Double whammy

The US Supreme Court handed down two decisions this week that may adversely affect venture-backed companies and development. By Art Janik

Imagine a world without iPods, mp3s and Tivo. That’s what’s at stake now that the US Supreme Court has unanimously ruled against file-sharing software company Grokster, which had been the target of a lawsuit brought on by MGM studios. The decision, while a victory for movie studios and the music industry, now brings in a new layer of legal risk for venture-backed companies developing fledgling technologies that may potentially be used to promote copyright infringement cause by illegal online downloading and sharing.

[T]he court’s finding may substantially alter the treatment of that landmark doctrine, which is considered the ’Magna Carta of the digital age.’

Gary Shapiro, Consumer Electronics Association

Businesses had long been protected by the 1984 Sony Betamax ruling, which states that companies offer copying technologies aren’t liable for copyright infringement by users. According to Gary Shapiro, chief executive officer of the Consumer Electronics Association, the court’s finding may substantially alter the treatment of that landmark doctrine, which is considered the “Magna Carta of the digital age.”

With the court’s decision final, online file sharing services may now be sued for copyright infringement if they market their products for users to illegally copy protected music and films. Grokster and companies such as StreamCast Networks, which is backed by venture capital firm Timberline Venture Partners, now face possible trials in lower courts where they can be found liable for the entertainment industry’s losses associated with copyright violations.

But though many industry observers feel it is still too early to gauge what the long-term affects of the court decision will be, for now there is still uncertainty about what type of product development may fall within the entertainment industry’s legal crosshairs. After all, the Betamax decision was the most significant case for consumer technology in the last 20 years because it deemed any product legal if it had legal uses. Now, in the Grokster case, the content industry is arguing that products are illegal if they have illegal uses. So in a sense, the whole basis of how VCRs, mp3s, iPods, Tivo and DVD-Rs are legal is in jeopardy. And the same goes for future technology developments that probably will often be backed by venture capitalists.

In another ruling on Monday, the Supreme Court decided 6 to3 that cable television companies do not have to share their high-speed Internet networks with their competitors.  This decision is great for cable companies trying to compete against the traditional landline phone companies, which are already trying to provide phone and television services over their networks while being required to grant rival companies access to their telephone lines.

The legal challenge stemmed form some Internet providers seeking access to cable lines, which give faster Internet connectivity than telephone-based DSL services. These smaller players argue that accessing the large cable networks is essential to their survival, particularly because of rising costs for access to telecommunications company lines and because of superior services being offered by big, established players.

The ruling does not bode well for small independent Internet companies, many of whom are venture-backed, particularly if the Federal Communications Commission decides to extend this right of blockage to landline companies as well. An example of a venture-backed company that may be threatened is Vonage, a provider of voice-over-internet-protocol (VoIP) services. Backed by firms such as Bain Capital, New Enterprise Associates and 3i Group, the company offers phone services over internet protocol that travels along already established phone lines. In other words, VoIP services take advantage of existing phone lines and DSL hookups in order to route their services to users. Much of the VoIP infrastructure, therefore, is already in place thanks to phone companies, and taking this cost-savings advantage away may destroy existing VoIP business models.