The makers of two leading file-sharing programs are not legally liable for copyrighted works swapped online by their users, a federal appeals court ruled Thursday in a blow to the entertainment industry.
Among other reasons, the U.S. Court of Appeals for the 9th Circuit said Grokster Ltd. and StreamCast Networks Inc., unlike the original Napster LLC, were not liable because they don't have central servers pointing users to copyrighted material.
"In the context of this case, the software design is of great import," Judge Sidney R. Thomas wrote for the unanimous three-judge panel, which upheld a lower-court ruling that dismissed the bulk of a lawsuit brought by movie studios and music labels.
The panel noted that the software firms simply provide tools that let individual users share information over the Internet, regardless of whether that shared information is copyrighted.
"The technology has numerous other uses, significantly reducing the distribution costs of public domain and permissively shared art and speech, as well as reducing the centralized control of that distribution," Thomas wrote.
There was no immediate word on whether the entertainment industry would appeal to the U.S. Supreme Court.
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 copyrighted 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.
Thursday's ruling puts additional pressure on the entertainment industry to take the more costly and less popular route of going directly after online file-swappers. 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.
Napster was shut down after the 9th Circuit ruled that its centralized servers, which contained directories of thousands of copyrighted songs, made it legally liable for contributing to copyright infringement.
But in the wake of that ruling, peer-to-peer technology developed that voided the need for a central hub, arguably limiting the liability of the companies involved.
Laurence Pulgram, an intellectual property attorney, called it "a big win not just for peer-to-peer companies but for technology companies that push the envelope and make available copyrighted information."
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."
Thursday's ruling could influence a separate ongoing entertainment industry case against Sharman Networks Ltd., makers of the Kazaa file-swapping program and Web site, which averages more users than any other file-sharing software.
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.
Thursday's ruling makes it less likely another company would similarly settle.
The lower-court ruling upheld on Thursday had cited the U.S. Supreme Court's 1984 decision in the Sony Betamax case. The court said then that Sony Corp. wasn't 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 copyrighted content from their systems, as they do with computer viruses, but refused to do so because the free songs and movies are what draw their users and ultimately generate ad profits. StreamCast and Grokster make money via advertising that pops up on users' screens.
Thomas, the appeals court judge, said agreeing with the entertainment industry's demands would be "unwise" and "would conflict with binding precedent."
"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."