US Supreme Court in Washington DC

At the end of its latest session, the Supreme Court issued two unanimous rulings that will have a profound effect on the course of IP law in the US.

One ruling confirmed for copyright owners that, after years of losing before the district courts, they can successfully sue to shut down illegal file-sharing services, while the other broadened the safe harbour for researchers who use patented compounds during preclinical tests to gather information for regulators.

The Grokster case

In a June 27 ruling in the long-running MGM Studios Inc v Grokster Ltd case, the Court said that the peer-to-peer (P2P) networks are not protected by the 1984 ruling in Sony Corp v Universal City Studios Inc.

In Sony the Court had ruled that the fact that a product has infringing uses is not enough for a finding of contributory infringement if its main use is legitimate. The Court heard the case after the film studios had sued Sony alleging that the company was liable for contributory infringement because it had produced a device that allowed the illegal copying of movies.

But in its Grokster decision, the Court set a test called the inducement rule to determine whether defendants promote infringing uses. If they are found to do so, said the Court, then these actions are enough for a contributory liability judgment, regardless of their technology's legitimate uses.

The ruling is a landmark victory for the entertainment companies in their battle against the P2P networks. After years of litigation, the record and music industries finally have a judgment that they can use to shut down services such as Grokster and StreamCast's Morpheus network, which allow users to upload copyright-protected songs for others to download for free.

"One who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps to foster infringement, is liable for the resulting acts of infringement by third parties," wrote the Court.

"Just as Sony did not find intentional inducement despite the knowledge of the VCR manufacturer that its device could be used to infringe ... mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor to liability," said the Court, adding that "the inducement rule, instead, premises liability on purposeful, culpable expression and conduct".

The case reached the Supreme Court after the Court of Appeals for the Ninth Circuit in San Francisco last August affirmed a district court's ruling. That court had interpreted the Sony judgment to find the P2P networks not liable for contributory infringements relating to the millions of illegal song and movie downloads made using P2P software.

"We've had a tough few years," said Mitch Bainwol, chairman and chief executive officer of the Recording Industry Association of America (RIAA), who described the ruling as a turning point in the industry's fortunes against online infringement. "The legitimate [online] marketplace now has a real shot to take off," he said.

Said Michael Weiss, chief executive officer of StreamCast, one of the companies sued by MGM: "Once all the evidence is put forward, we are confident that it will be proven that Morpheus did not, does not and will not promote or encourage copyright infringement."

In its opinion, the Court outlined three features in the case that prove inducement. Firstly, the networks were aiming to satisfy a known market for infringement, very clearly catering to former users of Napster, a song-swapping service that was closed down in 1999; secondly, no attempt was made to combat the infringing uses of the P2P software; finally, the Court found evidence that Grokster and StreamCast were, through advertising, making money from increased user traffic on their sites - traffic that was, for the most part, powered by illegal copying. "This evidence alone would not justify an inference of unlawful intent, but viewed in the context of the entire record its import is clear," said the Court.

There was praise for the ruling from copyright professionals, who believe that the Court found a balance between protecting copyright and allowing further technological progress.

"The Supreme Court upholds and clarifies the Sony case in a way that should allow innovation to continue, but which at the same time prevents people from hiding behind Sony," said Michael Graham, a partner at Marshall, Gerstein & Borun. "This ruling shows that Sony is a safe harbour, not a carte blanche."

However, despite what Bainwol called the "clarity" of the Court's ruling, some observers have reservations about the judgment's implications for the future of technological innovation.

"There is some vagueness about what a technology provider will in future need to do to avoid a ruling of contributory infringement," said Joe Norvell, head of the copyright group at Brinks Hofer Gilson & Lione.

In particular, Norvell is concerned about the Court's second test. In its ruling, the Court wrote that "evidence of unlawful objective is given added significance by MGM's showing that neither [Grokster nor StreamCast] attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software". Added the Court: "We think this evidence underscores Grokster's and StreamCast's intentional facilitation of their user's infringement."

According to Norvell, this standard may create insecurity for technology companies, who may be damned by what they do not do, rather than by their actions.

"As this case gets interpreted, the question could become 'did the technology company take enough measures to combat the infringement?'" said Norvell.

"Today's ruling is worrisome," added Ed Black, president and chief executive officer of the Computer & Communications Industry Association, whose members include Microsoft, Sun Microsystems, Yahoo! and Verizon.

"The Court has set the stage for less innovation, not more. If Hollywood and other content companies follow past patterns of behaviour, they may soon be dictating the terms of digital distribution," said Black. "This ruling muddies the meaning of the Supreme Court's own Sony standard, which for decades has assured innovators that they were free to invent as long as their goods and services were 'merely capable of substantial non-infringing uses'."

"The risk to technology companies and innovators has always been overblown," said Justin Hughes, assistant professor at Cardozo Law School. "On the other hand, an investor always asks about a viable business model before investing in new technology. If the business model for the new technology depends on obvious, widespread infringement, the investor ought to take their money elsewhere."

The Merck case

The ultimate impact of the Merck KGaA v Integra Lifesciences Ltd judgment, delivered on June 13, is even harder to predict than that of the Grokster decision. As a result of the ruling, drugs companies will have greater scope to use patented compounds in their research, but the threshold of permissible research is still unclear, as is the future of research tool patents.

The case began in 1996, when Integra sued Merck, claiming that Merck's funding of research carried out by the Scripps Research Institute into whether five Integra patents relating to cell adhesion could be used to fight cancer tumours constituted patent infringement.

The Supreme Court said that for researchers conducting tests, patent law provided that "exemption from infringement extends to all uses of patented inventions that are reasonably related to the development and submission of any [sic] information" to the Food and Drug Administration (FDA) or other regulatory agencies.

"This necessarily includes preclinical studies of patented compounds that are appropriate for submission to the FDA in the regulatory process," wrote the Court. "There is simply no room in the statute for excluding certain information from the exemption on the basis of the phase of research in which it is developed or the particular submission in which it could be included."

According to the Court, when Congress created the research exemption - known as the safe harbour - "it exempted from infringement all [sic] uses of patented compounds 'reasonably related' to the process of developing information for submission under any [sic] federal law regulating the manufacture, use, or distribution of drugs." This standard is sufficiently broad to include Merck's activities.

The Federal Circuit affirmed in part a district court's infringement ruling because, it said, the research carried out by Scripps on behalf of Merck did not meet the research exemption standards. The research exemption only applied if the research was "clinical testing to supply information to" the FDA for market approval.

The Federal Circuit's ruling narrowed the research exemption to the point where many patent professionals predicted a serious blow to future US drug research if the decision were to stand. But the Supreme Court removed such fears by comprehensively dismissing the lower court's formulation.

"The ruling is a Grand Slam home run from the perspective of our clients, for pharmaceutical researchers, and for consumers," said Josh Rosenkranz, a partner at Heller Ehrman White & McAuliffe, who argued the case on behalf of Merck.

Rosenkranz said that the ruling would allow drug makers to conduct research and tests using patented compounds so that they are able to release so-called second generation drugs, which use the patented compounds in new ways, as soon as the patents have expired.

"This case is about how quickly promising therapies can get to the market," he explained. If the patent owner had the right to prevent research, it could block all testing and applications for market approval for second-generation drugs until the end of the patent term. "If the Federal Circuit's ruling was to stand, other companies wouldn't be able to go to market for up to a decade after a patent's expiry."

But Integra's lawyers remained positive about the ruling: "We are confident that when the evidence is reviewed, the Federal Circuit will uphold the judgment in favour of Integra," said Mauricio Flores, a partner at McDermott Will & Emery.

Though the ruling hurts patent owners to a degree, it also helps other parts of the same companies. "Patent owners are big pharma, so the ruling can hurt them, but the decision also gives them the ability to research what their competitors are doing, so overall it's a wash," said Sandip Patel, a partner at Marshall Gerstein & Borun.

But while the Supreme Court broadened the research exemption, the ruling will not result in a patent free-for-all. "The statutory provision on which this decision rests is actually pretty narrow," said Professor Janice Mueller of the University of Pittsburgh School of Law. "It still only applies to work done for submitting data to the FDA or another regulatory body. I was hoping that the Court would take a broader view of other research and, indeed, for research outside the drugs industry."

Others worry about exactly what kind of work may be included in the exemption. "It's a little unclear what the Court means when it says that a company must have an 'intent to develop' a particular drug," said Steve Maebius, a partner at Foley & Lardner. "Does this mean that the standard can be research that has a specific goal in mind, or simply that you have a basic idea about where you're going with your research?"

The Court's ruling has also caused concern in the research tool industry. Taken to an extreme, the research exemption could allow patented research tools, such as screening techniques that help in the discovery and identification of new drugs, to be used in the testing process without causing infringement. The Court was silent on the issue, refusing to draw a direct link between research tools and the Merck case.

"What does this mean for research tools? That's the $64,000 question," said Heller Ehrman's Rosenkranz. "The sectors of the biotech industry that focus on this area were nervous before this ruling, and they're still nervous now."

Added Rosenkranz: "Even so, in this case we're only talking about the point from which someone has identified their target and the therapies that use the target, and are seeking regulatory approval. The research tools are still valuable before that stage, for instance screening tools to discover the target."

Representing the parties

Grokster and StreamCast: Richard Taranto of Farr & Taranto. MGM: Donald Verrilli of Jenner & Block. Merck: Josh Rosenkranz of Heller Ehrman White & McAuliffe. Integra: Mauricio Flores of McDermott Will & Emery.