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Supreme Court Hears File-Sharing Case

Can technology be blamed for digital piracy?

That was the question before the Supreme Court (search) on Tuesday, as justices heard arguments from the recording and motion pictures industries on one side and file-sharing technology companies on the other.

Metro-Goldwyn-Mayer Studios v. Grokster was brought before the high court after two lower courts ruled that entertainment companies could not sue software makers Grokster Inc. (search) and StreamCast Networks (search) over illegal file-sharing.

It is illegal to download content over the Internet without the copyright holders' permission, a fact that will be unaffected by a ruling on MGM. Still, millions of users download songs, TV shows and movies every day, despite the possibility that they could be sued for thousands of dollars.

Columbia Pictures, Atlantic Records and Twentieth Century Fox Films (the latter owned by News Corp., which also owns FOXNews.com) were among the entertainment giants arguing that the sheer volume of content exchanged over peer-to-peer networks (search) means software companies should also be sued for contributing to the massive copyright infringement.

"If theft on the Internet is left unchecked, it will continue to cause serious and increasing damage to the U.S. economy, which derives so much of its strength from intellectual property," said Bob Wright, chairman and CEO of NBC Universal. "Creativity and innovation — the primary drivers of our economic growth — can only thrive when protected by the rule of law."

Some of the petitioners argued against blanket protection for file-swapping companies, opening the possibility that inducement may become a factor when the court deliberates. During Tuesday's arguments, Justice David Souter asked if "willful indifference" should be a factor in liability. Justice Anthony M. Kennedy said it seemed "wrong" that companies were profiting from stolen property.

But the justices also seemed uncomfortable with the fact that such lawsuits could prevent the invention of the next-generation iPod or DVD player, which can both be used illegally.

Justice Stephen G. Breyer wondered if the legal and "really excellent uses" of that technology outweighed the potential for improper use.

The entertainment industry has struggled, at times awkwardly, to grapple with its new-media bugaboo. Results have been mixed; for instance, while the Recording Industry Association of America (search) successfully sued hundreds of people for swapping songs, a lawsuit against a 12-year-old New York girl in 2003 left it red-faced.

How the court rules has tremendous implications for how television shows, films and music are consumed in the age of TiVo.

Software companies have argued that some of their customers use their services legitimately and insist they do not exist to enable piracy. Moreover, a Supreme Court ruling against them would have a chilling effect on new technologies and could even put companies like Grokster out of business.

"We're not encouraging infringing uses. We're saying there's lots of legitimate [reasons] to download," Fred von Lohmann, an attorney for Grokster, told reporters.

But a ruling in favor of Grokster could spark an explosion of illegal file-swapping, a nightmare for artists who depend on royalties for their livelihood. And the entertainment industry contends that companies like Grokster operate knowing their products are most often used for illegal means.

"If you run a business like Grokster where the vast majority is infringing and you are putting profits in your pocket, you ought to be on the hook. You ought to have to stop the infringing activity," Donald B. Verrilli Jr., a lawyer for the entertainment companies, said outside the Supreme Court building. He added that his clients did not intend for companies like Grokster to go out of business.

But a ruling against Grokster and Streamcast would be a dramatic departure for the court, which has held that manufacturers are not liable for illegal uses of their products by customers.

About two decades ago, Hollywood was similarly alarmed by the introduction of VCRs. The court ruled in 1984's Sony Corp. v. Universal City Studios that recording copyrighted programming did not substantially "harm" their value.

The real harm in the MGM case, file-sharing supporters contend, would be to innovation.

Justice Antonin Scalia wondered if a ruling for entertainment companies would burden inventors with having to predict how pirates may try to co-opt their products, which means "if I'm a new inventor, I'm going to get sued right away," he said.

"The most important question here is, what is the proper balance point for the interest of copyright holders and the interest of inventors?" the Electronic Frontier Foundation's Ren Bucholz told FOXNews.com.

"In the past, manufacturers were certain if they brought a product to market they wouldn't have to ask Hollywood first, and that as long as it was a multipurpose device they wouldn't be held liable for their users' actions," he said.

Now, a company like Apple has to think twice about introducing iPods to the market, according to Bucholz.

Indeed, it would be difficult to imagine the world without the contributions of Apple, Microsoft and Google, the founders of which all started out as amateur inventors working independently of large corporations. A rule holding manufacturers liable for use could harm so-called garage inventors the most, Grokster supporters contend.

"Every garage inventor will have to take a hard look at the stuff they are making and weigh their assets, because even the beginning of a lawsuit is incredibly expensive to defend," Bucholz said.

But major-label recording artists, including Elvis Costello, the Dixie Chicks and Tom Waits, have argued that "even successful artists suffer economic loss when recorded music is downloaded and enjoyed, but not purchased." In an amicus brief, the artists were among a group that said those struggling in the industry were likely to be most deeply affected by losses incurred from piracy.

Not all recording artists are against the technology. Many have argued that P2P technology has allowed the anti-Britneys of the industry — the ones less likely to make it into heavy rotation on MTV — to find and broaden their audience.

Ken Waagner, and independent marketing consultant to Wilco, said the critically hailed band only began to thrive after releasing their album "Yankee Hotel Foxtrot" for free on the Internet.

"They never made money from selling records ever," Waagner told FOXNews.com. "'Yankee Hotel Foxtrot' was the first time they ever saw royalty checks, and that was after giving it away free for eight months" online.

Waagner said media consolidation — which has made it prohibitively expensive to market an artist by traditional means — is hurting the industry, not the Internet.

"The record industry kind of created their own problem here," he said. "They controlled the physical distribution of goods and then they controlled radio, and in order to get into record stores you had to be distributed by one of the major six — now four — record distributors.

"You have this window to get played on the radio, and you go to radio with guns blazing and wallet open, and if it doesn't happen, the band is dead in the water."

Few Web technology experts believe that a ruling in favor of the entertainment industry will make file-swapping go away. EFF's Bucholz predicted that as with the VCR, the movie industry could actually profit from the Internet, once it learned to embrace it.

"It's definitely clear that the entertainment industry has not quite known what to make of all this change," he said. "If we look back at other examples of technology that suddenly appeared on the scene, that kind of flailing about has happened many times before."

And the music business risks becoming irrelevant if it does not find a way to work with advances in technology, Bucholz warned.

"As their legal options are exhausted, the recording industry will have to come around to the idea that they can't just sit on their vaults as technology whizzes past them."

The case is Metro-Goldwyn-Mayer Studios v. Grokster, 04-480. Click here for the case (Findlaw) .