Among other things, the San Francisco-based 9th U.S. Circuit Court of Appeals said the suppliers of the free peer-to-peer software, unlike Napster, were not liable for illegally swapped music and movies online because they don't have central servers where computer users can access copyrighted material.
"In the context of this case, the software design is of great import," Judge Sidney R. Thomas wrote for the unanimous three-judge panel, which upheld a lower court ruling that dismissed the bulk of the lawsuit brought by movie studios and record labels.
The panel noted that the software firms simply provided software for individual users to share information over the Internet, regardless of whether that shared information was copyrighted.
"The technology has numerous other uses, significantly reducing the distribution costs of public domain and permissively shared art and speech, as well as reducing the centralized control of that distribution," Thomas wrote.
Napster was shut down after the 9th Circuit ruled that its centralized servers, which contained thousands of copyrighted songs, made it legally liable for contributing to copyright infringement. But in the wake of that ruling, peer-to-peer technology developed that avoided the need for a central hub, arguably limiting the liability of the companies involved.
Unless the entertainment industry appeals to the U.S. Supreme Court, Thursday's ruling basically means the software industry won that argument.
"Today's ruling makes it clear that people who build the technology cannot be responsible for the infringing activities of the users," said Fred von Lohmann, the attorney for Los Angeles-based Streamcast. "The same principle that people who make crowbars are not responsible for the robberies that may be committed with those crowbars."
Entertainment companies are free to continue suing individuals who unlawfully download copyrighted movies and music, and about 4,000 such cases have been filed so far, added Lohmann, a senior intellectual property attorney for San Francisco's Electronic Frontier Foundation.
A spokeswoman for the entertainment industry's lead attorney in the case said they were not immediatley prepared to comment.
Streamcast and Grokster make money via advertising that pops up on users' screens.
Thursday's ruling also may influence the entertainment companies' case against Sharman Networks Ltd., makers of the Kazaa program, which averages more users than any other file-sharing software.
Attorneys representing a cadre of entertainment companies and copyright holders argued their appeal in the Grokster-Streamcast case before the panel last February in Pasadena.
In April 2003, U.S. District Judge Stephen Wilson in Los Angeles also ruled that Grokster and StreamCast aren't liable when computer users illegally trade content using their software.
Wilson cited the U.S. Supreme Court's 1984 ruling in the Sony Betamax case. The court said then that Sony wasn't liable when people used its Betamax videocassette recorder to copy movies illegally, since the technology had significant uses that did not violate copyrights.
The studios and labels argued that while Sony could not control how consumers used their VCRs, Grokster and StreamCast could filter the copyright content from their systems, like they do with computer viruses, but refuse to do so, because the free songs and movies are what draw their users and ultimately generate ad profits.
Michael Page, the attorney for Grokster, based in Nevis in the Caribean, said that the 9th Circuit's ruling clearly followed the Supreme Court precedent.
"The biggest thing about this is the court recognized that changing copyright law to whatever new technology comes along is a bad idea," Page said.