The entertainment industry and big technology companies, often at one
another’s throats in Washington, should be able to get along.  In
a digital age, after all, they need one another if they are both to
thrive.  They both got something to cheer about in the Grokster ruling handed down earlier today.

The Supreme Court threaded the needle in its ruling in the Grokster case.  The Court managed to uphold, more or less, the two-decades-old Sony
ruling that made the legal world safe for the VCR.  In so doing,
the Court added a new line of reasoning for the peer-to-peer age. 
The Grokster ruling makes it
unlawful to be in the business of distributing a technology with the
object of inducing others to infringe copyright.  

With this subtle reasoning, the Court has made most people happy.  It is a remarkably good decision in this regard.

The entertainment industry has reason to claim victory.  From
their perspective, this decision is dramatically better than the one
that the Ninth Circuit Court of Appeals reached just months ago, in
which the Grokster business model and the underlying technology were
held not to violate the copyright laws.

On a subtler level, it is not clear that Grokster is
a complete victory for the entertainment industry.  Consider it on
a functional level.  All that this ruling means is that the
litigation strategy, fighting the digital era through the courts, will
continue, rather than a full-on embrace of new technologies and the
future that they herald.  A loss in Grokster might have prompted such a focus, which so far has been absent in the upper echelons of the recording and movie industries.

The Grokster case is not about
the right to make unauthorized copies.  Any serious observer would
agree that there’s no right to music piracy, as the entertainment
industry calls it.  The issue here is about innovation.  The Grokster case is about what business models are permissible and what layers of technology can be built.

The large technology companies, who feared more than anything that the Court might overturn the 1984 Sony decision, came out intact as well.  The Intels and the Ciscos of the world have little to fear from this opinion.  Sony,
which said that technologies must have substantial non-infringing uses,
is still good law.  The twist here is that a business has to ask a
second question.  In distributing this new technology, are they
acting reasonably with respect to what they tell people about using
their technologies?  If so, they should be in the clear.  

The cost to the large technology players will be higher legal bills in assessing the new Grokster prong of the analysis.  But this is a cost that the great margins of their business lines position them to absorb.

The hardest, unresolved question after Grokster
is what the effect of this ruling will be on the entrepreneur in her
garage and on the venture capitalist seeking to put investors’ money to
work.  In threading the needle, the Court has made the copyright
regime more subtle and less clear.  The Sony
rule was easy for the unrepresented technologist to understand: can
somebody use my technology for some lawful purpose?  If the answer
is yes, then the business model is presumptively lawful.  

The Grokster line, announced yesterday, is much harder to work out – and there’s the rub.  The cost of the Grokster
opinion lies in its lawyerly precision.   The problem is that
the entrepreneur will have to work harder to determine what she has to
do to make sure her business is able to attract the capital needed to
get it to market.

 The entrepreneur, and her prospective investor, now have to ask
some new questions.  Does her business model effectively induce
others to violate copyright?  What kinds of advertisements would
get her in trouble?  What are the “reasonable” steps that she
needs to take to stop people from using her technology for infringing
uses?   With the help of a good – and likely expensive –
lawyer, these questions should be able to be answered.  

The problem is that a venture capitalist may be less likely to give her
money if she is close to any of these lines.  She may fear that
it’s too much trouble to experiment in the first place, especially if
capital is going to be harder to come by.

So, it’s back to the courts again.  The Supreme Court’s decision
places the responsibility to uphold America’s culture of
entrepreneurship and innovation squarely in the hands of the lower
courts to determine what the ultimate effect of its thread-the-needle
ruling will be.
    
It’s the next few rulings, reading the tea leaves of the opinions
handed down yesterday, that matters.  If the next tests of the Grokster ruling turn out in favor of the entrepreneur, then the chilling effect of the Grokster opinion on innovation will hopefully be negligible.  

Overall, on reflection, the Grokster opinion isn’t so bad.  But the only clear winners in Grokster are the intellectual property lawyers, who’ve just been guaranteed more business.