www.christopher-pappas.com INTRODUCTION In 1883, the importance of intellectual property was recognized for first time in the Paris Convention for the Protection of Industrial Property followed by the Berne Convention for the Protection of Literary and Artistic Works in 1886. Nowadays, the Universal Declaration of Human Rights, and to be more specific Article 27, protects the intellectual property rights that a creator or an owner of a patent or copyright has on his/her own work or investment (“What is intellectual property?” n.d.). It is true to say that countries realized that intellectual property is a powerful tool for economic development and social and cultural welfare. Furthermore, countries wanted to promote creativity and invention especially when the interests of the innovator are the same as those of the public interest. As a result, countries created laws to protect intellectual property. Moreover, each of us should promote intellectual property rights because of the benefits we join. For example, with the patent system an inventor of a new and highly effective drug for cancer will continue his/her research in order to produce a better and more efficient product. The results of this invention will benefit the members of the society with several ways. Patients will have more possibilities of being cured and the inventor will be rewarded for his creativity. Intellectual property refers to the intangible property, such as patents, copyrights, trademarks, and trade dress, which belong to a person or a company. To be more specific, it refers to the creations of the mind like: symbols, inventions, artistic works, literary, and images (“Introduction to intellectual property: theory and practice” (1997). General speaking, intellectual property is divided into two categories: 1. Patent or industrial property, which includes trademarks, inventions, industrial designs, and geographic indications of source; and 2. Copyright, which includes literary and artistic works, such as poems, paintings, plays, films, musical works, novels, drawings, photographs, architectural designs, and sculptures (“What is intellectual property” n.d.). Moreover, a patent for an invention is an exclusive right granted to the inventor, issued by the United States Patent and Trademark Office. A patent provides protection for the invention to the owner of the patent for a limited period, generally 20 years from the date the application for the patent was filed in the United States and the maintenance fees were paid. Moreover, U.S. patent grants are effective only within the United States, U.S. territories, and U.S. possessions. Patent protection means that the invention cannot be commercially made, used, distributed, or sold without the patent owner’s consent. Furthermore, a patent owner can sell the right of the invention to someone else, who will become the new owner of the patent. When a patent expires the protection ends, and as a result, the invention becomes available to commercial exploitation by others (“What is a patent?” 2005). Also, there are several types of patents but the most common are three: 1. Utility or function patents, such as a process, machine, article of manufacture, or composition of matter, 2. Design patents, such as a new, original, and ornamental design for an article of manufacture; and 3. Plant patents, such as a distinct and new variety of plant (“What is patent? n.d). Furthermore, the purpose of copyrights is to protect the expression of ideas. In other words, it protects the rights of the authors and creators in any field, such as literary, dramatic, musical, artistic, and certain other intellectual works, both published and unpublished. As Jennings M. (2006), states: “A copyright gives the holder of the copyright the exclusive right to sell, control, or license the copyrighted work.” (p. 624) According to the Section 106 of the 1976 Copyright Act, the holder

1. 1
A&M Records, Inc. vs Napster, Inc.
Metro-Goldwyn-Mayer Studios vs Grokster, LTD
by Christopher Pappas
Master of Business Administration 607
Dr. Sue Ann Mota
Business Ethics, Law, and Communication
Monday, November 3, 2008

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Objectives
What is Intellectual Property?
What are the Legal Issues of the covering cases?
What are the Ethical Issues of the covering cases?

3. 3
Intellectual Property
Intellectual property refers to
the intangible property such as
patens, copyrights, trademarks,
and trade dress, which belong
to a person or a company

4. 4
Intellectual Property
Intellectual property refers to
the intangible property such as
patens, copyrights, trademarks,
and trade dress, which belong
to a person or a company
Patents
Copyrights

5. 5
Intellectual Property
Intellectual property refers to
the intangible property such as
patens, copyrights, trademarks,
and trade dress, which belong
to a person or a company
Patents
Copyrights

6. 6
Intellectual Property
Intellectual property refers to
the intangible property such as
patens, copyrights, trademarks,
and trade dress, which belong
to a person or a company
Patents
Copyrights

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Copyright’s Basics
The purpose of the copyrights is to protect the expression of ideas.
“A copyright gives the holder of the copyright the exclusive right to sell,
control, or license the copyrighted work” (Jennings, 2006).
According to Section 106 of the 1976 Copyright Act, the holder of the
copyright has the total control over the use of the copyrighted work.
After January 1 1978, the creator holds the copyright from the date it has
been created until 70 years after his death.
The Copyright Office of the Library of Congress registers copyrights.

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Copyright’s Fair Use
Fair use is occasionally and spontaneous use of copyrighted materials
for limited purposes.
According to sections 107 through 118 of the Copyright Act, “one of the
most important limitations is the doctrine of fair use.”
Based on Section 107, there are four factors that determine of whether
not an activity is within fair:
1. The purpose and character of the use,
2. The nature of the working being used,
3. The amount of the work used, and
4. The effect of the use on the market for or value of the
original, copyrighted work.

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Introduction CASE STUDY I
A&M Records Inc. vs Napster Inc.
Shawn Fanning, a 19-year-old student at Northeastern University,
Boston, created a P2P music file sharing service.
The purpose of the service was to enable people copy and
distribute MP3 music files with each other.
Napster was released in June 1999 and operated in this format until
July 2001.
Napster had to face legal challenges related to intellectual property
and copyrights.
Today, Napster operates under a new policy and philosophy.

10. 10
Introduction
A&M Records Inc. vs Napster Inc.
MP3: It makes an audio file smaller
and as a result, it is easier to be
transfered over the internet.
P2P technology means that individual
users connect to each other directly
without the need of a central point of
management.
Napster is a hybrid P2P network. It
uses a central server, but users have
the responsibility for hosting
information, for sharing files, and for
downloading.

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Napster’s Operation
A&M Records Inc. vs Napster Inc.
Napster was a search engine that was able to find only MP3 files.
The MP3 search engine had the ability to trade MP3 files directly,
without the use of a centralized server for storage.
Napster had an effective way of online interaction between its
users.
Napster index and directory were uploaded on Napster’s server, all
the MP3 files were transfered across the Internet using several
Window protocols directly from one user to the other.
Napster claimed that one year after the release of the service its
unique users’ accounts were more than 20 millions.

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Legal Issues
A&M Records Inc. vs Napster Inc.
In 2000, A&M Records along with 18 other record companies sued
Napster.
Under the US Digital Millennium Act (DMCA) of 1998, A&M accused
Napster for contributory and vicarious copyright infringement.
Under DMCA Act, A&M accused Napster for three major
infringements:
1. Its users were directly infringing plaintiff’s copyright,
2. Napster was liable for contributory infringement of
plaintiff’s copyright and,
3. Napster was also liable for vicarious infringement of
plaintiff’s copyright.

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Legal Issues
A&M Records Inc. vs Napster Inc.
vs
With simply words, A&M accused Napster not of
violating copyright itself but of contributing to
and facilitating other people’s infringement.

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Legal Issues
A&M Records Inc. vs Napster Inc.
The defense of Napster was based on the
following three major points:
The Audio Home Recording Act of 1992,
The Digital Millennium Copyright Act (DMCA) of 1998, and
Misuse of copyright and implied license.

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Legal Issues
A&M Records Inc. vs Napster Inc.
Napster stated that it was a service to be used for “space
shifting” of sound recordings and Napster referred to the
Betamax case of Sony vs. Universal Studios, where
television shows were recorded to be viewed at a later
time.
However, Napster did not only
move content into a more usable
format but also hold copies so
that files could be shared among
Napster’s users.

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Legal Issues
A&M Records Inc. vs Napster Inc.
Moreover, based on the DMCA that protects Internet
Service Providers (ISP) Napster stated that is was used
as a service for users to sample music before they
purchased an entire album.
Although, the District Court stated
that if Napster was used only to
sample music files, it would only
require limited usage of songs,
and not the entire song or album.
Thus, giving the capability to users
to download the MP3 files.

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Legal Issues
A&M Records Inc. vs Napster Inc.
Furthermore, Napster stated that since the launch
of Napster, music sales were increased.
Though, the District Court stated that
Napster did not provide enough
evidence to support that notion, and,
plaintiffs presented an incredible
amount of evidence indicating that
Napster actually harmed overall
music sales

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Legal Issues
A&M Records Inc. vs Napster Inc.
In July of 2000, the District Court for the Northern District of
California decided that Napster was guilty for the above three
infringements.
In February of 2001, the Ninth Circuit Court of Appeals confirmed the
District’s Court decision.
In 2001, the Napster case was settled. Napster had to pay $26 million
to creators and copyrighters for using their music without
authorization and another $10 million for future licensing royalties.
In April 2001, Napster had assets of $8 million and liabilities over
$100 millions.
In June 2002, Napster filed for Chapter 11 bankruptcy.

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Conclusion
A&M Records Inc. vs Napster Inc.
Napster still exists but it operates under new structure and policy.
Napster’s operation is both legal and ethical.
On September 15, 2008, Napster Inc. and Best Buy Co. informed the
public that they agreed to merge.
Fanning’s idea for creating this software was innovative and highly
creative. However, it lacked the legal and ethical base in order to
protect intellectual property rights of creators.

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Introduction CASE STUDY II
Metro-Goldwyn-Mayer Studios, Inc. vs Grokster, Ltd.
Grokster was a P2P file sharing service for music and movies.
Led by MGM, 28 major entertainment companies sued Grokster
with the accusation of contributory and vicarious copyright
infringement.
The case went to the Court of Appeals and finally to the Supreme
Court.

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Grokster’s Operation
Metro-Goldwyn-Mayer Studios, Inc. vs Grokster, Ltd.
Grokster was more sophisticated software than
Napster. The main characteristics of Grokster are:
1. It does not have access to the source code for
the application,
2. It uses FastTrack networking Technology, not
owned by Grokster, and
3. At the start page users see advertisements
that are retrieved by Grokster’s client
software.

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Grokster’s Operation
Metro-Goldwyn-Mayer Studios, Inc. vs Grokster, Ltd.
vs

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Legal Issues
Metro-Goldwyn-Mayer Studios, Inc. vs Grokster, Ltd.
In October 2001, MGM along with 28 major music and movie firms
sued Grokster with the accusation of contributory and vicarious
copyright infringement.
The defense supported its arguments using the Audio Home
Recording Act and won the first and second round.
In 2005, the Supreme Court decided that Grokster was liable for
inducing copyright infringement.
After that decision, Grokster had to pay $50 million to the recording
industry and was force to shut down its operation.

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Legal Issues First Court’s Decision
Metro-Goldwyn-Mayer Studios, Inc. vs Grokster, Ltd.
The companies complained that Grokster was acting
illegally and that music and movie industry were losing
significant profits.
The defense supported its arguments using the
Betamax case. The court rejected the
accusation based on that “file-sharing
software could be used for legitimate
purposes, and as such was protected under the
1984 Betamax ruling”.
The logic behind this decision was simple: electronic
firms should not be accused if their products could be
used to commit piracy.

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Legal Issues Second Court’s Decision
Metro-Goldwyn-Mayer Studios, Inc. vs Grokster, Ltd.
MGM was not satisfied by this decision, and went to the
Ninth Circuit Court of Appeals.
Entertainment industry proved that 90% of the daily
illegal downloading was happening throughout Grokster.
The defense supported that Grokster was no
liable since there was no central server, and
therefore, it had neither the right nor the ability
to control over its users.

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Legal Issues Supreme Court’s Decision
Metro-Goldwyn-Mayer Studios, Inc. vs Grokster, Ltd.
In 2005, the Supreme Court decide that Grokster was
liable for inducing copyright infringement.
The final decision of the Court was: “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 3rd parties”
In 2005, Grokster had to pay $50 million to the recording
industry and was force to shut down its operation.

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Conclusion
Metro-Goldwyn-Mayer Studios, Inc. vs Grokster, Ltd.
Grokster was liable for copyright
infringement.
The decision of the Supreme Court
maid electronic industry to believe
that it will block creativity and
technological innovation of devices
such as iPod.

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Ethical Issues
Institute for Policy Innovation
due to piracy copyrighted material.
U.S. losses $58 billion every
year.
373,375 U.S.’s workers losses
their jobs.
Worker’s earning is decreased
by $16.3 billion every year.
Government losses $2.6 billion
in tax revenues annually.

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Ethical Issues
How does this make you feel?

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Questions?

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Thank you!
www.christopher-pappas.com