File-Sharing Service Says Studios, Labels Misuse Copyrights

Dramatically raising the stakes in the battle over online piracy, the company behind the world’s most popular file-sharing service accused the major record labels and Hollywood studios of misusing copyrights and attempting to monopolize the market for digital music and movies.

The move by Sharman Networks, which distributes the Kazaa software, came less than two weeks after U.S. District Judge Stephen V. Wilson in Los Angeles confirmed that the labels and studios could sue Sharman in the United States. Sharman, which is based in the South Pacific tax haven of Vanuatu, had asked Wilson to throw out the copyright infringement claims for lack of jurisdiction.

Every file-sharing service sued for piracy has tried to defend itself by claiming the major entertainment companies abuse their copyrights and violate antitrust laws, and none has yet succeeded. Sharman has gone a step further, asking Wilson to bar the labels and studios from enforcing copyrights on all music and movies until the alleged misuse has ended and its effects have dissipated.

The injunction would shield Sharman from damages and protect anyone who pirated the labels’ and studios’ works.

A spokesman for the Recording Industry Assn. of America scoffed at Sharman’s claims, saying they were “akin to an arsonist burning down his home and then seeking sympathy for being homeless.” And Marta Grutka, a spokeswoman for the Motion Picture Assn. of America, said, “It’s just a tactic to avoid further focus being put on their ongoing pirate activity.”

Legal experts say copyright misuse is a relatively new and unsettled area of law, and claims are hard to prove. A key question is whether the privately held Sharman can afford the high costs of gathering the evidence needed to make its case.

“Mounting a full-fledged copyright-misuse defense is an incredibly expensive undertaking because it requires an enormous amount of discovery from an opponent that’s extremely reluctant to hand over any” of the documents needed, said Fred von Lohmann, an attorney for the Electronic Frontier Foundation, which is helping defend the Morpheus file-sharing network against the labels and studios.

“Whether or not the lawsuits against peer-to-peer technologies are motivated by anti-competitive motivations rather than purely copyright ones, while that’s an incredibly important question, I’m not at all sure that it will ever get addressed in court ... in any thorough fashion,” he said.

Last year a federal judge allowed Napster Inc., a pioneering file-sharing service being sued for aiding piracy, to gather evidence about copyright misuse at the major labels and music publishers. The RIAA said the allegation of misuse was “without merit,” and the inquiry ended when Napster went belly up and was liquidated.

Sharman’s claims are included in a response filed Monday to the lawsuit that the labels and studios brought against it last year. The filing not only argues that Sharman isn’t liable for piracy by users of the Kazaa network, but also tries to force the labels and studios to defend their approaches to the Internet.

Much of Sharman’s counterclaim, though, is based on the labels’ and studios’ dealings with another company: Altnet, a subsidiary of Los Angeles-based Brilliant Digital Entertainment. Altnet set up a secure distribution network within Kazaa that encourages users to download authorized, copy-protected versions of music, video, games and other software.

The filing asserts that Sharman founder Nicola Hemming, a businesswoman in Australia, learned of Altnet’s plans before she launched Sharman in January 2002 and bought the Kazaa software and Web site from Netherlands-based Kazaa BV. Altnet wasn’t incorporated until February, with Brilliant owning 51% and the founders of Kazaa BV owning the rest, according to a Brilliant securities filing.

Hemming’s original plan, the filing says, was to distribute authorized and copy-protected artistic works on Kazaa, using Altnet’s technology. Although Altnet struck deals with selected independent music outlets and other copyright holders, it had no success with the major labels and studios.

Copyright owners aren’t compelled to grant licenses to distribute their works. What makes the labels’ and studios’ behavior unlawful, Sharman attorney Roderick G. Dorman argued, is that they got together and decided not to license Altnet.

“There’s been a concerted refusal to deal with Altnet and with Sharman,” he said. “We think that’s an antitrust violation, and we think we can prove that.”

In addition, Sharman argues in its counterclaim that the labels and studios provided music and movies to the online ventures that they owned while they refused to do business with Altnet and Sharman. That refusal constitutes copyright misuse, Dorman said, because it prevented Altnet from combating piracy by offering legitimate copies of the entertainment companies’ works to Kazaa users.