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File-Sharing Firms Dealt Loss

Internet file-sharing services will be held responsible if they intend for their customers to use software primarily to swap songs and movies illegally, the Supreme Court (search) ruled Monday, rejecting warnings that the lawsuits will stunt growth of cool tech gadgets such as the next iPod.

The unanimous decision sends the case back to lower court, which had ruled in favor of file-sharing services Grokster Ltd. (search) and StreamCast Networks Inc. (search) on the grounds that the companies couldn't be sued. The justices said there was enough evidence of unlawful intent for the case to go to trial.

File-sharing services shouldn't get a free pass on bad behavior, justices said.

"We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by the clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties," Justice David H. Souter wrote for the court.

At issue was whether the file-sharing services should be held liable even if they have no direct control over what millions of online users are doing with the software they provide for free. As much as 90 percent of songs and movies copied on the file-sharing networks are downloaded illegally, according to music industry filings.

The entertainment industry said it needed protection against the billions of dollars in revenue they lose to illegal swapping. Consumer groups worried that expanded liability will stifle the technology revolution of the last two decades that brought video cassette recorders, MP3 players and Apple's iPod (search).

Companies will have to pay music and movie artists for up to billions in losses if they are found to have promoted illegal downloading.

Two lower courts previously sided with Grokster without holding a trial. They each based their decisions on the 1984 Supreme Court ruling that Sony Corp. could not be sued over consumers who used its VCRs to make illegal copies of movies.

The lower courts reasoned that, like VCRs, the file-sharing software can be used for "substantial" legal purposes, such as giving away free songs, free software or government documents. They also said the file-sharing services were not legally responsible because they don't have central servers pointing users to copyright material.

But in Monday's ruling, Souter said lower courts could find the file-sharing services responsible by examining factors such as how companies marketed the product or whether they took easily available steps to reduce infringing uses.

"There is substantial evidence in MGM's favor on all elements of inducement," Souter wrote.

In the closely watched case, supporting the effort to sue the companies were dozens of entertainment industry companies, including musicians Don Henley, Sheryl Crow and the Dixie Chicks, as well as attorneys general in 40 states.

About 20 independent recording artists, including musician and producer Brian Eno, rockers Heart and rapper-activist Chuck D, supported the file-sharing technology to allow for greater distribution of their works.

Monday's ruling gives the entertainment industry another legal option to the more costly and less popular route of going directly after millions of online file-swappers believed to distribute songs and movies illegally.

It's unclear how much the decision will actually deter the widespread problem of piracy since software programs created abroad won't be subject to the tougher U.S. copyright laws. Still, analysts say the court's stern rebuke should provide a boost to many file-sharing services that offer legal downloading for a fee.

Industry observers have said a ruling against Grokster could also prompt stiffer enforcement from European regulators, who were watching the case for guidance on tackling copyright questions in their countries.

Recording companies in the United States have already sued thousands of individual users; at least 600 of the cases were eventually settled for roughly $3,000 each.