Nine justices heard oral arguments on Tuesday in a case which the powerful interests of the entertainment companies clash with hi-tech industries.
On the surface, the court seeks to determine whether companies that distribute peer-to-peer software can be held liable for copyright infringement if the networks are used for illegal copying of songs, movies, software or other content.
But legal analysts say the case, likely to be decided in June, has broader implications for the battle against rampant online piracy and for whether new technologies can be introduced without fear of litigation.
Activists on both sides of the issue demonstrated outside the court. Some carried signs reading "hands off my iPod". Others, highlighting the losses for artistes, carried banners reading "Feed a Musician".
Music industry argument
Donald Verilli, arguing for the plaintiffs, including the movie and music industries, said the companies being sued for the file-sharing systems essentially built their businesses on the theft of copyrighted material.
Verilli said that allowing the defendants, Grokster and Streamcast Networks, to continue unchecked, "gives them a perpetual free pass" to facilitate illegal swapping of music and films.
"If a guy is sitting in his garage figuring out whether to invent the next iPod, how do we know in advance anything that would give the inventor the confidence he would not be sued?"
Justice David Souter
"The recording industry has lost 25% of its revenue since the onslaught of this," Verilli told the court, saying that the distributors of peer-to-peer software "are draining all the money out of the system".
But Richard Taranto, arguing for the defendants and a broad coalition of supporting technology firms and others, said the court should reaffirm a standard set 21 years ago in a case involving the Sony Betamax video recorder, when it upheld the use of technology that could be used both legally and illegally.
"Any alternative would be worse," Taranto said, adding that if the Betamax legal standard were overturned, "virtually every business [involved in new technology] would be subject to litigation".
Taranto added that while the peer-to-peer networks may be used for illegal copies, this applies to other technology, "including the personal computer, the modem, the internet service provider. Every piece in this chain is essential".
The justices peppered the lawyers with questions about how the case should be decided, specifically how to determine the portion of use of any new technology for legal or illegal uses.
Verilli cited studies showing that 90% of the use of Grokster and Streamcast were for illegal copies, but said it is "not a numerical question", but a question of what the companies set out to do.
"Are they building a business supporting legitimate activity, or are they building a business on [copyright] infringement?"
Would litigation worries stop the
development of new technologies?
But Justice Stephen Breyer said such a standard could mean a death blow for many types of technology, saying that under the terms proposed by the plaintiffs, "would we ever have a VCR? Would we have the Xerox machine? Would we have an iPod? Or for that matter the Gutenberg press? ... in each of those cases there would be vast amounts of infringing uses".
Justice David Souter made a similar point, saying: "If a guy is sitting in his garage figuring out whether to invent the next iPod, how do we know in advance anything that would give the inventor the confidence he would not be sued?"
Justice Anthony Kennedy, appearing to give some credence to the plaintiffs' arguments, said something is amiss about a company building a business around distribution of unauthorised copies.
He said it appeared that "expropriated property can be used as part of the start-up capital" of these firms, adding, "that sounds wrong".
The court was weighing the Sony Betamax precedent, but also another case involving Napster, which under its former owners had some 60 million users downloading mostly illegal copies of songs from its central servers.
Taranto argued that this case was different from that of Napster, which was eventually shut down by the courts, because it encouraged people to copy songs from its own computers.
In order to shut down Grokster and Streamcast, Taranto argued, the plaintiffs would have to show the companies encouraged piracy or were guilty of "wilful ignorance".