[Abstract] As it has emerged and developed, peer-to-peer technology has changed the traditional Client-Server pattern, which was centered on the large websites. It enables computer users to share information by providing greater convenience for resource sharing. However, as a double-edged sword, while it is convenient for the users and contributes to their daily life, it also raises numerous legal issues and disputes. As concerns existing types of infringement involving peer-to-peer technology, a number of theories and concepts have been developed in the United States, including indirect infringement, contributory infringement, vicarious infringement and inducement of infringement.
    Considering that the legal situation with peer-to-peer remains unclear, it is still too early to estimate the impact of peer-to-peer technology on the social welfare, nor can we deduce a legal system as “it ought to be” on the basis of existing legal theories and principles. Under the status quo, this article traces the dynamics of litigation and theoretical development in foreign countries involving peer-to-peer technology. By systematically introducing decisions involving typical cases, this analysis tries to demonstrate the significance of existing precedents and the experiences of foreign countries as a reference for China’s jurisdiction and legislation. The article also tries to provide some countermeasures against possible risks for the developers and network service providers of peer-to-peer technology under the current legal framework. Moreover, in the evaluation and analysis of case law from the United States, it discusses the application of laws for contributory infringement and vicarious infringement involving peer-to-peer technology.
Introduction
    In October 2005, a man was arrested in Hong Kong and sentenced to three months in prison for illegally uploading three copyrighted movies on to the Internet using Bit Torrent (BT) software. This was the first global criminal punishment ever given on the basis of BT and it caused a huge controversy around the world. It again sparked the public’s interest concerning peer-to-peer technology as represented by BT.
    Undoubtedly the case caused a great impact on the traditional legal system in regard to peer-to-peer technology. The technology initiated a continuous international discussion on infringement, freedom and file sharing.
I. Review of Typical Cases
     Looking back on the history of computer networks, no technology has caused as many worldwide disputes as peer-to-peer technology. On one hand, peer-to-peer technology overturns the previous Internet model that was centered on large websites, making it possible to use a large quantity of idle resources on PCs, and greatly facilitates network users in file indexing and swapping. On the other hand, a great many users take advantage of the technology to exchange copyrighted products, which seriously damages the interests of copyright holders, causes an imbalance of interests to occur among copyright holders, disseminators and the public and leads to numerous litigation involving the technology.
     For this reason, the author reviews typical cases in China and other countries, in order to sort out the theoretical issues involved.
     (I) The case of Napster in the United States
Napster, a networking technology company in the United States, developed the Musicshare software product. With peer-to-peer technology, the product provided users with a service to swap MP3 files and infringed upon the interests of record companies.
The Record Industry of America (RIAA) filed a lawsuit against Napster with the District Court in San Francisco at the end of 1999.
     The dispute concerned the following issues:
     1. Does the use of peer-to-peer technology to swap music constitute fair use or infringement?
     2. Did Napster’s acts constitute contributory infringement?
     3. Did Napster’s acts constitute vicarious infringement?
     The court confirmed that users exchanging unlicensed music with peer-to-peer technology created direct infringement. The Appellate Court and the District Court decided that Napster was liable for contributory infringement and vicarious infringement on the grounds that Napster adopted the centralized peer-to-peer technology and kept indexes of user file swapping on its main server. The decision led directly to the shutting down of Napster. This was the first infringement case in the world involving peer-to-peer technology.

     (II) The case of Grokster & StreamCast in the United States
     Grokster and StreamCast, two network companies in the United States, jointly developed software products for users to swap and share files. However, as opposed to Napster, they adopted decentralized peer-to-peer technology, by which users exchanged files directly, with no need for indexing and managing services of the central server.
     Metro-Goldwyn-Mayer Studios (MGM) filed a lawsuit against the two companies with the District Court in California, on the ground that many MP3 files shared by their software products were not licensed. The District Court and the Appellate Court confirmed that the users’ behavior constituted direct infringement, but held that the two companies were not liable for the users’ infringing conduct because with the decentralized technology the two companies were not capable of directly stopping such infringing conduct.
      However, according to the inducement of infringement principle, the Supreme Court of the United States held that the two companies should be liable because their users copied files under copyright protection without authorization. The case was remanded to the District Court and a final decision has yet to be rendered. 
      (III) The case of Kazaa in the Netherlands
      Kazaa B.V. of the Netherlands developed Kazaa, a peer-to-peer software product and offered downloading of the software from its own website for users to share and swap files. Buma/Stemra filed a lawsuit against Kazaa on account of copyright infringement.
      Kazaa lost the Dutch trial court case. The court of appeal reversed the first instance judgment on the grounds that: (1) the infringing conduct was done by computer software users rather than Kazaa; (2) Kazaa software, which had many others uses was not dedicated to downloading copyrighted products; (3) Kazaa was unable to establish barriers against illegal swapping of files because it was technically impossible to determine whether a file was copyrighted or not; and (4) it was irrational to deem it as illegitimate to provide software which might pose a threat to a copyright. The Supreme Court of the Netherlands affirmed the judgment of the court of appeal.
Internationally the case was one of the few in which the software developers prevailed.
      (IV) The case of MMO and “winny” in Japan and Kuro in Taiwan, China
Asian countries have also had similar cases involving peer-to-peer technology, including the case of MMO and “winny” in Japan and Kuro of Taiwan, China. The software developers were determined to be criminally responsible in the latter two cases.
      (V) The case of Kuro in Mainland China
      The only existing case of infringement concerning peer-to-peer technology on the grounds of audio production infringement in Mainland China occurred in August 2005, in the case of Shanghai Push Sound Music & Entertainment Co.，Ltd. (“Push Sound”) v. iwmusic.com. In its Kuro software (“酷乐” in Chinese), iwmusic.com adopted centralized peer-to-peer technology to provide its users with a music file swapping service. Push Sound owned the audio production for 53 unlicensed songs used for file swapping. In December 2006, the No. 2 Intermediate People’s Court of Beijing rendered the first instance judgment, deciding that iwmusic.com and its network service provider should cease their infringing conduct and compensate Push Music RMB 200,000 for their financial losses, and 10,000 yuan for reasonable expenditures occurring during the litigation.
     The first peer-to-peer technology-related case in China attracted much attention from the business community and was included by No. 2 Intermediate People’s Court of Beijing in the Ten Distinctive IP Cases of 2006. According to the judgment, the defendant lost the case mostly on the grounds that it provided a distributing platform and technical support. 
II. Theoretical and legislative developments on peer-to-peer technology
     Despite the turns and twists in the court decisions above, it is mostly the developers and network service providers (NSPs) for peer-to-peer software that were ultimately held liable for the infringements. However, the above judgments leave us with many unresolved questions. Why do similar acts lead to different decisions in different countries or even in different courts of law? Is it rational to hold software developers and NSPs, the indirect infringers, as liable for most of the damages? Why does peer-to-peer technology continue to develop faster even though it has been determined to constitute infringement in many lawsuits? How are we to strike a balance between the need for copyright protection and the encouragement of technological development?
The copyright protection system always evolves as the disseminating techniques and methods develop. Each and every innovation in the disseminating technology leaves its imprint in various degrees on copyright protection in different countries. However, the law never catches up with the technical advancements, and peer-to-peer technology infringement theory has emerged and matured, as the technology has developed. It is necessary to streamline the theoretical and legal progress concerning peer-to-peer technology.
     As a matter of fact, the legal relationships involved with peer-to-peer technology contain four possible infringing subjects: the software developer, the NSP, the uploader and the downloader. In most cases, the first two subjects are mutually inclusive. The following is a simple analysis of possible infringement risks faced by the software developer or NSP.
     (I)  The theory of indirect infringement
     The theory of indirect infringement has been adopted more or less in cases involving peer-to-peer technology.
     Established by the courts of the United States, indirect infringement is divided into contributory infringement and vicarious infringement.
     Contributory infringement originated from Tort Law, which basically means anyone who directly helps an infringer shall be held legally liable. In the Gershwin Publ’g Corp. v. Columbia Artists Mgt., 443 F.2d 1159, 1162 (2nd Cir. 1971), it is clearly defined that “[O]ne who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a ‘contributory infringer’” . According to the definition, contributory infringement has two important constitutive requirements: (1) subjectively speaking the infringer knows of the infringing conduct; (2) objectively speaking the infringer induces, causes, or materially contributes to the infringing conduct.
     Vicarious liability generally exists in a vicarious relationship, according to traditional civil infringement law. For example, the employer or the principal should be held liable for the infringement of its employee or agent. The doctrine of vicarious infringement is more widely applied in copyright infringement than in other areas. For copyright infringement, the concept of vicarious liability came about early as defined in the case of Shapiro, Bernstein & Co. v. H.L. Green in 1963 . The case provided two criteria for vicarious infringement: (1) the vicarious infringer has the capacity or power to stop the infringing conduct; and (2) the vicarious infringer directly benefits from the infringement.
The application of contributory or vicarious infringement was explained comprehensively in the case of Napster.
     First, for contributory infringement, the court held that, (1) the software developer or NSP knows or is in a position to know about the direct infringement by the users, which can be determined upon notice from the copyright holder; and (2) the software developer or NSP provides material help in the direct infringement by the users, such as by “the central indexing service” of Napster. Although the users have downloaded the copyrighted software, they cannot exchange the file if the server is closed.
Second, for vicarious infringement, the court determined that (1) with an indexing service containing infringing materials, the website had attracted a large number of registered users, which provided it with financial benefits; and (2) although the copyrighted materials were named by the users and not stored on the server of the defendant, Napster actually required the file name to basically match the file content. Therefore, the file name might be used to check copyright violations in the shared content. Hence, the defendant had the power and was in a position to supervise the conduct of the users.
As a result, the court decided that Napster engaged in contributory and vicarious copyright infringement.
     (II) The theory of inducement of infringement
     The United States Supreme Court in the cases of Grokster & StreamCast established liability for inducement of infringement. As we have mentioned above, decentralized peer-to-peer technology was involved in this case. Because there were no central servers to provide indexing and managing services, the users did not leave any trace on the server of the software developer or NSP. They could exchange information even if the software developer or NSP closed their websites. As the software developer or NSP could not know for sure how the infringement had occurred, nor could they control the use of the software, one of the essential elements was missing for "indirect infringement” due to the changed technology. The theory on indirect infringement could not be applied here.
     However, in the above case, the US Supreme Court established the theory of “inducement of infringement” which contains the following requirements:
     (1) the disseminator induces infringement by the users in order to obtain benefits from the infringement; in other words, the disseminator of a product, who has the intention to induce or encourage others to infringe the copyright, shall be liable for the infringement by the third party.
    (2) the users have actually engaged in the infringement.
    In the instant case, StreamCast released commercials on the computer screen of ex-Napster users, claiming that the new software provided similar services as Napster, with the promotionally inducing phrase “when the lights went off at Napster…where did the users go?” In addition, Grokster sent out email news across the network, which contained links to articles advocating the infringement potential of the Grokster software. As a result, the Supreme Court decided that Grokster and StreamCast were intended for illegal purposes.
    Moreover, numerous kinds of infringing conduct occurred in the case. MGM claimed that 90 percent of the two software products developed by the two companies were used to download pirated music files, among which 70 percent were owned by MGM.
     (III) Summary:
    Through analysis of the above cases and theories on peer-to-peer technology, it can be concluded that generally the following factors will be considered to determine whether the software developer or NSP engages in infringement:
     1. Users employ peer-to-peer technology for an irfair use.
     This is the prerequisite to determine infringement by the software developer or NSP. “Fair use” has been regulated in copyright laws around the world, under which the user does not need to ask for permission or pay the copyright holder under legal conditions. Moreover, to determine whether there is a fair use, the Berne Convention, TRIPS, WIPO Copyright Treaty and European Union Copyright Directive have adopted the “three-step test” method or employ clauses similar to the following: “…permit the reproduction of such works in certain special cases, provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author.”
     From the existing cases, the courts mainly hold that users of peer-to-peer technology exceed the scope of personal use, seriously impede the normal exercise of copyrights and unreasonably prejudice the legitimate interests of the author; their use is not a rational one, but constitutes infringement.
     2. The software developer or NSP is subjectively at fault.
    In the traditional legal standard for determining intellectual property infringement, an absolute majority of countries have legislation that requires that the direct infringer be held liable without regard to fault, i.e. once the fact of infringement occurs, the court may adjudge infringement whether or not the infringer knew of the legitimate rights of the infringed party or whether the infringement occurred intentionally or through negligence. The subjective fault of the infringer is considered only when the court decides the amount of damages.
    However, for copyright infringements involving peer-to-peer technology, as in the cases above, importance is given to determining whether the software developer or NSP is subjectively at fault. Subjective fault involves knowingly and intentionally inducing, causing or materially contributing to the infringement. In contributory and vicarious infringement, the infringer is negligent for failing to stop the infringement, which it is capable of stopping. Inducement of infringement involves the illegitimate inducement by the software company or NSP that allows users to infringe copyrights, for which they financially benefit.
III. Status quo of theories and China’s infringement legislation
    The division of direct infringement and indirect infringement is accepted in the copyright theory of China . However, there have been no concepts such as indirect infringement, contributory infringement, vicarious infringement or inducement of infringement. Instead the concepts of “joint infringement” and “joint and several liability” are set forth in Article 130 of the General Principles of Civil Law of the People’s Republic of China, Article 148 of the Opinion on the General Principles of Civil Law, and the Construction on Issues Concerning Application of Laws in the Hearing of Computer Network Copyright Infringement Disputes (as amended in 2003) issued by the Supreme People’s Court. In judicial practice, the concept of joint infringement is generally applied for an act of indirect infringement. There have been no cases involving copyright disputes on the network service involving peer-to-peer technology. However, this author believes that under the existing legal framework, the following factors must be considered to decide the liability of software developers or NSPs:
     Firstly, whether users employ peer-to-peer technology for purposes of a fair use or for infringement.
     According to the Copyright Law of the People’s Republic of China, fair use means the “use of a published work for the purposes of the user's own private study, research or self-entertainment”. As a result, it should be deemed a fair use to download copyrighted files for personal use, as long as the provision has not been amended or no new judicial construction has addressed it. However, as users of peer-to-peer technology also upload the file while downloading, the conduct should be deemed as infringing upon the copyright.
    Under the current networking conditions, it is very difficult for copyright holders to implement legal remedies for their damaged interests due to the anonymous uploading of copyrighted products and their storage on public networks or foreign servers, and the limited ability to obtain compensation from individual users. Under this scenario, the primary remedy for copyright holders is to bring a lawsuit against software developers or NSPs to seek joint and several liability from them.
    Secondly, is the ability of software developers and NSPs to control the users’ behavior?
    According to the laws and regulations concerned, “to contribute to the infringement” is one of essential elements of joint and several liability. The more peer-to-peer software products are centralized, the more possible it is for joint infringement to result. Software developers or NSPs, which provide centralized peer-to-peer software products, would take more risk than those that provide decentralized products. This was one of the main reasons that Push Sound chose to sue iwmusic.com in the first litigation involving peer-to-peer technology in China.
    Thirdly, is the subjective fault of software developers or NSPs.
    That is, whether software developers or NSPs intentionally aid or abet others in the infringement. From the current judicial practice, it is determined by two factors: a. whether the NSP knows of the infringement in advance; and b. whether the NSP timely removes and stops the infringing act upon learning of the infringement afterwards (generally upon notice from the copyright holder). The NSP may be deemed to be subjectively at fault if sufficient evidence proves it knew of or was in a position to know about the infringement beforehand, or it fails to remove or stop the infringement after receiving a warning from the copyright holder.
IV. Precautions against risks for software developers and NSPs involving peer-to-peer technology
     Setting off an upsurge in litigation involving peer-to-peer technology, the international movie and recording industry magnates quietly move towards the Internet sector of China. Under the situation, it bears practical significance to discuss the precautions against legal risks for software developers and NSPs involving peer-to-peer technology.
Law is an equalizer of interests in terms of legislation. The ultimate solution to the legal issues involving peer-to-peer technology lies in a legal system, which is designed to balance the interests between copyright holders, disseminators and the public, and encourage the creation and dissemination of products. Presently a number of experts are discussing a copyright compensation system, in which the copyright holder waives its licensing rights that are difficult to implement; the user pays a certain amount to the copyright holder, so that the copyright holder’s right to remuneration can be realized. Whether such a system can be established, how it operates and what it distributes may depend on the participation and competition among the interested parties.
     From a practical perspective, as a lawyer, this author recommends the following steps for software developers and NSPs to protect their interests and to try to avoid being involved in litigation:
    1. Legal personnel should participate in the software’s development so that software engineers are notified of the potential legal risks, and are required to do their best to restrict rather than encourage the development of potentially infringing functions of the software product.
    2. Decentralized peer-to-peer technology should be used, so that the main server does not participate in the swapping or provide any clue on the content to be swapped.
    3. Diversify functions and develop legal functions for peer-to-peer software, such as, instant messaging function.
    4. Install filters, if applicable and filter out copyrighted files, if appropriate; unlicensed files, which can be determined by common sense, should be intercepted and removed immediately.
    5. Avoid inducing advertisements for software products. The legal personnel may examine the advertisement beforehand, to avoid mentioning any potential infringing function of the product.
    6. Use of a non-encouragement clause in the software document as follows: “users are not recommended to use this software product in any violation of law, including any infringement upon the copyright, trademark right or other legitimate rights of others”, or the like, to show that the software product is not intended to abet or aid the users in their illegal behaviors.
     How to enhance the precautions against legal risks for peer-to-peer technology, how to avoid the current risks or disadvantages in the laws and regulations and how to obtain a stable development for the technology are complicated practical issues, which should be researched and discussed continuously in the business community.
Lin Xiaojing is an attorney at M&A Law Firm.
(Translated by Ren Qingtao)