Although the ruling is only enforceable in Australia, the record industry hailed it as a victory that would resonate around the world.
"The court has ruled the current Kazaa system illegal. If they want to continue, they are going to have to stop the trade in illegal music on that system," record industry spokesman Michael Speck said outside the court. "It's a great day for artists. It's a great day for anyone who wants to make a living from music."
The Federal Court ruling culminated a long-running court battle between Australia's record industry and Kazaa.
The 10 defendants in the case include Kazaa's owners, Sharman Networks Ltd., and Sharman's Sydney-based chief executive officer, Nikki Hemming, as well as Altnet, a company that provided some of the software for the Kazaa Web site.
Federal Court Judge Murray Wilcox found six of them, including Hemming, Sharman Networks Ltd. and Altnet, infringed copyright and ordered them to pay 90 percent of the record industry's costs in the case. A hearing will be held at a later date to establish damages.
"These people have crowed for years about the downloads, 270 million downloads of somebody else's work each month," said Speck. "We will ask the court when it comes to damages to reflect the value of the music these people ripped off."
Lawyers for Kazaa said they would appeal but made no immediate detailed response to the ruling.
They had argued that the software is no different from a tape recorder or photocopier, and that Kazaa could not control copyright infringement by users of the network.
But Wilcox said that they actively encouraged users to share files, the vast majority of which were copyrighted material.
"Far from taking steps that are likely effectively to curtail copyright file-sharing, Sharman Networks and Altnet have included on the Kazaa Web site exhortations to users to increase their file-sharing," he told a packed courtroom in Sydney.
Wilcox said that Sharman and Altnet should stop authorizing Kazaa users swap copyright material.
If it wants to continue its operations, Wilcox said Kazaa's owners have to ensure that new versions of the software filters unlicensed copyright material and he ordered them to press existing users to upgrade their software to a new version that filters unlicensed material.
"The court has made orders that will see the system either legitimized or disappear," Speck said.
The case is the latest in a long line of courtroom showdowns between so-called peer-to-peer (P2P) networks and copyright holders, such as record companies.
Speck said the ruling would have global effects.
"This court order ... will have a worldwide impact not only on Kazaa but on every other illegal peer-to-peer business," he said. "If you're out there and you're ripping off music without permission and without payment, you should sit up and take notice. Now's the time to go legal or get out of the business before another court does what's happened to Kazaa today."