updated 12/10/2004 7:55:56 PM ET 2004-12-11T00:55:56

The Supreme Court said Friday it will consider whether Internet file-sharing services are responsible for their customers illegally swapping songs and movies, a multibillion-dollar case testing the limits of copyright law in the digital age.

Justices will hear a challenge to a lower court ruling in favor of Grokster Ltd. and StreamCast Networks Inc. that was a blow to recording companies and movie studios seeking to stop the online distribution of their copyrighted works.

At issue is whether the file-sharing services should be held liable, even if they have no direct knowledge of what millions of online users are doing with the software they provide for free.

The entertainment industry says it needs protection against the billions of dollars in revenue they lose to illegal swapping. Consumer groups worry that expanded liability will stifle the technology revolution of the last two decades that brought videocassette recorders, MP3 players and Apple’s iPod.

“What’s at stake is basically the future of a close to $500 billion copyright industry, specifically the music recording, motion picture and video industries which have been completely hammered with the advent of the Internet,” said Michael Elkin, a copyright litigator in New York who successfully sued Napster, the original file-sharing service, for copyright violations.

Appeal based on VCR case
The appeal hinges on a 20-year-old Supreme Court ruling in a case brought by the movie industry, which wanted to block home video recorders on copyright grounds. The high court disagreed, saying VCRs had “substantial” uses other than illegally recording movies.

Using that reasoning, the 9th U.S. Circuit Court of Appeals in San Francisco ruled in August that file-sharing services were not legally responsible for their customers’ illegal activity because the companies don’t have central servers pointing users to copyright material.

It reasoned that the firms simply provide software that lets individual users share information over the Internet, regardless of whether that shared information is copyrighted.

“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,” the 9th Circuit stated. “Thus, it is prudent for courts to exercise caution.”

The fight has drawn the support of dozens of entertainment industry companies as well as attorneys general in 40 states, who fear file-sharing software will encourage illegal activity, stem the growth of small artists and lead to lost jobs and sales tax revenue.

‘Bad actors ... must be held accountable’
“Bad actors who have hijacked a legitimate technology for illegitimate means must be held accountable. Without strong rules of the road, there will never be a level playing field for the multitude of legitimate online music services,” said Mitch Bainwol, chairman of the Recording Industry Association of America.

Civil libertarians and consumer groups, meanwhile, have warned that a defeat for Grokster and StreamCast could force technology companies to delay or kill innovative products that give consumers more control.

They add that imposing liability on Grokster and StreamCast won’t solve the problem of piracy because there are similar software programs created abroad that wouldn’t be subject to the tougher U.S. copyright laws.

“People are incredibly concerned this case could chill financing, chill innovation, chill discussion of new technology,” said Gigi B. Sohn, president of the consumer group Public Knowledge.

If the lower court ruling is upheld, the entertainment industry would have to take the more costly and less popular route of going directly after millions of online file-swappers believed to distribute songs and movies illegally.

Recording companies have already sued more than 3,400 such users; at least 600 of the cases were eventually settled for roughly $3,000 each.

The case is Metro-Goldwyn-Mayer Studios v. Grokster, 04-480. Arguments are expected next spring, with a ruling by July.

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