Dutch File-Sharing Firm Kazaa to Fold

Kazaa BV, creator of a popular but controversial online file-sharing network, is folding in the face of a copyright-infringement lawsuit brought by leading record and film companies.

But the collapse of the company won’t slow the torrent of file sharing online, and it may have no effect at all on the Kazaa network, which bills itself as the world’s most popular file-sharing network. That’s because Kazaa BV says it has sold the network to another company that the record and film companies have yet to sue.

The Dutch company asked the plaintiffs in the case, which include the seven major Hollywood studios, five major record companies and music publishers, for “their terms of surrender.” The company maintains that it has not violated copyrights by letting its users copy music and movies freely from one another’s computers, but its lawyers said in court papers filed Friday that Kazaa can’t afford to defend itself against the lawsuits.

The move drew a skeptical response from the plaintiffs, who argued that Kazaa’s owners are trying to dodge liability through a corporate “shell game.” They called on the court to scrutinize Kazaa’s intention to default and ensure that the company provide key pieces of evidence in the case.

Technically, the record and film companies can’t stop Kazaa BV from withdrawing its defense and conceding defeat. The firm’s motion all but guarantees that it will be ordered to pay millions in damages, which is likely to drive the two-person firm into bankruptcy.

Kazaa’s lawyers accused the plaintiffs of driving the company out of business with hardball legal tactics.

“It cannot afford to respond to the multitude of motions, pleadings, discovery requests and letters that plaintiffs drop on its doorstep on a daily basis,” the firm said in its filing. “Plaintiffs have engaged in Rambo-style litigation, such as filing 88 pages of pleadings and declarations to attempt to move the date of a status conference.”

Lawyers for another defendant, Streamcast Networks Inc., which launched the Morpheus file-sharing network, voiced a similar complaint. Morpheus’ main law firm, Palo Alto-based Wilson Sonsini Goodrich & Rosati, told the court it intends to withdraw from the case because Streamcast can’t afford to pay the bills.

Streamcast also is represented by the Electronic Frontier Federation, a group that advocates civil liberties on the Internet. Lawyers for the EFF could not be reached for comment Tuesday.

The plaintiffs denied the accusation and said the defendants--and Streamcast in particular--were trying to drag out the case.

Legal fees are running high in the case not only because it’s extremely important to some of the world’s largest media companies but also because it involves several of California’s biggest law firms. Also, U.S. District Judge Stephen V. Wilson has set an unusually rapid schedule for gathering evidence and going to trial.

In an effort to reduce the legal bills, Streamcast’s lawyers urged the judge to limit the preliminary work to a pair of pretrial motions to dismiss the core of the plaintiffs’ case. The motions would decide whether the defendants’ version of file-sharing was legal.

The plaintiffs also want the core of the case decided without a trial. They argue that “despite small differences in the software architecture,” the defendants’ networks are functionally the same as the service operated by Napster Inc., which an appeals court already has ruled against.

After the lawsuit was filed in October, Kazaa BV announced that it had sold the Kazaa software and Web site to Sharman Networks, a privately held firm based in Vanuatu, an island nation in the Pacific. Kazaa BV continued to develop new versions of the peer-to-peer technology underlying the Kazaa network, which it licensed to Sharman, but Sharman officials say the network could sustain itself without any intervention by Kazaa BV or Sharman.

In a court filing Monday, lawyers for the plaintiffs said the two principals in Kazaa BV, Niklas Zennstrom and Janus Friis, “received substantial consideration for this sale [and] continue to be involved in the operation of the current Kazaa service by Sharman Networks.”