Technical Aspects

The FastTrack Protocol

Grokster made use of the FastTrack protocol, a "second generation" P2P protocol. This was a semi-distributed system, meaning there was no single centralized server, such as Napster used. But, it is only considered "semi-distributed" since it made use of supernodes to improve the scalability. A supernode is any node on the P2P network that also acts as a proxy server, handling near by connections.  These supernodes reduce the overhead on each individual user, while maintaining the decentralized nature of a distributed network.  

Grokster Compared to Napster

While this system is technically different than that of Napster, where a central server managed queries, the District Court, which handled the Grokster case described the two as “conceptually analogous.” A user could make multiple downloads and uploads from a single computer. Moreover, Unlike Napster, Grokster allowed users to search and share any file type, not just MP3's.

How They Got Caught

Since it was decentralized, taking down a single node would not stop the overall P2P network. This led many to believe that this form of file sharing was free from legal threats. The following argument from the defendants held until their supreme court hearing:

The defendants argued that they merely provided software to users over whom they had no control, and that they had no liability for copyright infringement; they sought summary judgment for dismissal of the action.

However, in the end the supreme court ruled in favor of MGM.  This set the precedent of liability on the file sharing software distributor and programmer, in the form of inducement, a secondary copywrite infringement.  This means that although Grokster Ltd did not break any copywrite violations by distributing or hosting files, their software facilitated the means for their users to do so.

Resources:
[1] From Napster to Grokster
[2] Philip Larson on P2P Filesharing
[3] Tech Law Journal
[4] O'Reilly P2P
[5] IEEE Spectrum