Three years after it effectively shut down Napster for music piracy, a federal appeals court Thursday blessed a new generation of online file-sharing networks and scolded the entertainment industry for trying to stretch copyright law to thwart innovation.
The decision by a three-judge panel of the 9th Circuit Court of Appeals was a defeat for major record labels and Hollywood studios, which fear that runaway online piracy of songs and movies could destroy their businesses.
And it was a victory for developers of rapidly evolving technologies that are changing how people get their entertainment.
The battle over file sharing is now likely to shift to Washington. Congress is considering a bill that would crack down on the companies making the software used by millions to copy music, movies and games over the Internet.
What's more, if the entertainment industry appeals the decision, the U.S. Supreme Court could revisit its landmark Sony Betamax ruling, which protects from copyright lawsuits products that have substantial legitimate uses.
The 9th Circuit panel relied on that 1984 ruling in unanimously affirming a lower-court decision issued last year that the companies behind the Grokster and Morpheus networks don't violate copyright law, even though many of the people who use the networks do.
The same appeals court came to a different conclusion about Napster in 2001, holding the pioneering file-sharing service responsible for its users' illegal activity because its central computers tracked all the songs available for downloading.
But today's file-sharing networks have no central computers. The companies behind such "peer to peer" systems cannot even monitor users, let alone rein them in, Judge Sidney R. Thomas noted in his opinion for the appeals panel.
Thomas suggested that the entertainment industry would adapt to file sharing in the way movie studios did after losing the Betamax case, which established the right of television viewers to record shows at home. In fact, home-video sales and rentals now generate more revenue than cinema box-office receipts.
"The introduction of new technology is always disruptive to old markets, and particularly to those copyright owners whose works are sold through well- established distribution mechanisms," Thomas wrote. "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."
In Thomas' view, the case was just the latest in a series of battles between entertainment companies and new technologies. "Every new means of reproducing sound has struck a dissonant chord with musical copyright owners," he wrote.
File-sharing software enables people to search for and freely copy material from one another's computers. The networks have become so popular that, according to firms that monitor such online activity, billions of unauthorized copies of movies, songs, computer programs and other works are made every year.
Thursday's ruling came in a lawsuit filed in 2001 by the seven major movie studios, the five top record labels and leading music publishers.
Lawyers for the industry argued that the file-sharing software makers should be held liable for the illicit behavior of the networks' users. They claimed that the companies knew about the infringements, contributed to them and could eliminate piracy simply by altering their software.
The court disagreed. Under the Betamax decision, Thomas wrote, it isn't enough to argue that a file-sharing company knows that its users are downloading copyrighted works without permission. Rather, the companies that distribute Grokster and Morpheus software -- Grokster Ltd. and StreamCast Networks Inc. -- had to have known about specific infringements in time to stop them. Neither had that kind of knowledge.
The Betamax decision also protects StreamCast and Grokster, Thomas wrote, because their software has other, legitimate, uses. For instance, the networks can be used to distribute works in the public domain, such as Shakespeare's plays. They also are used by artists and others who want a low-cost way to expose their works to the public.
Executives of the Recording Industry Assn. of America and the Motion Picture Assn. of America were considering Thursday whether to appeal. In the meantime, they said, they won't let up on their efforts to tame file sharing. The RIAA, for instance, has sued nearly 4,000 file sharers, and the MPAA has said it may sue individuals too.
"Today's decision should not be viewed as a green light for companies or individuals seeking to build businesses that prey on copyright holders' intellectual property," MPAA President Jack Valenti said. "We will continue to pursue all avenues in our power to fight those who illicitly profit from our members' valuable property."
RIAA Chief Executive Mitch Bainwol vowed to press the industry's case against piracy in Congress. "This decision does nothing to absolve these businesses from their responsibility as corporate citizens to address the rampant illegal use of their networks," Bainwol said.
Key to that effort is the so-called Induce Act, which would make it a federal crime to induce people to violate copyrights. The bill, which was sponsored by leading senators from both parties, is awaiting action in the Senate Judiciary Committee.
Adam Eisgrau of P2P United, a lobbying group for file-sharing companies, cautioned legislators to proceed carefully or risk stifling the sort of experimentation that leads to technological breakthroughs.
"This was a court that wants to send, and has sent, a very clear signal that making copyright law an instrument of powerful parochial concerns can have hugely negative consequences for the consumer and, very importantly, for the American economy that the entertainment industries try to make synonymous with their own deep-pocketed well-being," Eisgrau said.
StreamCast Chief Executive Michael Weiss said the ruling should push the entertainment industry to adapt their businesses to file sharing and, ultimately, increase its profits.
"Not only is today's ruling a victory for Morpheus -- a hard-fought one at that -- but this is a victory for our fellow [peer-to-peer software] developers, a victory for American innovation and, perhaps more importantly, history will prove this to be a bigger win for the entertainment industry," Weiss said.
Many leading video game companies have used file-sharing networks to help sell their wares, as have more than 70 independent record companies. But the major labels contend that file sharing has damaged CD sales, and the major Hollywood studios say the networks supply films to commercial pirates who sell bootlegged disks around the world.
Ken Hertz, an attorney for several top recording artists and a longtime critic of the music industry's approach to file sharing, said a few music executives were starting to adapt to the changes wrought by the Internet.
Yet he doubts that the appeals panel ruling will do much to change the industry's approach. "They will see this as a lost battle," Hertz said, but no reason to stop "a war that they seem insistent on fighting."
On the other hand, some file-sharing advocates said they had already seen a growing interest among major entertainment companies in finding a way to work together.
"The progress that we have now versus the progress we had six months ago is night and day," said Sam Yagan, president of MetaMachine Inc., the company behind the eDonkey file-sharing network.
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Millions of people share music and video files on the Internet, often in violation of copyright law. Here are the most popular file-sharing programs.
Total number of downloads of each program as of Thursday (In millions)
Kazaa 365.2 Morpheus 125.5 iMesh 78.3 LimeWire 25.7 BearShare 19.4 Grokster 9.5 WinMX 7.5 Blubster 5.0 Ares Galaxy 4.7 Xolox 2.7
Source: Download.com, Times research