Read the court's decision • MGM vs Grokster

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NEW YORK (CNN/Money) - The U.S. Supreme Court ruled Monday that software companies can be held liable for copyright infringement when individuals use their technology to download songs and movies illegally.

The unanimous decision handed the music and movie industries a crucial victory in their ongoing battle to curb Internet piracy -- a campaign centered on lobbying for new laws, filing thousands of lawsuits against Internet users, and winning a ruling from the nation's highest court.

Their victory Monday on the third piece of that strategy dealt a big blow to technology companies, which claim that holding them accountable for the illegal downloading of songs, movies, video games and other proprietary products would stifle their ability to develop new products.

In MGM v. Grokster, the high court overturned a ruling that had barred Hollywood and the music industry from suing Internet services used by consumers to swap songs and movies for free.

The decision was one of two key Internet-related cases that the Supreme Court handed down Monday. The justices also overturned a prior ruling that required cable operators to open up their high-speed Internet lines to rivals. (For more on that decision, click here.)

In Grokster, the court did not address the question of whether the technology at issue in the case -- known as file-sharing, or "peer-to-peer" -- is illegal. Rather, the justices focused on the actions of the peer-to-peer software companies named in the case, Grokster Ltd. and StreamCast Networks Inc., the maker of file-sharing software known as Morpheus, and whether they encouraged the illegal use of their technology.

In a strongly-worded opinion written by Justice David Souter, the court called Grokster and StreamCast's unlawful intent "unmistakable."

"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 by third parties," Justice Souter wrote.

The case isn't over and neither is the entertainment industry's efforts to curtail piracy.

The Supreme Court, in its order Monday, sent Grokster back to a lower court for a trial, assuming the case doesn't settle first, on whether Grokster and StreamCast did induce copyright infringement.

Still, the decision stunned consumer rights groups, which had backed the technology industry in the case. They said after the ruling that the court had effectively established a new legal standard for copyright infringement -- one that the entertainment industry had lobbied Congress aggressively for last year.

"This is a very dangerous decision for technology and for innovation," said Edward Black, the president of the Computer and Communications Industry Association, which opposed the entertainment industry in the lawsuit.

Hollywood and the major record labels disagreed.

Donald Verrilli, the entertainment industry's lead lawyer in Grokster, called opponents' claims that the decision will chill innovation "fear-mongering." He said the court simply verified a "common sense" principle: "It can't be written under this nation's laws that you can build a business on the basis of taking somebody else's property," he said.

Verrilli, a partner in Jenner & Block, called the Supreme Court's decision a "terrific result" and noted repeatedly that it was unanimous.

The Grokster case was the second major battle in a piracy war that erupted in 2000, when a nascent company then known as Napster operated a centralized directory of songs that users could download for free. The Ninth Circuit U.S. Court of Appeals eventually shut down Napster, which now operates a legitimate music site under different ownership.

After the Napster victory, the music and movie industries went after other distributors of file-sharing, or so-called peer-to-peer software. In the case decided Monday, the entertainment industry sued Grokster and StreamCast, both advertising-driven companies that give away file-sharing software for free. Unlike the original Napster, however, they don't operate a central database containing songs or movies.

Grokster and StreamCast Networks argued that they should not be held responsible for illegal activity using their software. In August 2004, the Ninth Circuit sided with the peer-to-peer companies and the case moved to the Supreme Court.

Raymond Van Dyke, a technology law expert and partner with the law firm Nixon Peabody, said the 'hear-no-evil, see-no-evil' defense adopted by Grokster and other peer-to-peer technologies as a way around the earlier Napster decision failed.

"The Supreme Court really came out strong here," said Van Dyke. "I don't think the judges could have ruled otherwise. They would have sanctioned the wholesale destruction of the content industry."

But some peer-to-peer experts weren't convinced that Monday's decision was the clear-cut victory that Hollywood and the music studios had hoped for.

The case was seen as a test of a controversial decision the Supreme Court handed down 20 years ago in a battle over the Betamax home video recorder. In that earlier case, the high court rejected claims by entertainment companies that Betamax and the VCR threatened their livelihoods because it allowed consumers to tape programs illegally and to share them freely.

In a very close decision, however, the Supreme Court declined to make the Betamax illegal after concluding that device's legitimate uses outweighed its potential misuse. Five justices voted in favor of the technology industry in that earlier case, negating the four justices who sided with the entertainment industry.

Eric Garland, the CEO of file-sharing tracker BigChampagne who has followed the Grokster case closely, said Hollywood & Co. was looking to the Supreme Court to rule that peer-to-peer technology is illegal because it's used mostly for illegitimate purposes.

But the court, said Garland, sidestepped the issue in Grokster by focusing instead on how Grokster and StreamCast marketed themselves to potential customers.

"The entertainment industry really needed this to be about the technology. What they didn't get was a decision that said 'tools that allow people to exchange files freely on the Internet, without permission, are illegal,'" said Garland.

"I think this just opens more doors and asks more questions than it answers," added Garland. "We're going to see a whole of litigation because there's still no clear standard."

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