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."