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The entertainment industry is pondering its next move in the wake of a legal setback delivered Thursday, August 19. On that day, a Federal appeals court in San Francisco upheld a ruling by a lower court in Los Angeles that file-sharing software made by Grokster Ltd. and StreamCast Networks, Inc. does not violate US copyright law. The three-judge panel voted unanimously in favor of the defendants.

Unlike Napster, which used central servers to link large databases of music files, Grokster and StreamCast (maker of Morpheus) simply make their software available for any application their users might find appropriate. That distinction—providing a tool vs providing a service—was the basis of the lower court's dismissal of a lawsuit brought by the entertainment industry.

The 9th US Circuit Court of Appeals determined that simply because software can be used to circumvent copyrights doesn't mean that it should be illegal. There are many legitimate uses for such products, the court found. In the ruling written by Judge Sidney R. Thomas, the court observed that "the software design is of great import . . . it is prudent for courts to exercise caution before restructuring liability theories."

The judges noted that the software makers don't have control over how consumers use their products, and therefore couldn't be held liable for such use. Fred von Lohmann, frequent spokesman for the Electronic Freedom Foundation (EFF), said the ruling follows "the same principle that people who make crowbars are not responsible for the robberies that may be committed with those crowbars." Fred von Lohmann also represented StreamCast in the appeal.

The ruling was seen as an especially strong blow to the music industry, which has been engaged in protracted litigation against both commercial pirates and individual file-swappers—approximately 3400 as of late August, some of whom have been forced into massive debt due to fines. It could also put a dent in the bottom line for authorized music download services, only one of which, Apple Computer's iTunes Music Store, has been at all profitable. Recording Industry Association of America (RIAA) chairman Mitch Bainwol said the decision calls into question whether "digital music will be enjoyed in a fashion that supports the creative process or one that robs it of its future." The decision "does nothing to absolve these businesses from their responsibility ... to address the rampant illegal use of their networks," he added.

Jack Valenti, president of the Motion Picture Association of America (MPAA) told reporters that his trade group was contemplating its next move, including a possible appeal to the US Supreme Court. "Copyright theft is still illegal," he stated.

The film industry lost a previous copyright battle that went all the way to the top, Disney v Sony, in 1984. In that case, the Supreme Court established the legality of VCRs just as the video rental industry was beginning to emerge as an important revenue stream for the plaintiffs. "History has shown that time and market forces often provide equilibrium in balancing interests, whether the new technology be a player piano, a copier, a tape recorder, a video recorder, a personal computer, a karaoke machine, or an MP3 player," Judge Thomas noted. The 9th Circuit Court was the same one that determined the illegality of the original Napster.

Technology buffs, electronics industry entrepreneurs, and civil libertarians alike celebrated the August 19 ruling as a victory for creative freedom and technical innovation. "I think today counts as a pretty big victory for innovators of all kinds," von Lohmann said outside the courtroom. A recent survey shows that most Americans oppose the music industry's legal battle against music fans.