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In an enormous blow to the music and motion picture industries, a Los Angeles federal judge has dismissed a lawsuit against file-sharing services Grokster and StreamCast Networks, saying that they cannot be held culpable for illegal file trading done over their networks.

The Recording Industry Association of America (RIAA) said it would appeal the ruling immediately.

Friday's ruling, made by U.S. District Court Judge Stephen Wilson, represents an almost complete turnaround from previous victories the record and motion picture industries have enjoyed in cases involving illegal peer-to-peer file trading.

VCR Case Cited

In his opinion, Wilson ruled that the peer-to-peer networks have substantial noninfringing uses in addition to infringing uses that cannot be dismissed.

"It is undisputed that there are substantial noninfringing uses for defendants' software," Wilson wrote, such as distributing movie trailers, free songs, and other noncopyright works.

Furthermore, he ruled that the peer-to-peer network operators do not have any direct knowledge of when illegal trading is happening on their systems, said Grokster spokesman Wayne Rosso.

While Wilson wrote that "it is undisputed that defendants are generally aware that many of their users employ defendants' software to infringe copyrighted works," he added that direct knowledge of users' infringement could not be proven.

The judge compared the case to the 1984 ruling in Universal City Studios' lawsuit against Sony, in which the court said that the sale of video recorders did not subject Sony to contributory copyright liability.

Peer-to-Peer Pleased

"This is a huge victory for us," Rosso said. "And one of the remarkable things is that this judge showed a rare comprehension of both the technical and legal matters."

The entertainment industries sued Grokster; StreamCast Networks, which runs the Morpheus file-swapping system; and Kazaa distributor Sharman Networks, accusing them of assisting copyright infringement on a massive scale and asking the court for a summary judgment that would shut their file-trading services down.

Friday's ruling does not directly apply to Kazaa, which has been arguing that it cannot be held to U.S. law given that it is incorporated in the South Pacific island nation of Vanuatu and has no ties here.

Furthermore, the ruling only pertains to the current versions of Grokster and StreamCast's products and services and does not apply to past versions of their software or other past activities.

RIAA Plans Appeal

In a statement Friday, the RIAA said it disagrees with the court's decision that the file-swapping services are not liable for the "massive illegal piracy that their systems encourage" and that it will appeal the ruling immediately.

Businesses that intentionally facilitate piracy should not be able to evade responsibility for their actions, the RIAA said.

Still, the RIAA said it was not entirely displeased with the ruling. The court affirmed that individual users are accountable for sharing copyright-protected material, the RIAA said.

The ruling is certainly a blow to the entertainment industry but is only a first-round victory for the file-sharing services, said Mike McGuire, research director at GartnerG2, the business strategy research arm of Gartner.

"It is almost certain there is going to be a lengthy appeals process, so nobody is out of the woods yet and nobody is home free and can start popping champagne corks," he said.

In another case Thursday, a U.S. federal judge upheld a law that requires ISPs to turn over names of alleged copyright infringers, in this case to the RIAA.

The ruling could lead to a change in the mindset of executives at recording companies, GartnerG2's McGuire said.

"There are some people in the entertainment industry who are not afraid of [peer-to-peer] technology and are looking at ways to use it as a cool distribution model. They might now see their stock rise within their companies and will increasingly now be looked at to come up with ways to create legitimate music services using P-to-P," he said.

In the short term, however, record companies will likely accelerate the introduction of copyright-protected CDs in an effort to prevent songs from being shared online, McGuire said.

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