Turning to the litigation front, the most important and geographically proximate lawsuit of interest is the MGM v. Grokster case currently being heard in Federal District Court in Los Angeles. Motion picture and record label plaintiffs in that case are suing a number of distributors of second generation P2P software. Plaintiffs argue that the defendants are guilty of vicarious and contributory copyright infringement, as was held in the earlier Napster case. But defendants respond that the Napster court did not find P2P to be illegal per se, but held against that particular company because of its actual and direct knowledge of what copyrighted works were being shared over its network as well as its control over the central server directory that facilitated such activities. Second generation PTP software, to the contrary, connects end users without any intervening action or monitoring by a central server. Defendants therefore argue that they are no more liable than providers of other types of software, such as e-mail and instant messaging applications, which can facilitate the transmittal of copyrighted works over the Internet. They further contend that their software is capable of substantial non-infringing use and is thereby sheltered by the Supreme Court's Betamax standard that determines whether new technologies can be held liable for facilitating copyright infringement.

On Jan. 10, 2003 the District Court held that my client, Sharman Networks, was subject to its jurisdiction despite its lack of employees or facilities in California. This decision seems to be at direct odds with the November 2002 decision of the California Supreme Court in the case of DVD Copy Control Association v. Pavlovich, where jurisdiction was denied in regard to a Texas resident who had made software capable of breaking DVD encryption available at his web site. The California Supreme Court reached that conclusion because Mr. Pavlovich had not intentionally targeted California for distribution of that software.

The Federal District Court based its jurisdiction decision primarily on two factors — that California is a big state with a large population and that Sharman should therefore have known that some substantial number of California residents might download its software, and that many copyright owners reside in California. This standard seems essentially useless in helping to determine how the laws applicable to specific Internet activities can be confined to key
jurisdictions. Regardless of how U.S. courts rule on the legality of distributing P2P software within the U.S., such distribution may well remain legal in other nations. For example, in spring 2002 the Amsterdam Court of Appeals held that distribution by KaZaA BV, the former owner of the KMD software, did not create copyright liability. In addition, a number of U.S. courts have refused to uphold judgments entered by foreign courts against U.S. residents for their activities on the Internet, and the reverse could certainly occur.

On this very important matter of jurisdiction, Mr. Chairman, the Internet appears to constitute the greatest challenge to the power and autonomy of individual nation-states since the invention of the legal entity known as the corporation. Corporations challenge the state by facilitating aggregations of private economic power sufficient to confer political power; and multinational corporations compound that by straddling national borders with their activities and facilities. The technology of the Internet challenges sovereignty in an altogether different manner, by raising difficult questions about where jurisdiction is located and how enforcement can be accomplished. This dilution of nation-state autonomy has its benefits. For example, it undermines the censorship powers of authoritarian states by facilitating the transmission of uncensored data to populations yearning for the truth, and by providing a means by which they can communicate with the outside world.