On December 10, 2004, the Supreme Court granted certiorari in two cases of interest to the business community. Amicus briefs in support of the petitioners will be due on Monday, January 24, 2005, and amicus briefs in support of the respondents will be due on Monday, February 28, 2005.

1. Peer-To-Peer File Sharing Software ― Contributory or Vicarious Copyright Infringement. Peer-to-peer ("P2P") file sharing software allows users to link themselves together in a network in which each individual computer makes information available to every other computer on the network, thereby eliminating the need for shared files to be stored on a centralized computer server. The ability to locate files available for sharing over these networks is facilitated by one of three indexing methods: a centralized system controlled by a host (the method by which Napster operated before being held legally liable for copyright violations); a completely decentralized system in which each computer on the network maintains a list of files available for sharing on that computer (the method by which Streamcast Networks, Inc. operates); and a "supernode" system, in which a select number of computers on the network serve as indexing servers (the method by which Grokster, Ltd. operates). The Supreme Court granted certiorari in Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., No 04-480, to decide whether distributors of P2P software which uses either the decentralized or the "supernode" indexing method may be held to be contributorily or vicariously liable for copyright infringements by users of their product.

It is largely undisputed that "the vast majority of the files" shared by the users of defendants’ software "are exchanged illegally in violation of copyright law." 380 F.3d 1154, 1160 (9th Cir. 2004). It is also undisputed, however, that the defendants’ software is "capable of substantial noninfringing uses." Id. at 1161. Under the Ninth Circuit’s construction of the Supreme Court’s decision in Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), a defendant whose product is capable of being used in commercially significant, noninfringing ways can be held liable for contributory copyright infringement only if the plaintiff shows that the defendant had reasonable knowledge of specific acts of infringement. 380 F.3d at 1160-61. The Ninth Circuit held that, because the decentralized indexing systems employed by defendants’ software left the defendants without any control over the networks over which infringement allegedly occurred, they could not, as a matter of law, be held either to have had the requisite knowledge to sustain a finding of liability, or to have materially contributed to the infringement. See id. at 1162-64. The Ninth Circuit further held that the decentralized nature of the indices employed by defendants’ software deprived them, as a legal matter, of the right and ability to supervise the infringing activities, as is required to sustain a finding of vicarious copyright infringement. See id. at 1164-65.

The Ninth Circuit’s construction of the Supreme Court’s decision in Sony Corp. conflicts with that of the Seventh Circuit, which considers not only whether the product at issue is capable of substantial noninfringing uses, but also how "probable" it is that the product will be used in a noninfringing manner. See In re Aimster Copyright Litig., 334 F.3d 643, 653 (7th Cir. 2003).

This case is of interest to any business that produces copyrighted material capable of being converted to digital format and shared electronically. Any questions about this case should be directed to Craig Canetti (202-263-3276) in our Washington, D.C. office.

2. Takings Clause ― Issue Preclusion. In Williamson County Regional Planning Commission v. Hamilton Bank, 473 U.S. 172 (1985), the Supreme Court ruled that a federal takings claim against a local government is not ripe unless the plaintiff has pursued available procedures for obtaining compensation under state law. The Supreme Court granted certiorari in San Remo Hotel, L.P. v. City and County of San Francisco, No. 04-340, to decide whether a claimant who has been denied compensation in a state-court proceeding undertaken under a reservation of federal rights may be barred by the doctrine of issue preclusion from pursuing a federal takings claim in federal court.

The San Remo Hotel in San Francisco filed a federal action challenging the constitutionality of a city ordinance that allowed hotels to avoid severe limitations on their operations only by paying a substantial fee. The Ninth Circuit held that San Remo’s claims were unripe because it had failed to seek compensation in state court as required by Williamson. Years later, the California Supreme Court rejected San Remo’s state-law claim for compensation, and San Remo renewed its federal court challenge. The district court dismissed the claim after finding it to be barred by issue preclusion and the statute of limitations. The Ninth Circuit affirmed solely on the ground that San Remo’s claims were barred by issue preclusion. 364 F.3d 1088 (2004). Although the court recognized that San Remo had expressly reserved its federal rights, it held that issue preclusion nonetheless applied because "the state courts would give preclusive effect to the judgment of the state court and the state and federal substantive law of takings are equivalent." Id. at 1096.

Under the Ninth Circuit’s approach, property holders may be entirely precluded from presenting the merits of a federal takings claim in federal court. Accordingly, the case is important to all businesses that are subject to state or local regulation affecting their use of property.

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