Supreme Court rules against file swapping

In a unanimous decision, the justices ruled companies that build businesses with the active intent of encouraging copyright infringement should be held liable for their customers' illegal actions.

"We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement," Justice David Souter wrote in the majority opinion.

The decision comes as a surprisingly strong victory for copyright companies and stands to reshape an Internet landscape in which the presence of widespread file swapping has become commonplace.

The ruling will give the recording industry and movie studios immediate ammunition to file lawsuits against other file-trading companies. It could also be a boon for legal music services such as Apple Computer's iTunes, which could see their strongest competitor -- freely downloadable songs -- driven further underground.

It won't immediately shut down access to the trading networks, however. The court's ruling will send the case back to the lower courts, which will review the evidence against Grokster and co-defendant StreamCast in the light of Monday's decision.

Record labels and movie studios immediately hailed the decision as an unambiguous victory.

"The most important message from today's historic decision is that progress and innovation do not have to come at the expense of recording artists, songwriters and the people who make their living in the entertainment industry," Warner Music Group chief executive Edgar Bronfman said in a statement. "This important decision will allow artists and the creative community to prosper side by side with the technology industry."

The peer-to-peer companies involved warned that the court had opened the floodgates to litigation against a wide variety of technology companies, but said they would continue to distribute their software, and expected to be cleared of any wrongdoing.

"We are confident that it will be proven that Morpheus does not promote or encourage copyright infringement," said StreamCast Chief Executive Officer Michael Weiss. "We're staying in this for the fight. We're going to continue to innovate and come out with new products."

Cloud over Silicon Valley?

The justices were reviewing a pair of lower court decisions in which both courts said that file-swapping companies such as Grokster were not liable for the copyright infringement of people using their software. The nation's top court heard oral arguments on the case in late March.

With the potential to rewrite the Supreme Court's 1984 Sony Betamax ruling that made VCRs -- and by extension any technology with "substantial noninfringing use" -- legal to sell, the decision has been closely watched across Silicon Valley.

Four generations of file swapping have laid the groundwork for the Supreme Court decision. Technology companies have feared that a new copyright-focused standard aimed at controlling peer-to-peer networks might result in a rise in lawsuits aimed at blocking new products. The Betamax ruling had protected generations of products, ranging from CD burners to Apple's iPod to personal computers.

In its ruling Monday, the court said that that original standard still applied -- but that the non-infringing use shield wasn't enough to protect a company that actively induced or encouraged the use of its products for copyright infringement. That appeared to be so in the case of the file-swapping companies, the court said.

"There is no evidence that either company (Grokster or StreamCast) made an effort to filter copyrighted material from users' downloads or otherwise impede the sharing of copyrighted files," Souter wrote. "Each company showed itself to be aiming to satisfy a known source of demand for copyright infringement, the market comprising former Napster users."

However, the court provided no clear standard or test to define inducement on a broad level, aside from noting several instances in which the peer-to-peer companies appeared to cross the line.

Some in the technology world said the result could lead to more litigation against young companies with new technologies.

"This is a very dangerous decision for technology and innovation," said Ed Black, chief executive officer of the Computer and Communications Industry Association. "If you think of the Sony decision as a shield or an umbrella, we're afraid some holes have been punctured in that umbrella."

Michael Petricone, vice president of technology policy for the Consumer Electronics Association, added that "it is a real concern for entire industry. We are faced with competitors in China and India who do not face the same litigation burden that companies will with this decision."

Not everyone in Silicon Valley took as bleak a view of the ruling, however. An Intel spokeswoman said the company was still studying the ruling, but noted that the court seemed to have upheld the most important aspects of the Betamax decision.

Companies offering legal music services hailed the decision as a boost for their business models.

"As the world's leading legal music download service, today's ruling is good news for the iTunes Music Store," Apple said in a statement. "With over 430 million songs downloaded, iTunes has proven that music fans around the world want to purchase and own their music."

Souter was joined unanimously in his decision. Justice Ruth Bader Ginsburg wrote one concurring decision that was joined by Justices Anthony Kennedy and William Rehnquist. Justice Stephen Breyer wrote a second concurrence, joined by Justices John Paul Stevens and Sandra Day O'Connor.

CNET News.com's Declan McCullagh contributed to this report.