SAN FRANCISCO (AP)—In a judicial blow to the entertainment industry, a federal appeals court ruled that makers of two leading file-sharing programs are not legally liable for the songs, movies and other copyright works their users swap online.
The decision is likely to force the industry to take the more costly and less popular route of going directly after file-swappers.
Jack Valenti, president of the Motion Picture Association of America Inc., said his group is reviewing its next step following Thursdays ruling by the 9th U.S. Circuit Court of Appeals in favor of Grokster Ltd. and StreamCast Networks Inc.
Mitch Bainwol, chairman of the Recording Industry Association of America, said the decision begs the question of whether "digital music will be enjoyed in a fashion that supports the creative process or one that robs it of its future."
Recording companies already have sued more than 3,400 such users; at least 600 of the cases were eventually settled for roughly $3,000 each.
Among other reasons, the three-judge panel unanimously upheld a lower court ruling that dismissed the bulk of the lawsuit brought by movie studios and music labels because Grokster and StreamCast dont have central servers pointing users to copyright material, as the original Napster did.
"In the context of this case, the software design is of great import," Judge Sidney R. Thomas wrote.
The panel noted that the software firms simply provide software that lets individual users share information over the Internet, regardless of whether that information was copyrighted.
"History has shown that time and market forces often provide equilibrium in balancing interests, whether the new technology be a player piano, a copier, a tape recorder, a video recorder, a personal computer, a karaoke machine, or an MP3 player," Thomas wrote. "Thus, it is prudent for courts to exercise caution before restructuring liability theories."
A ruling against the file-sharing services could have made them unavailable for legitimate uses, analogous to banning VCRs to watch a school play because they could also record and play copyright TV shows.
Civil libertarians had also warned that a defeat for Grokster and StreamCast could have forced technology companies such as Microsoft Corp. to delay or kill innovative products that give consumers more control.
The decision came nearly two weeks after attorneys general from 45 states sent letters to seven companies that offer online file-sharing software, including Grokster and Streamcast, hinting at possible legal consequences if the networks dont better inform computer users about potential copyright violations from sharing files.
The attorneys general asked the companies to improve how they inform those who use their software about potential legal and security risks associated with file-sharing, which include being sued for copyright infringement, identity theft, and unwittingly being exposed to pornography, computer viruses and spyware.
Napster was shut down after the 9th Circuit ruled that its centralized servers, which contained directories to thousands of copyright songs, made it legally liable for contributing to copyright infringement.
But in the wake of that ruling, peer-to-peer technology developed, avoiding the need for a central hub and arguably limiting the liability of the companies involved.
Fred von Lohmann, who represented Los Angeles-based StreamCast, said the ruling follows "the same principle that people who make crowbars are not responsible for the robberies that may be committed with those crowbars."
Thursdays ruling could influence a separate ongoing entertainment industry case against Sharman Networks Ltd., makers of the Kazaa file-swapping program, which averages more users than any other file-sharing software.
A Sharman attorney, Rod Dorman, said the company now would seek to have a U.S. court declare Kazaa legal. But he noted Thursdays ruling would not directly affect the recording industrys lawsuit against Sharman in Australian courts.
In a different case, the maker of iMesh file-sharing software recently agreed to pay $4.1 million to the recording industry for copyright infringement and to change its Internet service later this year to prevent consumers from illegally distributing music or downloading songs.
Thursdays ruling makes it less likely another company would settle.
The lower court ruling cited the U.S. Supreme Courts 1984 decision in the Sony Betamax case. The court said Sony wasnt liable when people used its Betamax videocassette recorder to copy movies illegally because the technology had significant uses that did not violate copyrights.
The studios and labels argued that while Sony could not control how consumers used their VCRs, Grokster and StreamCast could filter the copyright content from their systems, like they do with computer viruses, but refuse to do so, because the free songs and movies are what draw their users and ultimately generate ad profits.