advertisements promoted LimeWire with direct references to other infringement-fostering programs. For example, LW purchased banner advertisements for LimeWire that read “Join Millions of Morpheus users and download the best P2P file-sharing application for free. Free music downloads ...”; “Outperforms Morpheus!”; and “Faster Downloads Than Kazaa!” (Pl. SUF ¶¶ 199-210, Exs. 82, 102-105.) In its promotional materials, LW touted user testimonials declaring that the LimeWire application is “excellent for downloading music files” and “[h]ands-down the best current mp3 search tool.” (Pl. SUF ¶¶ 246, 533; Exs. 119, 149.) LW also marketed LimeWire as “similar to the popular Napster service, in that [LimeWire] enables the sharing, searching, and downloading of MP3 music files.” (Pl. SUF ¶ 156; Ex. 74). It is undisputed that the vast majority of “MP3 music files” are copyrighted and not authorized for free distribution through LimeWire.

The evidence that LW marketed LimeWire to users of Napster and similar programs, and promoted LimeWire's infringing capabilities supports the conclusion that LW intentionally induced infringement. See Grokster Remand, 454 F.Supp.2d at 986.

c. LW's efforts to enable and assist users to commit infringement

The evidence demonstrates that LW optimized LimeWire's features to ensure that users can download digital recordings, the majority of which are protected by copyright, and that LW assisted users in committing infringement.

LimeWire's search functions are designed to facilitate searches for copyrighted digital recordings. The program's user interface allows users to search for specific artists or albums, or to search for music by genre. A number of LimeWire's genre categories-including “Classic Rock,” “SoundTrack,” and “Top 40”-relate specifically to popular music and inevitably guide users to copyrighted recordings. (Exs. 23, 24. See also Grokster, 545 U.S. at 926, 125 S.Ct. 2764 (recognizing as evidence of inducement-based liability that defendant “in fact allowed users to search specifically for “Top 40” songs, ... which were inevitably copyrighted”) (internal citation omitted); Grokster Remand, 454 F.Supp.2d at 987 (finding that a feature that permits users to narrow a file search to “Top 40” sound recordings constitutes strong evidence that the defendant intentionally enabled infringing activity)).

LW tested and sought to improve LimeWire's ability to search for and download unauthorized copies of digital recordings. For example, in August 2000, LW conducted a search for Sinead O'Connor's copyrighted song “Nothing Compares 2 U,” which it considered a “definitive test” of LimeWire's file-sharing capabilities. The fact that LW tested LimeWire by searching for infringing content gives rise to a “particularly forceful” inference that LW intended to promote copyright infringement.

[715 F.Supp.2d 512] See Grokster Remand, 454 F.Supp.2d at 979-80, 987 (finding that evidence that defendants tested Grokster program by searching for copyrighted music supported a finding of intent).

In addition to ensuring that users can obtain unauthorized copies of recordings through LimeWire, LW has actively assisted LimeWire users in committing infringement. The record reveals several online communications between LW employees and LimeWire users that plainly relate to unauthorized sharing of digital recordings through LimeWire. In many instances, LimeWire users requested assistance in sharing and downloading digital music files, most of which were copyrighted. In response, LW employees offered technical information about the system's functionality, thereby helping users obtain unauthorized copies of recordings. (Pl. SUF ¶¶ 288-305.)^[27]

Evidence that LW has ensured that LimeWire can be used to commit infringement, and that the company has actively assisted infringing users, supports a finding that LW “intended and encouraged” infringement. See Grokster, 545 U.S. at 940 n. 13, 125 S.Ct. 2764.

d. LW's dependence on infringement for success of its business

From 2004 to 2006, LW's annual revenue grew from nearly $6 million to an estimated $20 million. (Pl. SUF ¶¶ 420, 432; Exs. 252, 263.) Such growth has depended greatly on LimeWire users' ability to commit infringement through LimeWire.

Since 2000, LimeWire has developed an enormous user base. The program is widely available online, and can be downloaded for free. LW has estimated that LimeWire was downloaded over three million times during its first year in existence. By 2003, LW boasted that around two million users accessed the program every month. At the time Plaintiffs filed this action, LW claimed that LimeWire had four million users per day. (Pl. SUF ¶¶ 86-96.) LW has acknowledged that the “[s]haring [of] media files,” a category comprised mostly of copyrighted digital recordings (Pl. SUF ¶¶ 126-127), “[brought] the initial user base” to LimeWire. ( Id. ¶¶ 126-128; Ex. 53.) The company has continued to develop LimeWire's user base by promoting the program's infringing capabilities, and marketing it to users known to commit infringement.

LW's sources of revenue depend on LimeWire attracting the massive user population generated by its infringement-enabling features. From 2000 to 2004, LW earned revenue primarily by selling advertising space on LimeWire and LW's website, and by distributing software bundled with LimeWire. (Pl. SUF ¶¶ 410-417.) As LimeWire's user base expanded, LW's revenues from advertising and software distribution increased. (Pl. SUF ¶¶ 409-416). In 2004, LW began selling LimeWire “Pro,” an upgraded version of LimeWire that is available for purchase and makes file-sharing activities easier. (Pl. SUF ¶¶ 56-60.) In January 2008, LW obtained licenses to sell approximately half a million songs, and opened an online LimeWire Store offering authorized sales of digital music. (Pl. SUF ¶¶ 456-460.) LW markets LimeWire “Pro” and the LimeWire Store to LimeWire users. LW's commercial success, therefore, is derived largely from the high-volume use of LimeWire, [715 F.Supp.2d 513] most of which is infringing. This evidence supports a finding that LW intended to induce infringement. Grokster, 545 U.S. at 940, 125 S.Ct. 2764.

e. LW's failure to mitigate infringing activities

The evidence reveals that LW has not implemented in a meaningful way any of the technological barriers and design choices that are available to diminish infringement through file-sharing programs, such as hash-based filtering, acoustic fingerprinting, filtering based on other digital metadata, and aggressive user education.

In May 2006, LW implemented an optional, hash-based content filter. A hash-based filter can identify a digital file that contains copyrighted content, and block a user from downloading the file.^[28] The “default” setting of LimeWire's hash-based filter was “off,” however, meaning that LimeWire users would have to affirmatively turn the filter “on” for it to have any effect on the transfer of digital recordings to or from their computers. LW could have made the hash-based content filter mandatory for all LimeWire users, or made “on” the default setting, so that a user's file-sharing activities would be subject to the filtering process unless he affirmatively deactivated the filter. According to LW's expert Steven Gribble, LW chose to set the filter to “off” because it wished to provide users with “enough flexibility to enable, disable, or configure filtering.” (Gribble Report at 25, 33.) LW's decision was a conscious “design choice” (Gribble Tr. 302-03.), the direct result of which was a failure to mitigate infringement.^[29]

LW considered, but failed to implement, several other plans to block the availability of infringing content through LimeWire. LW discussed a plan for a “hybrid” filtering system that would have combined hash-based filtering and acoustic fingerprinting.^[30] (Pl. SUF ¶ 499; Exs. 289, 290.)

[715 F.Supp.2d 514] The company also developed, but did not implement, its Conversion Plan, which would have included a user education campaign designed to inform users about the legal consequences of copyright infringement and to promote the purchase of authorized music through the LW online store. Under the Conversion Plan, LW eventually would have implemented hash-based filtering and acoustic fingerprinting to prevent users from downloading unauthorized files. (Pl. SUF ¶¶ 435-40, 444-53, 552-16; Exs. 50-53, 273, 274).

LW was aware of other filtering mechanisms that it could have used to mitigate infringing use. For example, LW could have used a keyword-based filter to block unauthorized recordings from appearing in LimeWire searches. LW already uses keyword-based filtering to allow users to limit their receipt of adult content: a LimeWire user can activate a keyword-based filter that prevents a search from bringing up files containing keyword terms that LW has identified as likely to contain pornographic content. LW also has implemented filters to prevent online sharing of personal document files and software program files. (Pl. SUF ¶¶ 522-23.)

Plaintiffs also note that LW does in fact employ active filtering technology, but only to prevent LimeWire users from sharing digital recordings purchased from the LimeWire online store. (Pl. SUF ¶¶ 524-529.) This selective filtering further demonstrates LW's knowledge of infringement-mitigating technologies and the company's intentional decision not to employ any such technologies in a way that meaningfully deters LimeWire users' infringing activities.

The only step LW has taken to address infringement is to post an electronic notice that appears when a user first downloads LimeWire. The notice states that “LimeWire Basic and LimeWire PRO are peer-to-peer programs for sharing authorized files only. Downloading either program does not constitute a license for obtaining or distributing unauthorized content.” (Berlin Decl. ¶ 246; Ex. 5.) Before a user can initiate the download of the LimeWire software, he must choose from the following statements: (1) “I will not use LimeWire for copyright infringement,” or (2) “I might use LimeWire for copyright infringement.” (Ex. 5) If the user selects the second option, LimeWire will not download. The user may then change his response to “I will not use LimeWire for copyright infringement” in order to download the program. (Horowitz Report ¶¶ 86-87.) The notice and “statement of intent” requirement, on their own, do not constitute meaningful efforts to mitigate infringement. See Grokster, 545 U.S. at 926, 125 S.Ct. 2764 (finding that defendant's transmission of e-mails warning users about infringing content does not prevent imposition of inducement-based liability where there is “no evidence that [defendant] made an effort to filter copyrighted material from users' downloads or otherwise impede the sharing of copyrighted files”).

LW chose not to implement any meaningful infringement-reduction strategies in part because it recognized that, “as long as there were other [P2P] applications that didn't filter,” LimeWire users would respond to filtering by switching “to another [P2P application] that doesn't have that filtering behavior or that is less aggressive in making fewer files available.” (Falco Tr. 157-58.)

Failure to utilize existing technology to create meaningful barriers against infringement is a strong indicator of intent to foster infringement. See Grokster, 545 U.S. at 939, 125 S.Ct. 2764; Grokster Remand, 454 F.Supp.2d at 989 (“[A]lthough [defendant] is not required to prevent all the harm that is facilitated by the technology, [715 F.Supp.2d 515] it must at least make a good faith attempt to mitigate the massive infringement facilitated by its technology.”); cf. Aimster, 334 F.3d at 653 (in claim of contributory copyright infringement, if the infringing uses are “substantial,” to avoid liability, the defendant “must show that it would have been disproportionately costly for him to eliminate or at least reduce substantially the infringing uses”).

In conclusion, the evidence shows LW has engaged in purposeful conduct that fostered infringement, with the intent to foster such infringement. LW distributes LimeWire, and (1) is aware that LimeWire's users commit a substantial amount of copyright infringement; (2) markets LimeWire to users predisposed to committing infringement; (3) ensures that LimeWire enables infringement and assists users committing infringement; (4) relies on the fact that LimeWire enables infringement for the success of its business; and (5) has not taken meaningful steps to mitigate infringement. Accordingly, the Court GRANTS Plaintiffs' motion for summary judgment on their claim of inducement of infringement against LW.

C. Contributory Copyright Infringement

Plaintiffs and LW cross-move for summary judgment on Plaintiffs' claim that LW is secondarily liable for copyright infringement because it “materially contributed” to infringement committed by LimeWire users. The Court finds that summary judgment is not warranted because the Court cannot determine, based on the record, whether LimeWire is capable of substantial noninfringing uses.

1. Legal Standard

A defendant may be held liable for contributory copyright infringement if, “with knowledge of the infringing activity,” it “materially contributes to the infringing conduct of another.” Matthew Bender & Co., Inc. v. West Pub. Co., 158 F.3d 693, 706 (2d Cir.1998) (quoting Gershwin Pub. Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1162 (2d Cir.1971)). Unlike an inducement claim, a claim for contributory infringement does not require a showing that the defendant intended to foster infringement. See Grokster, 545 U.S. at 942, 125 S.Ct. 2764 (Ginsburg, J., concurring) (noting that an inducement claim and a contributory infringement claim “capture different culpable behavior”). Rather, to establish a “material contribution” claim, a plaintiff must show that the defendant (1) had actual or constructive knowledge of the infringing activity, and (2) encouraged or assisted others' infringement, or provided machinery or goods that facilitated infringement. See Faulkner v. Nat'l Geographic Soc'y, 211 F.Supp.2d 450, 473-74 (S.D.N.Y.2002), aff'd at 409 F.3d 26 (2d Cir.2005); Matthew Bender, 158 F.3d at 706; accord Napster, Inc., 239 F.3d at 1020 (“Contributory liability requires that the secondary infringer know or have reason to know of direct infringement.”).

A defendant's contribution to a third party's infringing activities must be “material” to give rise to a claim for contributory infringement. See Gershwin, 443 F.2d at 1162; Dynamic Microprocessor Assocs., Inc. v. EKD Computer Sales, No. 92-2787, 1997 WL 231496, at *14 (E.D.N.Y. Apr. 14, 1997). For example, a defendant who is peripherally involved in infringement, such as one who provides online payment services for transactions involving infringement, does not “materially contribute” to infringement. See Perfect 10, Inc., 508 F.3d at 1172 (9th Cir.2007). In contrast, where a “computer system operator learns of specific infringing material available on his system and fails to purge such material from the system,” that party “knows of and contributes to direct infringement” and may be liable for contributory copyright infringement. Napster, 239 F.3d at 1021.

[715 F.Supp.2d 516] [57] In Sony Corp. v. Universal City Studios, the Supreme Court established a rule, known as the Sony-Betamax rule, that shields some defendants from liability for contributory infringement. 464 U.S. at 442, 104 S.Ct. 774. Pursuant to the Sony-Betamax rule, a defendant who distributes a product that materially contributes to copyright infringement will not be liable for contributory infringement if the product also is “widely used for legitimate, unobjectionable purposes” or is “merely ... capable of substantial noninfringing use.” Id. (finding that the defendant was not liable for contributory infringement based on its distribution of the Betamax video recorder, because the recorder was “capable of a substantial non-infringing use,” namely “time-shifting,” i.e. permitting a user to record a television program to watch at a later time^[31]). The purpose of the Sony-Betamax rule is to “leave[ ] breathing room for innovation and a vigorous commerce.” Grokster, 545 U.S. at 933, 125 S.Ct. 2764 (citing Sony Corp., 464 U.S. at 442, 104 S.Ct. 774).^[32]

The plaintiffs in Grokster brought a claim for contributory infringement. The defendants argued that the Grokster P2P file-sharing program was capable of supporting substantial non-infringing uses, such that the Sony-Betamax rule precluded defendants' liability for contributory infringement. The defendants offered evidence that Grokster users employed the program to exchange some authorized files, including authorized digital recordings, digital files of public domain books, and authorized software files. The defendants also argued that, in the future, users would exchange even more authorized content through Grokster, including academic research, public domain files, and user-created audio and video files. Id. at 954-55, 125 S.Ct. 2764. The Ninth Circuit found that the defendants' evidence established that Grokster was “capable of substantial noninfringing” uses, and thus granted summary judgment in favor of defendants on the contributory infringement claim.

The plaintiffs appealed the Ninth Circuit's ruling regarding contributory infringement to the Supreme Court. On appeal, the Supreme Court did not decide whether the Ninth Circuit had been correct in granting summary judgment on the contributory infringement claim.^[33] Rather, the Supreme Court issued two concurring opinions, which took differing positions on whether the Ninth Circuit had been correct in holding, as a matter of law, that Grokster was capable of substantial non-infringing uses.

[715 F.Supp.2d 517] In her concurring opinion, Justice Ginsburg, joined by Chief Justice Rehnquist and Justice Kennedy, found that there was “at least a genuine issue of material fact” as to whether Grokster was capable of substantial noninfringing uses, and thus that the Ninth Circuit had erred in granting summary judgment in favor of defendants. Id. at 942, 125 S.Ct. 2764 (Ginsburg, J., concurring.) Justice Ginsburg stated that, at the time of the lawsuit, Grokster was “overwhelmingly used to infringe.” Given this, defendants' evidence of some non-infringing uses was insufficient, on summary judgment, to establish “a reasonable prospect that substantial or commercially significant noninfringing uses were likely to develop over time.” Id. at 948, 125 S.Ct. 2764.

Justice Breyer, joined by Justice Stevens and Justice O'Connor, reached a different conclusion. In his concurring opinion, Justice Breyer agreed that the vast majority of Grokster users employed the program for infringing purposes. He concluded, however, that the defendants had established that Grokster was capable of significant non-infringing uses based on the evidence that (1) Grokster was already used for some noninfringing purposes; and (2) there was “a significant future market for noninfringing uses of [Grokster].” Id. at 954-55, 125 S.Ct. 2764. Accordingly, Justice Breyer stated, it was appropriate to grant summary judgment in defendants' favor on the contributory infringement claim. Id. at 955, 125 S.Ct. 2764.

2. Application

As previously discussed, Plaintiffs have established that LW has been aware of the prevalence of its users' infringing activities since the creation of LimeWire. LW “materially contributed” to the infringement by designing, distributing, supporting, and maintaining the program. See Usenet.com, 633 F.Supp.2d at 155; see also In re Aimster Copyright Litig., 252 F.Supp.2d 634, 651 (N.D.Ill.2002) (holding that defendant materially contributed to online infringement by providing the “software and the support services necessary for individual Aimster users to connect with each other”); Napster, 239 F.3d at 1022 (finding that defendant materially contributed to its users' infringement by providing the “site and facilities” to commit direct infringement).

There exists a genuine issue of material fact, however, as to whether LimeWire is “capable of substantial noninfringing uses” such that liability should not be imposed pursuant to the Sony-Betamax rule.^[34] See Sony Corp., 464 U.S. at 442, 104 S.Ct. 774; Grokster, 545 U.S. at 939 n. 12, 125 S.Ct. 2764. Currently, LimeWire is used overwhelmingly for infringement. LW, however, has presented evidence of some types of noninfringing content that users share and download through LimeWire, including: (1) electronic copies of books that are in the public domain or authorized for online distribution; (2) historical documents, archival films, and other public domain works; and (3) digital music recordings produced by musicians seeking to promote their work through free online distribution, including musicians who use LW's MagnetMix service (a service that assists musicians and other independent [715 F.Supp.2d 518] artists in distributing their works online, without the assistance or expense of a recording company). LW argues that additional non-infringing uses for LimeWire are likely to develop in the future.

In light of the evidence presented, the Court cannot determine, as a matter of law, whether LimeWire is capable of substantial non-infringing uses. The record before the Court is insufficient to permit the Court to assess the “technological feasibility or commercial viability” of LimeWire's potential non-infringing uses. Id. at 958, 125 S.Ct. 2764 (Breyer, J., concurring). Summary judgment on Plaintiffs' contributory infringement claim, therefore, is not appropriate. Accordingly, the Court DENIES the parties' cross-motions for summary judgment.

D. Vicarious Copyright Infringement

LW moves for summary judgment on Plaintiffs' claim of vicarious copyright infringement. The Court denies LW's motion for summary judgment based on the evidence that LW (1) had the right and ability to supervise and control LimeWire users' infringing activities; and (2) possessed a direct financial interest in the infringing activity.

1. Legal Standard

A defendant is liable for vicarious copyright infringement if it “profit[s] from direct infringement while declining to exercise a right to stop or limit it.” Grokster, 545 U.S. at 930, 125 S.Ct. 2764. To establish liability, a plaintiff must show that the defendant “[1] had the right and ability to supervise the infringing activity and ... [2] has a direct financial interest in such activities.” Gershwin, 443 F.2d at 1162.

The first element of the test for vicarious liability is satisfied if the plaintiff proves that the defendant had the ability to supervise or control the third parties' infringing activity and failed to do so. See Arista Records, Inc. v. Flea World, Inc., No. 03-2670, 2006 WL 842883, at *9 (D.N.J. Mar. 31, 2006); Playboy Enter. v. Webbworld Inc., 968 F.Supp. 1171, 1177 (N.D.Tex.1997) (finding that operator of website was liable for vicarious infringement for failing to exercise its ability to control use of website for infringement).

The second element of the vicarious infringement test requires showing a “causal relationship between the infringing activity and any financial benefit [the] defendant reaps.” See Ellison v. Robertson, 357 F.3d 1072, 1079 (9th Cir.2004). The financial benefit need not be tied directly to sales of the infringing goods. See Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 263 (9th Cir.1996). It may also be established by evidence showing that users are attracted to a defendant's product because it enables infringement, and that use of the product for infringement financially benefits the defendant. See id.; Flea World, Inc., 2006 WL 842883, at *12.

2. Application

There is substantial evidence that LW had the right and ability to limit the use of its product for infringing purposes, including by (1) implementing filtering; (2) denying access; and (3) supervising and regulating users (Pl. SUF ¶¶ 364-368; Add'l SOF ¶ 20; Bildson Decl. ¶ 17). LW has not exercised any meaningful supervisory control over LimeWire users' infringing activity, or provided a legitimate reason for its failure to do so.^[35]

[715 F.Supp.2d 519] The evidence establishes that LW possesses a direct financial interest in users' infringing activity. See Fonovisa, Inc., 76 F.3d at 263; Flea World, Inc., 2006 WL 842883, at *12. As discussed earlier, LimeWire users are drawn to LimeWire because the program permits infringement. LW has profited from its ability to attract infringing users, including through increased advertising revenue and increased sales of LimeWire Pro and authorized music.

LW contends that because LimeWire is capable of substantial non-infringing uses, LW cannot be liable for vicarious infringement. The Court, however, has found no case in which the Sony-Betamax rule was applied in the context of a vicarious infringement claim; some courts have explicitly rejected such an application. See Napster, Inc., 239 F.3d at 1022. The Court, therefore, declines to extend the Sony-Betamax rule to Plaintiffs' vicarious liability claim. Moreover, even if the rule did apply, summary judgment in favor of LW would be unwarranted because the record does not support a finding that LimeWire is capable of substantial noninfringing uses.

Accordingly, the Court DENIES LW's motion for summary judgment as to Plaintiffs' claim of vicarious copyright infringement.

E. Common Law Copyright Infringement and Unfair Competition

The parties cross-move for summary judgment on Plaintiffs' claims of common law copyright infringement and unfair competition. The Court finds that Plaintiffs are entitled to summary judgment on both claims.

1. Common Law Copyright Infringement

Federal copyright law does not cover sound recordings made prior to 1972. Rather, these recordings are protected by state common law on copyright infringement. 17 U.S.C. § 301(c); Capitol Records, Inc. v. Naxos of America, Inc., 4 N.Y.3d 540, 797 N.Y.S.2d 352, 830 N.E.2d 250, 263-64 (2005) (recognizing that common law infringement protects pre-1972 recordings). Plaintiffs have brought a claim for common law infringement with respect to their Recordings made prior to 1972. A claim for infringement pursuant to New York common law consists of two elements: (1) the existence of a valid copyright; and (2) unauthorized reproduction of the work protected by the copyright. See id., 797 N.Y.S.2d 352, 830 N.E.2d at 266.

LW argues that Plaintiffs cannot establish a common law infringement claim because New York common law prohibits only direct infringement, and does not impose secondary liability. The Supreme Court, however, has explained that infringement claims based on secondary liability, including claims for inducement of infringement, derive from the common law. See Grokster, 545 U.S. at 930, 934-36, 125 S.Ct. 2764 (stating that secondary liability for infringement, including claims [715 F.Supp.2d 520] for inducement of infringement and contributory and vicarious infringement, “emerged from common law principles”) (internal quotations and citations omitted); Kalem Co. v. Harper Bros., 222 U.S. 55, 62-63, 32 S.Ct. 20, 56 L.Ed. 92 (1911) (finding that common law principles rendered defendant liable for copyright infringement where defendant “expected” and “invoked” infringing use by a third party). New York courts have recognized the possibility for secondary liability under the common law. See Underhill v. Schenck, 238 N.Y. 7, 143 N.E. 773, 777 (1924) (“One who sells a film with the intention that the buyer shall use it in the infringement of a copyrighted drama is himself liable as an infringer.”); see also Thomson-Houston Elec. Co. v. Kelsey Elec. Ry. Specialty Co., 75 F. 1005, 1007-08 (2d Cir.1896) (finding defendant liable of inducing patent infringement).

The elements of a common law claim of inducement are the same as those of a federal inducement claim: direct infringement, purposeful conduct, and intent. See Underhill, 143 N.E. at 776; Grokster, 545 U.S. at 936, 125 S.Ct. 2764 (stating that inducement of infringement under common law consisted of “active steps ... taken to encourage direct infringement”) (internal quotations and citations omitted); Kalem Co., 222 U.S. at 62-63, 32 S.Ct. 20.

As previously discussed, the evidence establishes that LimeWire users directly infringed Plaintiffs' copyrights, and that LW engaged in purposeful conduct intended to foster that infringement. Accordingly, the Court GRANTS Plaintiffs' motion for summary judgment on their claim of common law copyright infringement.

2. Unfair Competition

Infringement of recordings made prior to 1972 may also give rise to a claim of unfair competition by misappropriation. See Roy Exp. Co. v. Columbia Broad. Sys., Inc., 672 F.2d 1095, 1105 (2d Cir.1982). An unfair competition claim “usually concerns the taking and use of the plaintiff's property to compete against the plaintiff's own use of the same property.” Mp3Board, Inc., 2002 WL 1997918, at *12 (quoting Roy Exp. Co., 672 F.2d at 1105). To establish such a claim, a plaintiff must show (1) unauthorized reproduction and distribution of the plaintiff's work; and (2) the existence of “competition in the marketplace or similar actions designed for commercial benefit.” Capitol Records, Inc. v. City Hall Records, Inc., No. 07-6488, 2008 WL 2811481, at *4 (S.D.N.Y. July 18, 2008) (quoting Naxos, 797 N.Y.S.2d 352, 830 N.E.2d at 266).

There is significant legal overlap between a claim for unfair competition by misappropriation and a claim for infringement pursuant to federal copyright law. See Mp3Board, Inc., 2002 WL 1997918, at *12 (citing Kregos v. Associated Press, 3 F.3d 656, 666 (2d Cir.1993)). Because of this overlap, courts have allowed claims for unfair competition to go forward, where the claims were based on allegations that the defendant induced a third party to reproduce and distribute the plaintiff's work. See id. (denying defendant's motion for summary judgment on unfair competition claim, where claim was based on allegations that defendant induced third parties to make and distribute digital copies of plaintiffs' recordings).

The Court has already found that LW induced LimeWire users to infringe the Recordings. Free distribution of the Recordings through LimeWire competes with Plaintiffs' sales of the Recordings. Accordingly, the Court GRANTS Plaintiffs' motion for summary judgment on their unfair competition claim against LW.

VI. Claims Against Other Defendants

Plaintiffs raise their federal and state-law infringement claims against Gorton [715 F.Supp.2d 521] (the sole Director and former CEO of LW) and Lime Group (an investor in LW). Plaintiffs move for summary judgment on their claims of: (1) inducement of infringement; (2) contributory infringement; and (3) common law copyright infringement and unfair competition. Gorton and Lime Group cross-move for summary judgment on each of these claims, and on Plaintiffs' claim for vicarious infringement. Gorton and Lime Wire FLP also move for summary judgment on Plaintiffs' fraudulent conveyance claim. LimeWire FLP moves for summary judgment on Plaintiffs' unjust enrichment claim. The Court finds that Plaintiffs are entitled to summary judgment on their claims for inducement of infringement, common law copyright infringement, and unfair competition. The Court denies the parties' motions for summary judgment on the remaining claims.

A. Infringement Claims Against Gorton and Lime Group1. Legal Standard

It is well established that “[a]ll persons and corporations who participate in, exercise control over or benefit from an infringement are jointly and severally liable as copyright infringers.” Musical Prods., Inc. v. Roma's Record Corp., No. 05-CV-5903, 2007 WL 750319, at *1 (E.D.N.Y. Mar. 7, 2007) (quoting Sygma Photo News, Inc. v. High Soc'y Magazine, Inc., 778 F.2d 89, 92 (2d Cir.1985)). “[A]n individual, including a corporate officer, who has the ability to supervise infringing activity and has a financial interest in that activity, or who personally participates in that activity is personally liable for infringement.” Stumm v. Drive Entertainment, Inc., 2002 WL 5589, *5 (S.D.N.Y. Jan. 2, 2002) (emphasis added); see also Aram, Inc. v. Laurey, No. 05 Civ. 8380, 2006 WL 510527, *2 (S.D.N.Y. Mar. 1, 2006). These principles apply equally to claims of direct infringement and claims based on secondary liability. See Capitol Records, Inc. v. Wings Digital Corp., 218 F.Supp.2d 280, 284-85 (E.D.N.Y.2002) (finding that CEO of defendant corporation could be individually liable for contributory and vicarious infringement committed by corporation).

2. Application

Gorton is the sole Director of LW. From 2000 to the end of 2006, Gorton was LW's CEO. Gorton is also the CEO and sole Director of Lime Group. Gorton owns 100% of Lime Group. Until June 2005, Lime Group owned an 87% share of LW.^[36]

The Court has already found that LW is liable for inducement of infringement, common law copyright infringement, and unfair competition. The evidence establishes that Gorton directed and benefited from many of the activities that gave rise to LW's liability. In his deposition, Gorton testified that, as CEO, he “ran” LW. (Gorton Tr. 10:11.) LW's former Chief Operating Officer stated that Gorton was the company's “ultimate decisionmaker,” and that his approval was required for “any major strategic and design decisions.” (Bildson 9/10/08 Decl. ¶ 25.) Another LW employee stated that Gorton had the authority to “veto” decisions regarding the development of LimeWire. (D. Nicponski Tr. 163:14-164:25.)

Gorton directed and approved many aspects of LimeWire's design and development. Gorton admits that he conceived of LimeWire and decided that the program should be decentralized and should use [715 F.Supp.2d 522] P2P technology. (Gorton 11/07/2008 Decl. ¶¶ 21-22; Gorton 9/26/2008 Decl. ¶¶ 7-18.) Gorton oversaw the development of LimeWire's filtering system, and decided that the filter should be turned “off” by default. (Bildson Decl. ¶ 26; Gorton 11/07/2008 Decl. ¶¶ 17, 21; Gorton 9/26/2008 Decl. ¶¶ 36-44; Berlin 11/07/2008 Decl. ¶ 20.) Gorton conceived of and was heavily involved in developing the Conversion Plan. (Catillaz Tr. 268:2-21, 322:9-324:21; Exs. 278, 458-460; Gorton 9/26/2008 Decl. ¶¶ 45-57.) He represented LW in negotiations with the recording industry over the Conversion Plan and over plans that the industry proposed for filtering infringing content. (Gorton 9/26/2008 Decl. ¶¶ 55-61.) Gorton made decisions regarding LW's public relations and advertising efforts, and was involved in discussions about marketing LimeWire to Napster users. (Pls. SOF ¶ ¶ 149-162.) This evidence, taken together, also establishes that Gorton knew about the infringement being committed through LimeWire. ( See also Gorton 9/26/2008 Decl. ¶¶ 30-62.)

The evidence further shows that Lime Group was intimately involved in LW's operations. Gorton was CEO of both LW and Lime Group. While LW and Lime Group are formally separate companies, the evidence establishes that Gorton operated them “as a single company.” (Bildson Decl. ¶ 31.) Lime Group and LW share offices, computer services, and support staff. Employees moved between Lime Group and LW without changing titles or job responsibilities. (Bildson Decl. ¶ 32.) Lime Group employees developed much of LimeWire's original technology, and then provided systems administration support for LimeWire and developed user guides, FAQ guides, and merchandising for the program. Lime Group provides numerous services to LW, including managing LW's financial operations and employee benefits; hiring LW employees; and performing investor relations, public relations, and customer support functions for LW. (Pls. SOF ¶¶ 650-55.)

As the majority owner of LW until 2005, Lime Group directly benefited from LW's inducement of infringement through LimeWire, which drove the company's success. Because he owned 100% of Lime Group, Gorton indirectly owned a majority share of LW, and thus also benefited from LW's infringing conduct.

As a result of the actions and benefits described above, Lime Group and Gorton are liable for LW's inducement of infringement. See Capitol Records, Inc., 218 F.Supp.2d at 284-85; Blum v. Kline, 1988 WL 52916, *2 (S.D.N.Y. May 17, 1988) (finding that president of defendant corporation could be found liable for infringement because he “owns all of [the corporation's] shares and is responsible for [its] daily activities.”).

Accordingly, the Court GRANTS Plaintiffs' motion for summary judgment on their claims against Lime Group and Gorton for inducement of infringement, common law copyright infringement, and unfair competition. For the reasons stated above with respect to LW, the Court (1) DENIES the parties' motions for summary judgment on the claim against Lime Group and Gorton for contributory infringement; and (2) DENIES Gorton's and Lime Group's motion for summary judgment on the vicarious liability claim.

B. Fraudulent Conveyance and Unjust Enrichment Claims Against Gorton and Lime Wire FLP1. Legal Standard

A fraudulent conveyance claim arises under Section 276 of the New York Debtor and Creditor Law. Section 276 provides that any “conveyance made ... with actual intent ... to hinder, delay, or defraud either present or future creditors, is fraudulent as to [those] creditors.” N.Y. Debt. & Cred. L. § 276. A plaintiff must [715 F.Supp.2d 523] prove “actual intent” to defraud by “clear and convincing evidence.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). “Ordinarily, the issue of fraudulent intent cannot be resolved on a motion for summary judgment” because intent is “a factual question involving the parties' state of mind.” Golden Budha Corp. v. Canadian Land Co. of America, 931 F.2d 196, 201-02 (2d Cir.1991).

To establish a claim for unjust enrichment, a plaintiff “must prove that the defendant was enriched, that such enrichment was at plaintiff's expense, and that the circumstances were such that in equity and good conscience the defendant should return the money or property to the plaintiff.” Dolmetta v. Uintah Nat'l Corp., 712 F.2d 15, 20 (2d Cir.1983).

2. Application

Gorton established Lime Wire FLP, a family limited partnership, in 2005. Gorton is the general partner of Lime Wire FLP. In June 2005, the partnership purchased Lime Group's 87% interest in LW. When Lime Group owned LW, it received periodic cash distributions from the company. When Lime Wire FLP purchased Lime Group's interest, however, LW began paying the distributions to Lime Wire FLP.

Plaintiffs claim that the distributions from LW to Lime Wire FLP are fraudulent conveyances. Plaintiffs allege that Gorton established Lime Wire FLP and funneled LW's distributions to it in order to protect Lime Group's and Gorton's assets should Plaintiffs receive a judgment against either party. Plaintiffs also claim that Lime Wire FLP has been unjustly enriched by the distributions. Plaintiffs allege (1) that Lime Wire FLP received the distributions at Plaintiffs' expense, because money held by Lime Wire FLP cannot be used to satisfy Plaintiffs' judgment against Gorton and Lime Group; and (2) that equity and good conscience require that the distributions be used to satisfy any judgment Plaintiffs may receive against Gorton and Lime Group, because Gorton intended to defraud Plaintiffs by channeling the distributions to Lime Wire FLP. Gorton and Lime Wire FLP move for summary judgment on both claims, on the ground that Plaintiffs have failed to offer “credible competent summary judgment” evidence showing that Gorton intended to defraud Plaintiffs by establishing Lime Wire FLP.

There is a genuine issue of material fact as to whether Gorton intended to defraud Plaintiffs by establishing Lime Wire FLP. Plaintiffs have submitted a declaration from Vincent Falco, former Chief Executive Officer of a company that also distributed P2P software. In his declaration, Falco states that Gorton told him that Gorton had “created a family limited partnership ... [and] put his personal assets in to [it] ... so that the record companies could not get his money if they sued him and won.” At his deposition, Gorton testified that he told “Falco that [he] had done some estate planning, and that one of the benefits of the [ ] planning ... was that it did help protect [his] assets in the event of a legal judgment against [him] personally.” In a declaration submitted after his deposition, however, Gorton states that he did not establish Lime Wire FLP in order to protect his assets. (Gorton Decl. ¶ 7.) Falco's declaration and Gorton's deposition testimony and declaration create an issue of fact as to Gorton's intent when he established Lime Wire FLP. Accordingly, the Court DENIES Gorton's and Lime Wire FLP's motion for summary judgment on Plaintiffs' fraudulent conveyance and unjust enrichment claims.

VII. Conclusion

For the reasons stated above, the Court (1) DENIES Defendants' motions to exclude [715 F.Supp.2d 524] evidence (D.E. 138, 140, 153, 165, 168);^[37] (2) GRANTS Plaintiffs' motion for summary judgment on the claim against LW of inducement of copyright infringement, and DENIES LW's motion for summary judgment on the claim (D.E. 75, 108); (3) DENIES the parties' cross-motions for summary judgment on the claim against LW of contributory copyright infringement (D.E. 75, 108); (4) DENIES LW's motion for summary judgment on the claim of vicarious copyright infringement (D.E. 108); (5) GRANTS Plaintiffs' motion for summary judgment on their claims against LW of common law copyright infringement and unfair competition, and DENIES Defendants' motion for summary judgment on these claims (D.E. 75, 101, 108); (6) GRANTS Plaintiffs' motions for summary judgment on the claims against Gorton and Lime Group for inducement of copyright infringement, common law infringement, and unfair competition, and DENIES Defendants' motions for summary judgment on these claims (D.E. 75, 101); (7) DENIES the parties' motions for summary judgment on the claims against Gorton and Lime Group for contributory copyright infringement and vicarious copyright infringement (D.E. 75, 101); and (8) DENIES Gorton's and Lime Wire FLP's motion for summary judgment on the fraudulent conveyance and unjust enrichment claims (D.E. 101).

The Court will hold a status conference in this case on June 7, 2010 at 11:00 am. SO ORDERED.

[1] The case was transferred to the undersigned in October 2009 following the Honorable Gerard E. Lynch's appointment to the Court of Appeals for the Second Circuit.

[2] LW filed (1) antitrust counterclaims against Plaintiffs pursuant to Sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§ 1 and 2, and Section 4 of the Clayton Act, Act, 15 U.S.C. § 15; and (2) ancillary counterclaims under New York State law for conspiracy in restraint of trade, deceptive trade practices, and tortious interference with prospective business relations. The Court dismissed LW's claims in 2007. Arista Records LLC v. Lime Group LLC, 532 F.Supp.2d 556 (S.D.N.Y.2007).

[3] A joint amicus brief was submitted by the Electronic Frontier Foundation, Center for Democracy and Technology, Computer & Communications Industry Association, Consumer Electronics Association, Home Recording Rights Coalition, Information Technology Association of America, Public Knowledge, Special Libraries Association, and U.S. Internet Industry Association.

[4] Except that, as set forth below, the Court (1) places conditions on Plaintiffs' future meetings and conversations with Bildson; and (2) excludes certain exhibits containing emails and internet forum postings written by Adam Fisk, a former LW employee, after his employment with LW had ended.

[5] Napster, Inc. was one of the first companies to develop a file-sharing program that permitted users to exchange digital recordings via the Internet. The vast majority of files that were shared through the Napster program were digital recordings protected by copyright, the sharing of which was not authorized. Napster was found liable of contributory and vicarious copyright infringement. The Napster program was shut down by a court-ordered injunction.

[6] LimeWire recommends that “all LimeWire users share generously with one another.” (Pl. SUF ¶ 82.) LimeWire's default settings make all files that a user downloads through LimeWire available to other LimeWire users for download. (Pl. SUF ¶ 83.)

[7] Plaintiffs provided this documentation pursuant to an instruction given by Judge Lynch at a hearing held on December 7, 2007. Since 1972, all new sound recordings have been protected by federal copyright law. See 17 U.S.C. § 102(a)(7). Sound recordings created before February 15, 1972 are protected from infringement by New York common law. See Capitol Records, Inc. v. Naxos of America, Inc., 4 N.Y.3d 540, 797 N.Y.S.2d 352, 830 N.E.2d 250, 263-64 (2005); 17 U.S.C. § 301(c). Here, twenty-five of the Recordings were made after 1972. Plaintiffs have provided federal copyright registration certificates that establish that Plaintiffs' own valid copyrights to these recordings. See 17 U.S.C. § 401(c); Hamil Am. Inc. v. GFI, 193 F.3d 92, 98 (2d Cir.1999). With respect to the five recordings created prior to 1972, Plaintiffs have provided copies of agreements granting them common law copyrights to these recordings. (Pl. SUF ¶ 102.) Plaintiffs have never authorized or licensed LW or users of LimeWire to distribute, publish, or copy any of the Recordings.

[8] Dr. Waterman has conducted similar studies and provided expert opinion in other copyright infringement cases in this and other districts. Courts have approved and relied on his expert testimony in those cases. See Columbia Pictures Industries, Inc. v. Fung, Case No. 06-5578, 2009 WL 6355911, at *1 n. 2, 2009 U.S. Dist. LEXIS 122661, at *5-7 n. 2 (C.D.Cal. Dec. 21, 2009); Arista Records LLC v. Usenet.com, 633 F.Supp.2d 124, 131 n. 4 (S.D.N.Y.2009).

[9] The Court notes that Defendants offer no statistical study to rebut the accuracy or reliability of Dr. Waterman's findings and expert opinion, and do not challenge Dr. Waterman's expertise in the field of statistical analysis.

[10] The categories used include: (1) “confirmed infringing;” (2) “highly likely to be infringing;” (3) “highly likely noninfringing,” and (4) “authorization status indeterminable.”

[11] Defendants do not challenge Dr. Horowitz's expertise or his description of the LimeWire application and its file-sharing system.

[12] Dr. Horowitz's expert opinions on a computer software system and its features was found to be admissible and, in fact, “deserving of substantial weight” by another judge in this district. See Arista Records LLC v. Usenet.com, Inc., 608 F.Supp.2d 409, 425 n. 23 (S.D.N.Y.2009); see also Arista Records LLC v. Usenet.com, Inc., 633 F.Supp.2d 124, 130-31, 133, 150, 152 (S.D.N.Y.2009) (relying on Horowitz's testimony); Columbia Pictures Indus., Inc. v. Fung, Case No. 06-5578, 2009 WL 6355911, at *1 n. 2, 2009 U.S. Dist. LEXIS 122661, at *5-7 n. 2 (C.D.Cal. Dec. 21, 2009) (finding Horowitz's testimony admissible on summary judgment).

[13] Defendants also move for a stay of the summary judgment proceedings until the Court has considered Plaintiffs' motion to strike the Bildson Declaration and for a protective order. Briefing on summary judgment is complete, however. The Court is capable of considering Plaintiffs' motion to strike and for a protective order at the same time as the parties' summary judgment motions, without prejudicing Defendants. Accordingly, the Court denies Defendants' motion for a stay.

[14] Defendants argue that the meeting was improper because Baker intended to give Forrest permission to speak with Bildson only about a settlement, not a declaration. Defendants' argument is unpersuasive. Defendants have presented no evidence indicating that Baker attempted to limit the scope of Forrest's conversation with Bildson, or that Forrest knew that Baker's consent was limited. In her email, Forrest asked if she could have a “substantive” conversation with Bildson in his capacity “as a [LW] employee.” Baker responded “this is fine.” Baker's response did not limit the conversation between Plaintiffs' counsel and Bildson to settlement.

[15] Defendants cite to two cases to support their argument that the Court should strike the Bildson Declaration based on a presumption of disclosure, Hull v. Celanese Corp., 513 F.2d 568 (2d Cir.1975) and MMR/Wallace Power & Indus., Inc. v. Thames Assocs., 764 F.Supp. 712 (D.Conn.1991). These cases involve attorney disqualifications. They do not stand for the proposition that a court should strike an entire declaration where there is no evidence that the entire declaration contains privileged information.

[16] Kempe is the Manager of Technical Account Services at MediaSentry Services, a company hired by the Recording Industry Association of America to monitor various P2P programs, including LimeWire. In their initial witness disclosure list, Plaintiffs included Thomas Carpenter, a “Director” at MediaSentry Services. ( See Forrest 12/05/08 Mot. To Strike/Exclude Decl., Ex. 492.) Plaintiffs sought the same evidence from Kempe that they would have sought from Carpenter, namely MediaSentry's information regarding the infringing activity occurring through LimeWire. Both Kempe and Carpenter derived their knowledge of that information from their work at MediaSentry.

[17] Plaintiffs do not seek to recover for conduct that occurred outside the limitations period.

[18] Rule 803(6) defines a business records as: “A memorandum, report, record, or data compilation, in any form, of acts, events, [or] conditions ..., made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record or data compilation, all as shown by the testimony of the custodian or other qualified witness, ... unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness.”

[19] In addition to the objections discussed above, Defendants have made a number of other objections to Plaintiffs' evidence. The Court has considered those objections and finds them to be without merit.

[20] It is notable that major record companies, including Plaintiffs, have pursued legal action against individuals who commit direct copyright infringement, with considerable success. See, e.g., BMG Music v. Gonzalez, 430 F.3d 888 (7th Cir.2005); Sony BMG Music Entertainment v. Tenenbaum, 672 F.Supp.2d 217 (D.Mass.2009); Atlantic Recording Corp. v. Visione, No. 07-2268, 2008 WL 1924892 (N.D.Ill. Apr. 29, 2008); Arista Records, LLC v. Butler, No. 8:07-cv-3-T-23EAJ, 2007 WL 4557198 (M.D.Fla. Dec. 21, 2007); Atlantic Recording Corp. v. Falgout, No. 06-3784, 2007 WL 4163430 (E.D.La. Nov. 21, 2007). Plaintiffs have sued more than 6,000 LimeWire users for direct copyright infringement. They have obtained judgments against more than 700 users and settled claims against almost 4,000 users. (Coggon Decl. ¶ 4.) The damage awards and other litigation costs imposed upon individual infringers and the publicity concerning such cases have arguably had some deterrent effect on Internet users' infringing activities through online networks. See Justin Hughes, On the Logic of Suing One's Customers and the Dilemma of Infringement-Based Business Models, 22 Cardozo Arts & Ent. L.J. 725, 731-35 (2005) (discussing the extent to which record companies' lawsuits against music consumers for P2P copyright infringement are increasing awareness of copyright law and deterring future infringement).

[21] A conclusive determination of whether a particular audio file was downloaded through LimeWire may be made through analysis of its “hash.” A hash is a property of a particular digital file that reflects all aspects of that file, including its content, quality and resolution, length, encoding, and any “ripping” software that has been used to transfer the file. Thus, two audio files with the same hash not only have the same sound content but also have been created using the same “ripping” software. Based on a hash-based analysis, it is clear that copyrighted digital recordings downloaded through LimeWire by Plaintiffs' investigators, were previously digitally shared and downloaded by other LimeWire users.

[22] Accordingly, the Court rejects Defendants' motion for summary judgment on this ground with respect to all claims of secondary liability.

[23] LW argues that because the tort of “inducement” was not defined until the 2005 Supreme Court decision in Grokster, pre-2005 evidence of inducement should not be considered. ( See Lime Wire Mem. Opp. Pl. Mot. for Partial Sum. J. at 11, n. 8.) This argument ignores the fact that an inducement claim is a form of the long-established cause of action for contributory copyright infringement. See Grokster, 545 U.S. at 930, 125 S.Ct. 2764 (“One infringes contributorily by intentionally inducing or encouraging direct infringement....”); Kalem Co. v. Harper Bros., 222 U.S. 55, 62-63, 32 S.Ct. 20, 56 L.Ed. 92 (1911) (Holmes, J.) (finding contributory infringement liability appropriate where the “defendant not only expected but invoked by advertisement the [infringing] use” of its product); Gershwin Pub. Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1162 (2d Cir.1971) (“One who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a ‘contributory’ infringer.”) (emphasis added). The Court rejects LW's argument.

[24] Defendants make several arguments contesting the reliability of Dr. Waterman's report, which the Court has already rejected.

[25] An “mp3 file” is a digital audio file that commonly contains music.

[26] To date, LW has not implemented any such features.

[27] LW contends that the employees who provided technical assistance and encouragement to infringing users were “rogue moderators,” and that LW did not know of or endorse their actions. This “rogue employee” defense is belied by the evidence of LW's intent to facilitate copyright infringement over a period of several years. See Arista Records LLC v. Usenet.com, Inc., 633 F.Supp.2d 124, 152 n. 19 (S.D.N.Y.2009).

[28] Hash-based filtering utilizes a digital file's “hash,” which is a numeric representation of a file based on a complex algorithm, to identify and block infringing files. If two files have the same hash function, then they are identical. A hash-based content filter may compare files scheduled for online transfer against a database of digital files that are known to possess audio content protected by copyright. Where there is a match, transfer of the digital file may be blocked to prevent unauthorized transfer and copyright infringement. (Horowitz Report ¶¶ 93-103.) Two audio files may contain the same song recording but have different hashes as a result of different settings or “ripping” software that have been applied to the respective files. Because a digital audio file's hash will depend not only on its audio content but also on a number of other factors and settings, a hash-based filtering system cannot be expected to recognize and thwart all infringement on a file-sharing system. (Id.) A hash-based filter system nevertheless has the capacity to substantially diminish unauthorized transfers through a file-sharing system.

[29] LW contends that several of the record companies in this litigation chose not to provide LW with a list of copyright-protected song recordings and their hash content. (Gorton Decl. ¶¶ 59-61.) This argument does not create a genuine issue of fact as to whether LW has taken meaningful steps to mitigate users' infringement. As discussed in this section, LW's decision to set the hash-based filter to “off” by default and its failure to take other available action reveal an intentional course of action to preserve infringing activities among LimeWire users.

[30] Acoustic fingerprinting can monitor the uploading or downloading of digital files. Two audio files that sound the same will have the same acoustic fingerprint. Digital files may be transmitted to a content recognition filter that compares the files against an existing database of unauthorized digital content. If the acoustic fingerprint of a particular file matches a copyright-protected file present in the existing database, the transfer of that file may be blocked. Content filtering software tools have been effectively implemented by other P2P file-sharing systems. (Horowitz Report ¶¶ 104-111.)

[31] In Sony Corp., there was significant statistical evidence suggesting that about nine percent of the Betamax recorder's use was for time-shifting. The Court found that this data, when considered in the context of the product's general capabilities, was sufficient to establish that the recorder was “capable of substantial noninfringing uses.”

[32] The rule also stems from the recognition of the tension between artistic protection and technological innovation. The Supreme Court has noted that the “administration of copyright law is an exercise in managing the tradeoff.” Grokster, 545 U.S. at 928, 125 S.Ct. 2764; see also Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156, 95 S.Ct. 2040, 45 L.Ed.2d 84 (1975) (“[T]he ultimate aim [of copyright law] is ... to stimulate artistic creativity for the public good.... When technological change has rendered its literal terms ambiguous, the Copyright Act must be construed in light of this basic purpose.”). Judge Posner of the Seventh Circuit has recognized that in Sony Corp., the Supreme Court was reluctant to enforce copyright protections against a new technology, where such enforcement might deny noninfringing users the benefit of that technology. See Aimster, 334 F.3d at 649.

[33] The Court's controlling opinion addressed only the plaintiffs' claim for inducement of infringement.

[34] In a recent decision in this district, Judge Baer held that the Sony-Betamax rule could not apply to a contributory liability claim against an Internet service provider that operated a network of Internet bulletin boards. See Arista Records LLC v. Usenet.com, Inc., 633 F.Supp.2d 124, 155-56 (S.D.N.Y.2009). The Court notes that the technology at issue in Usenet.com is different from the technology at issue in this case. In Grokster, the Supreme Court applied the SonyBetamax rule to a P2P file-sharing program similar to the LimeWire program.

[35] In Grokster, the Court of Appeals for the Ninth Circuit affirmed the granting of summary judgment in favor of defendants on plaintiffs' vicarious liability claim. Grokster, 380 F.3d 1154, 1164-66 (9th Cir.2004). LW urges the Court to follow the Ninth Circuit's decision and find that LW did not have the “right and ability to control” the infringing activity. LW argues that the Supreme Court's decision the following year did not affect this holding. This contention is incorrect. Grokster, 545 U.S. at 941, 125 S.Ct. 2764; see also id. at 942, 125 S.Ct. 2764 (Ginsburg, J., concurring) (noting that the Court's decision “vacate[d] in full the judgment of the Court of Appeals for the Ninth Circuit”). The Court of Appeals for the Ninth Circuit has itself recognized that its 2004 decision is “persuasive authority only.” Perfect 10, Inc. v. Visa Int'l Serv. Ass'n, 494 F.3d 788, 804 n. 15 (9th Cir.2007). In any event, the rulings of the district court and intermediate appellate courts in Grokster on the issue of vicarious liability were intensely fact-specific. This Court conducts its own fact-specific inquiry on the evidence in this case. Based on the facts presented, summary judgment in favor of Defendants is not warranted on Plaintiffs' claim of vicarious liability.

[36] In June 2005, Lime Wire FLP, a family limited partnership, purchased Lime Group's share of LW. Gorton had established Lime Wire FLP in early 2005, and serves as its general partner. Lime Wire FLP's limited partners are Gorton, Jody Gorton, Mira Even Gorton, and Zachary Kaleb Gorton.

[37] Except that, as set forth above, the Court (1) places conditions on Plaintiffs' future meetings and conversations with Bildson; and (2) excludes certain exhibits containing emails and Internet forum postings written by Adam Fisk after his employment with LW had ended.

Stephanie LENZ, Plaintiff,
v.
UNIVERSAL MUSIC CORP., Universal Music Publishing, Inc., and Universal Music Publishing Group, Defendants.
Case No. C 07-3783 JF.

United States District Court, N.D. California, San Jose Division.
August 20, 2008.

JEREMY FOGEL, District Judge.

Defendants Universal Music Corp., Universal Music Publishing, Inc., and Universal Music Publishing Group (collectively, “Universal”) move to dismiss the instant case for failure to state a claim upon which relief may be granted. See Fed.R.Civ.P. 12(b)(6). The Court has read the moving papers and has considered the oral arguments of counsel. For the reasons set forth below, the motion will be DENIED.

I. BACKGROUND

On February 7, 2007, Plaintiff Stephanie Lenz (“Lenz”) videotaped her young children dancing in her family’s kitchen. The song “Let’s Go Crazy” by the artist professionally known as Prince (“Prince”) played in the background. The video is twentynine seconds in length, and “Let’s Go Crazy” can be heard for approximately twenty seconds, albeit with difficulty given the poor sound quality of the video. The audible portion of the song includes the lyrics, “C’mon baby let’s get nuts” and the song’s distinctive guitar solo. Lenz is heard asking her son, “what do you think of the music?” On February 8, 2007, Lenz titled the video “Let’s Go Crazy # 1” and uploaded it to YouTube.com (“YouTube”), a popular Internet video hosting site, for the alleged purpose of sharing her son’s dancing with friends and family.[1] YouTube provides “video sharing” or “user generated content.” The video was available to the public at http://www.youtube.com/ watch?v=N1KfJHFW1hQ.

Universal owns the copyright to “Let’s Go Crazy.” On June 4, 2007, Universal sent YouTube a takedown notice pursuant to Title II of the Digital Millennium Copyright Act (“DMCA”), 17 U.S.C. § 512 (2000). The notice was sent to YouTube’s designated address for receiving DMCA notices, “copyright@youtube.com,” and demanded that YouTube remove Lenz’s video from the site because of a copyright violation. YouTube removed the video the following day and sent Lenz an email notifying her that it had done so in response to Universal’s accusation of copyright infringement. YouTube’s email also advised Lenz of the DMCA’s counter-notification procedures and warned her that any repeated incidents of copyright infringement could lead to the deletion of her account and all of her videos. After conducting research and consulting counsel, Lenz sent YouTube a DMCA counter-notification pursuant to 17 U.S.C. § 512(g) on June 27, 2007. Lenz asserted that her video constituted fair use of “Let’s Go Crazy” and thus did not infringe Universal’s copyrights. Lenz demanded that the video be re-posted. YouTube re-posted the video on its website about six weeks later. As of the date of this order, the “Let’s Go Crazy # 1” video has been viewed on YouTube more than 593,000 times.

In September 2007, Prince spoke publicly about his efforts “to reclaim his art on the internet” and threatened to sue several internet service providers for alleged infringement of his music copyrights.[2] Lenz alleges that Universal issued the removal notice only to appease Prince because Prince “is notorious for his efforts to control all uses of his material on and off the Internet.” Lenz’s Opposition Brief at 3. In an October 2007 statement to ABC News, Universal made the following comment:

On July 24, 2007, Lenz filed suit against Universal alleging misrepresentation pursuant to 17 U.S.C. § 512(f) and tortious interference with her contract with You-Tube. She also sought a declaratory judgment of non-infringement. Universal filed a motion to dismiss, which the Court granted on April 8, 2008, 2008 WL 962102. Lenz was given leave to amend her complaint to replead her first and second claims for relief. On April 18, 2008, Lenz filed the operative SAC, alleging only a claim for misrepresentation pursuant to 17 U.S.C. § 512(f). On May 23, 2008, Universal filed the instant motion.

II. LEGAL STANDARD

“Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. Centinela Hosp. Medical Center, 521 F.3d 1097, 1104 (9th Cir.2008). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the `grounds’ of his `entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic Corp. v. Twombly, _ U.S. _, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (internal citations omitted).

III. DISCUSSION

The DMCA requires that copyright owners provide the following information in a takedown notice:

17 U.S.C. § 512(c)(3)(A) (emphasis added). Here, the parties do not dispute that Lenz used copyrighted material in her video or that Universal is the true owner of Prince’s copyrighted music. Thus the question in this case is whether 17 U.S.C. § 512(c)(3)(A)(v) requires a copyright owner to consider the fair use doctrine in formulating a good faith belief that “use of the material in the manner complained of is not authorized by the copyright owner, its agent, or the law.”

Universal contends that copyright owners cannot be required to evaluate the question of fair use prior to sending a takedown notice because fair use is merely an excused infringement of a copyright rather than a use authorized by the copyright owner or by law. Universal emphasizes that Section 512(c)(3)(A) does not even mention fair use, let alone require a good faith belief that a given use of copyrighted material is not fair use. Universal also contends that even if a copyright owner were required by the DMCA to evaluate fair use with respect to allegedly infringing material, any such duty would arise only after a copyright owner receives a counternotice and considers filing suit. See 17 U.S.C. § 512(g)(2)(C).

Lenz argues that fair use is an authorized use of copyrighted material, noting that the fair use doctrine itself is an express component of copyright law. Indeed, Section 107 of the Copyright Act of 1976 provides that ”[n]otwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work … is not an infringement of copyright.” 17 U.S.C. § 107. Lenz asserts in essence that copyright owners cannot represent in good faith that material infringes a copyright without considering all authorized uses of the material, including fair use.

Whether fair use qualifies as a use “authorized by law” in connection with a takedown notice pursuant to the DMCA appears to be an issue of first impression. Though it has been discussed in several other actions, no published case actually has adjudicated the merits of the issue. See, e.g., Doe v. Geller, 533 F.Supp.2d 996, 1001 (N.D.Cal.2008) (granting motion to dismiss for lack of personal jurisdiction).

A. Fair Use and 17 U.S.C. § 512(c)(3)(A)(v).

When interpreting a statute, a court must begin “with the language of the statute and ask whether Congress has spoken on the subject before [it].” Norfolk and Western Ry. Co. v. American Train Dispatchers Ass’n, 499 U.S. 117, 128, 111 S.Ct. 1156, 113 L.Ed.2d 95 (1991). If “Congress has made its intent clear, [the court] must give effect to that intent.” Miller v. French, 530 U.S. 327, 336, 120 S.Ct. 2246, 147 L.Ed.2d 326 (2000) (internal quotation marks and citation omitted). Here, the Court concludes that the plain meaning of “authorized by law” is unambiguous. An activity or behavior “authorized by law” is one permitted by law or not contrary to law. Though Congress did not expressly mention the fair use doctrine in the DMCA, the Copyright Act provides explicitly that “the fair use of a copyrighted work … is not an infringement of copyright.” 17 U.S.C. § 107. Even if Universal is correct that fair use only excuses infringement, the fact remains that fair use is a lawful use of a copyright.[4] Accordingly, in order for a copyright owner to proceed under the DMCA with “a good faith belief that use of the material in the manner complained of is not authorized by the copyright owner, its agent, or the law,” the owner must evaluate whether the material makes fair use of the copyright. 17 U.S.C. § 512(c)(3)(A)(v). An allegation that a copyright owner acted in bad faith by issuing a takedown notice without proper consideration of the fair use doctrine thus is sufficient to state a misrepresentation claim pursuant to Section 512(f) of the DMCA. Such an interpretation of the DMCA furthers both the purposes of the DMCA itself and copyright law in general. In enacting the DMCA, Congress noted that the “provisions in the bill balance the need for rapid response to potential infringement with the end-users [sic] legitimate interests in not having material removed without recourse.” Sen. Rep. No. 105-190 at 21 (1998).

Universal suggests that copyright owners may lose the ability to respond rapidly to potential infringements if they are required to evaluate fair use prior to issuing takedown notices. Universal also points out that the question of whether a particular use of copyrighted material constitutes fair use is a fact-intensive inquiry, and that it is difficult for copyright owners to predict whether a court eventually may rule in their favor. However, while these concerns are understandable, their actual impact likely is overstated. Although there may be cases in which such considerations will arise, there are likely to be few in which a copyright owner’s determination that a particular use is not fair use will meet the requisite standard of subjective bad faith required to prevail in an action for misrepresentation under 17 U.S.C. § 512(f). See Rossi v. Motion Picture Ass’n of America, Inc., 391 F.3d 1000, 1004 (9th Cir.2004) (holding that “the `good faith belief requirement in § 512(c)(3)(A)(v) encompasses a subjective, rather than objective, standard”).[5]

The Copyright Act unequivocally establishes the four factors used to determine fair use:

17 U.S.C. § 107. Undoubtedly, some evaluations of fair use will be more complicated than others. But in the majority of cases, a consideration of fair use prior to issuing a takedown notice will not be so complicated as to jeopardize a copyright owner’s ability to respond rapidly to potential infringements. The DMCA already requires copyright owners to make an initial review of the potentially infringing material prior to sending a takedown notice; indeed, it would be impossible to meet any of the requirements of Section 512(c) without doing so. A consideration of the applicability of the fair use doctrine simply is part of that initial review. As the Ninth Circuit observed in Rossi, a full investigation to verify the accuracy of a claim of infringement is not required. Rossi, 391 F.3d at 1003-04.

The purpose of Section 512(f) is to prevent the abuse of takedown notices. If copyright owners are immune from liability by virtue of ownership alone, then to a large extent Section 512(f) is superfluous. As Lenz points out, the unnecessary removal of non-infringing material causes significant injury to the public where timesensitive or controversial subjects are involved and the counter-notification remedy does not sufficiently address these harms. A good faith consideration of whether a particular use is fair use is consistent with the purpose of the statute. Requiring owners to consider fair use will help “ensure[] that the efficiency of the Internet will continue to improve and that the variety and quality of services on the Internet will expand” without compromising “the movies, music, software and literary works that are the fruit of American creative genius.” Sen. Rep. No. 105-190 at 2 (1998).

B. The Sufficiency of Lenz’s Second Amended Complaint

1. The “Prince Policy”

The operative SAC contains sufficient allegations of bad faith and deliberate ignorance of fair use to survive the instant motion to dismiss. Lenz alleges that Universal is a sophisticated corporation familiar with copyright actions, and that rather than acting in good faith, Universal acted solely to satisfy Prince. SAC ¶ 31. Lenz alleges that Prince has been outspoken on matters of copyright infringement on the Internet and has threatened multiple suits against internet service providers to protect his music. Id. at ¶ 28. Lenz also alleges that Universal acted to promote Prince’s personal agenda and that its actions “ha[ve] nothing to do with any particular [YouTube] video that uses his songs.” Id. at ¶ 30. Although the Court has considerable doubt that Lenz will be able to prove that Universal acted with the subjective bad faith required by Rossi, and following discovery her claims well may be appropriate for summary judgment, Lenz’s allegations are sufficient at the pleading stage.

2. Damages

Universal also contends that the SAC fails to allege a compensable loss under the DMCA. Universal Brief at 2. The SAC provides that:

SAC ¶ 38. Universal nonetheless claims that Lenz has not alleged a compensable loss because: (1) Universal is a private entity and thus not subject to First Amendment actions; (2) Lenz did not suffer any actual injury as a result of the notice; (3) Universal is not liable for damages for intimidation; and (4) Section 512 does not provide for injunctive relief.

At oral argument, counsel for Lenz indicated that while the damages incurred in preparing Lenz’s counter-notice cannot be elaborated upon for reasons of privilege, Lenz did incur actual damages in reviewing counter-notice procedures, seeking the assistance of an attorney, and responding to the takedown notice. See Transcript of Law & Motion Hearing, July 18, 2008, p. 5:15-25. Though damages may be nominal and their exact nature is yet to be determined, the Court concludes that Lenz adequately has alleged cognizable injury under the DMCA.

IV. ORDER

Good cause therefor appearing, IT IS HEREBY ORDERED that the motion to dismiss is DENIED. Universal shall file its answer within twenty (20) days of the date of this order.

[1] Lenz has posted other home videos on You-Tube, allegedly for the same purpose. These additional videos are not at issue in this action.

[2] See, e.g., M. Collett-White, Prince to Sue YouTube, eBay Over Music Use, REUTERS, Sept. 13, 2007, http://www.reuters.com/article/ internetNew/idUSL1364328420070914? feedtype=.RSS&feedName_InternetNews& rpc=22&sp=true (last visited July 23, 2008).

[3] Lenz has dubbed this alleged pattern of activity the “Prince Policy.”

[4] The Supreme Court also has held consistently that fair use is not infringement of a copyright. See e.g., Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 433, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984) (”[a]nyone … who makes a fair use of the work is not an infringer of the copyright with respect to such use.”).

[5] One might imagine a case in which an alleged infringer uses copyrighted material in a manner that unequivocally qualifies as fair use, and in addition there is evidence that the copyright owner deliberately has invoked the DMCA not to protect its copyright but to prevent such use. See, e.g., Online Policy Group v. Diebold, Inc., 337 F.Supp.2d 1195, 1204-05 (N.D.Cal.2004) (suggesting that the copyright owner sought to use the DMCA “as a sword to suppress publication of embarrassing content rather than as a shield to protect its intellectual property”).