The makers of Kazaa, the world's most popular computer file-sharing program, cannot be held liable for copyright infringement of music or movies swapped on its free software, the Dutch Supreme Court ruled Friday.

The decision upheld a 2002 appellate-court verdict in Amsterdam that dismissed a suit filed by Buma/Stemra (search), which protects the interests of the music industry.

Buma/Stemra had demanded that Kazaa (search) stop offering free downloads from its Web site, or face a daily fine of $124,000.

Kazaa's Media Desktop software is one of a variety of file swapping programs used by tens of millions of people worldwide. Kazaa alone has 3 million to 4 million users at any given time.

Kazaa said the ruling, the first by a national court dealing with the legality of file-sharing Web sites, affirms not just the legality of its software, but all file-sharing programs.

"This victory sets the precedent about the legality of peer-to-peer technology across the European Union, and around the world," Kazaa founders Niklas Zennstrom and Janus Friis said in a statement distributed on the Internet. They called the ruling a "historic victory for the evolution of the Internet and for consumers."

Buma/Stemra said it regretted the court hadn't dealt with the broader issue of the legality of file-sharing programs, leaving the group in a similar position as the American recording industry, which has sued individual song-swappers for tens of thousands of dollars in damages.

"We now have the unpleasant situation that only the consumers who swap music can be held accountable for copyright violation," said Cees van Rij, the head of legal affairs at Buma/Stemra.

But Buma/Stemra spokeswoman Noortje de Bakker said the agency hoped it wouldn't have to take similar action in the Netherlands. She said the group was promoting the use of paid alternatives such as Apple Computer Inc.'s iTunes Music Store (search), MusicMatch (search), Rhapsody (search) and the revamped, legal Napster (search).

Kazaa's parent company, Sharman Networks Ltd., still faces a copyright lawsuit filed in the United States by the Recording Industry Association of America (search). Sharman is incorporated in the South Pacific island nation of Vanuatu (search) with main offices in Sydney, Australia.