Music, Movie Companies Rebuffed in File-Sharing Suit

The entertainment industry suffered a major setback in its fight against online piracy Friday when a federal judge ruled that two popular sources of free music and movies on the Internet do not violate copyright law.

In a 34-page decision that dismayed the record labels and Hollywood studios, U.S. District Judge Stephen V. Wilson held that the Morpheus and Grokster file-sharing networks are legal -- even though they are commonly used to copy songs and movies illegally.

Unlike the now-defunct Napster Inc. service, Wilson ruled, Morpheus and Grokster are not liable for users’ infringements because the networks do not monitor or control what people do on them.

Executives at the Motion Picture Assn. of America and the Recording Industry Assn. of America said they would appeal.

“It is not sharing; it’s stealing,” said Jack Valenti, chief executive of the MPAA. “And I don’t believe any court, in the final end, is going to condone that. Therefore I feel quite confident ... we will prevail because we are right.”

But technology advocates and consumer electronics executives lauded Wilson’s decision. They said it reaffirmed the principles of the Supreme Court’s 1984 Sony Betamax ruling, which held that videocassette recorders were legal even though they could be used for piracy.

“Every technology company ... has relied on that ruling for almost two decades,” said Fred von Lohmann of the Electronic Frontier Foundation, a group that advocates civil liberties in cyberspace. “This is not a case about piracy. This is a case about technology. And the courts today agreed.”

Although many of the files shared on Morpheus and Grokster are copyrighted works, the networks also can be used to transfer non-copyrighted files quickly and easily.

Wilson’s action curtails much of a lawsuit against the firms behind Morpheus and Grokster. The movie and music companies still have an active case against the firm behind Kazaa, the most popular file-sharing network. Several lawyers involved in the case speculated that Wilson would use the same reasoning to dismiss that suit as well.

The ruling leaves the record labels with a clear, if uncomfortable, option for attacking file sharing, which they blame for decimating CD sales: suing individual users. On that front, Wilson’s ruling adds to the growing body of cases that say it is illegal to copy or make copyrighted works available through a file-sharing network.

“The decision highlights the vulnerability and liability of people who use peer-to-peer services to distribute music without permission,” said Zach Horowitz, president of Vivendi Universal’s Universal Music Group. “While the owners of these technologies may not be liable for these activities, the court could not have been clearer that users of these systems are.”

Historically, the record labels have been loath to pursue individual users out of fear of alienating other fans. That attitude, though, is changing.

“If you think of these people as your customers, you’re misunderstanding what’s going on here,” said Sony Music Entertainment Chairman Andrew Lack. “These people are doing something the judge is clearly saying is illegal. It’s supportive of a view that the music companies have had.”

The industry’s threats have done little to curb the appetite for free music and movies.

“When they start carting people off in paddy wagons, that’s when I’ll start to pay attention,” said a 27-year-old from Los Angeles who occasionally downloads free songs and asked that his name not be used. “I feel protected by the numbers. There are millions of people like me.”

Tens of millions, in fact. Kazaa alone says that more than 218 million people have downloaded its free software and that 4 million or more users are logged on at any time.

The software behind the file-sharing services, also called peer-to-peer networks, enables users to find and copy files from one another’s computers through the Internet. So if a user wants a copy of New Order’s “Thieves Like Us,” he can find it stored on the hard drive of another user’s computer. Likewise, he can make his collection of songs available to others.

That decentralized structure and the sheer number of users make suing individuals a daunting task. And the big companies that sell Internet access and storage are reluctant to cough up the names of customers to entertainment lawyers.

Verizon Communications Inc., for instance, plans to appeal a judge’s order Thursday to name two users accused of making songs available on file- sharing networks. The recording industry had sued the telecommunications company to force disclosure of the names.

Faced with those difficulties, the music industry ought to focus instead on making fee-based online alternatives appealing enough to wean the public from free sites, some analysts said Friday. The fledgling music and movie services supported by the industry have only a small fraction of the audience that the file-sharing networks do, in part because of the restrictions the labels and studios impose in the name of deterring piracy.

Wilson’s ruling could end up boosting the sanctioned entertainment services by triggering more promotional efforts and more user-friendly features.

Grokster attorney Michael Page predicted that two services wholly or partially owned by the major labels, MusicNet and Pressplay, would “get serious about distributing a wider range of content at a reasonable price.” The services also will come under pressure to develop anti- piracy measures that work without driving users away, he said.

Wayne Rosso, president of Grokster Ltd., said the labels and studios should embrace file sharing and “bring us onto their side to help them distribute their stuff.”

He added: “We’re a massive distribution arm. It’s very powerful, and we happen to have their customers.”

In the meantime, the ruling could invite more entrepreneurs to launch and promote free file-sharing systems, which have operated largely in the Internet underground. And by giving Morpheus and Grokster the court’s stamp of legitimacy, it could make both more attractive to the blue-chip advertisers that had avoided them.

The file-sharing networks still pulled in considerable money from advertising, according to the ruling. For example, StreamCast Networks Inc., which distributes the Morpheus software, expected to collect $5.7 million in ad revenue last year.

When Napster popularized file sharing, the record companies’ first response was to sue. But after the federal courts ordered Napster to block copyrighted files from being downloaded, millions of users migrated to a new generation of file-sharing networks led by Kazaa, Morpheus and Grokster.

The major record companies, music publishers and Hollywood studios eventually sued StreamCast Networks, which is based in Bellevue, Wash.; Grokster, which is based in Nevis; and Kazaa operator Sharman Networks Ltd., which is based in the South Pacific tax haven of Vanuatu.

They argued that these networks not only performed the same functions as Napster but also profited more directly from infringements through ads that ran on users’ computer screens.

But the new networks were different in a way that proved crucial to Wilson. Napster used its own computers to help users find and copy songs, but the new, decentralized networks did all the searching and copying through the users’ own computers and Internet connections.

Lawyers for StreamCast and Grokster argued that the firms distributed a product with legitimate, non-infringing uses and so were protected by the Sony decision. Wilson agreed, writing: “Grokster and StreamCast are not significantly different from companies that sell home video recorders or copy machines, both of which can be and are used to infringe copyrights.”

Although the companies were aware of and profited from their users’ piracy, Wilson said, they were not liable because the networks don’t tell them what users are doing. Nor are any of their computers or Internet connections being used to help users make copies, he wrote.

The two firms aren’t completely in the clear. Not only is Wilson’s ruling being appealed, but the judge also left open the possibility that the firms could be found liable for previous versions of their software.

The decision left some former Napster employees feeling like the martyrs of a now-successful revolution.

“This may be the best thing that ever happened to the labels,” said Napster co-founder Sean Parker, now president of Internet start-up Plaxo Inc. “It could signal an end to the hubris that has led them down their self-imposed path to destruction, and I’m optimistic that it may spur a genuine effort to find a constructive resolution to the file-sharing problem.”

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Times staff writers Joseph Menn and Jeff Leeds contributed to this report.