In a closely watched decision, the Supreme Court ruled unanimously on Monday that file-trading networks can and should be held liable when they create programs that are used primarily to illegally swap music, movies and other copyright-protected works.

The ruling sends the case (Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.) back to the lower courts, which have twice ruled in favor of peer-to-peer networks Grokster and StreamCast, saying the services couldn't be sued for the illegal actions of their users because they also had legitimate, legal uses as well.

"We hold that one who distributes a device with the object of promoting its use to infringe copyright ... is liable for the resulting acts of infringement by third parties," wrote Justice David Souter, according to a Reuters report.

Monday's ruling rejected the argument that opening up such services to lawsuits could curtail the kind of technological innovation that has brought forth such popular devices as VCRs and iPods. The court said there was enough evidence of unlawful intent on Grokster's part that the case should be sent back to the lower courts for a possible trial.

Dan Glickman, president of the Motion Picture Association of America, labeled the court's decision a "historic victory for intellectual property in the digital age."

In a statement released shortly after the ruling on Monday (June 27), Glickman said it was "good news for consumers, artists, innovation and lawful Internet businesses. The Supreme Court sent a strong and clear message that businesses based on theft should not and will not be allowed to flourish. This decision will be of utmost importance as we continue developing innovative and legitimate ways to marry content and technology so consumers can access entertainment on a variety of devices."

The two lower courts had passed on the suit without trial, using as evidence a 1984 Supreme Court ruling that the Sony Corporation could not be sued for consumers using its VCRs to illegally copy movies, because the devices also have "substantial" legal uses as well.

The services had argued that there are legitimate uses for their products as well -- such as distributing free songs and software, and hosting government documents -- and that they should not be held liable if some of their users choose to swap illegal material on the free networks. They also argued that, unlike the original version of Napster, they were not legally responsible for their users' actions because they did not have central servers that led their clients to illegal material.

"The scale of the whole thing is mind-boggling," attorney Donald Verrilli said earlier this year while testifying in front of the court on behalf of the music industry. "They intentionally built a network of infringing users."

The Recording Industry Association of America has argued that up to 90 percent of the traffic on the P2P networks consists of the trading of illegally downloaded copies of movies and music. If the P2P services are found to have actively promoted illegal file-swapping, they could be on the hook for some of the billions in losses the entertainment industry claims it has suffered as a result of illegal trading, according to the Reuters report.

It could also provide the entertainment industry with a means of suing to get back some of those losses without going after its customers, which is what the music industry has done over the past several years in suing thousands of individuals (see [article id="1487252"]"RIAA Sues 493 More For File-Sharing -- But More People Than Ever Are Doing It "[/article]).

In a statement, RIAA Chairman Mitch Bainwol said, "With this unanimous decision, the Supreme Court has addressed a significant threat to the U.S. economy and moved to protect the livelihoods of the more than 11 million Americans employed by the copyright industries. The Supreme Court has helped to power the digital future for legitimate online businesses -- including legal file-sharing networks -- by holding accountable those who promote and profit from theft. This decision lays the groundwork for the dawn of a new day -- an opportunity that will bring the entertainment and technology communities even closer together, with music fans reaping the rewards."

Artists such as Don Henley, Sheryl Crow and the Dixie Chicks have lent their support to MGM's case, while independent musicians including Brian Eno, Heart and Public Enemy leader Chuck D spoke out in favor of file-sharing technology.

For complete digital music coverage, check out the [article id="1491468"]Digital Music Reports[/article].