What is MGM v. Grokster?
It's a case where movie studios (including MGM), record labels, and music publishers sued Grokster and StreamCast, companies that make peer-to-peer file-sharing (p2p) software.
What did MGM say?
MGM claimed that Grokster's product allowed users to infringe MGM's copyrights, and that Grokster was responsible for their actions (Grokster should have "contributory liability").
What did Grokster say?
Grokster claimed they were protected by the "Betamax doctrine," the result of a lawsuit over Sony's Betamax VCR in the '80s. The Betamax doctrine said that as long as a technology can be used in legal ways ("capable of substantial non-infringing uses"), then the product's manufacturer isn't responsible for any infringement its users do with the product.
What did the court decide?
In a very simplified fashion, the Supreme Court said that if a company encourages ("induces") customers to infringe copyright, then the company can be held liable in court and possibly has to pay damages for it. The legal standard is far more complicated than this, and it is something that will have to be clarified by other courts.
So did Grokster lose?
No, the Court sent the case back to a lower court to re-try the case. The lower court will have to decide if Grokster and StreamCast induced their customers to infringe copyright.
Did the court throw out the Betamax doctrine?
No, the Court created a new standard that can be applied in addition to Betamax. Now a technology manufacturer can be held liable for its customers' infringement if a.) the technology is only capable of being used for infringement or b.) the manufacturer encourages the customers to infringe.
Is p2p illegal now?
No. P2P is no different from the Web, e-mail, instant messaging or any other way to trade files. It can be used for legal or illegal purposes. P2P is used for all sorts of legal purposes, and has some serious advantages over other methods of distribution. But if a certain program's manufacturer induces its customers to infringe then that manufacturer could be liable for their infringement.
You keep saying "induce." What's that mean?
Well, that's the tricky part... [add text here]
problems with the inducement standard
Will BitTorrent, etc. get sued?
That is a hard question to answer. It is possible that they might be sued under this new standard, but we don't know what would happen if they were. This is not, however, a clear cut sign that companies that make technologies such as BitTorrent that can make legitimate file transfers more efficient would be held responsible if its users break the law with it.
the effects on p2p users today (i.e. none)
effects on future consumers
effects on future innovators (e.g. current students who might design software / technology in the future)