Supreme Court Deals Blow to File Sharing

Updated from 12:25 p.m. EDT

In a decision with major implications for the entertainment industry, the Supreme Court ruled unanimously Monday that online file-sharing service Grokster can be held liable if consumers illegally exchange songs and movies using its technology.

The ruling is a major victory for companies like Time WarnerTWX, ViacomVIA and Warner MusicWMG, which have been battling intellectual-property piracy for the past several years.

The ruling has widespread implications for how consumers will access movies and music on the Internet in the future. It also adds clarity to the long-running debate over regulation and blame for file-sharing online.

In a research report out this morning, Merrill Lynch said the decision was key to copyright owners. "To date, the music industry has borne the brunt of the impact from illegal file sharing. However, we believe that increasing bandwidth will eventually expose nearly all content to widespread sharing (indeed, most movies can already be found on file sharing services).

The case was brought by MGMMGM and was widely supported by the media industry, which claimed that services like Grokster were used entirely for theft. Grokster makes no money from sharing but did have online advertising. Media companies said it and other file-sharing services abetted illegal use of files and should be held liable.

Louis K. Bonham, a lawyer with international technology firm Osha Liang, says that the legal impact on the end user doesn't change - it's always been illegal, but the "decision does put a strong point on the fact that it's illegal."

Bonham said he expects Grokster and other sharing sites will be enjoined in the U.S. very soon. "It gives media companies a very big club," he said.

The next battle for copyright holders will likely be with offshore entities that try, much like foreign-based online gambling operators, to circumvent U.S. laws by basing operations in places they say are outside federal jurisdiction.

Speaking on CNBC, former Grokster CEO Wayne Rosso said that the ruling will eventually shut down the service.

Warner Music chief Edgar Bronfman Jr. recently argued that the potential for digital distribution of media would improve if piracy were better controlled. The Supreme Court decision will come as a boon to music labels and to the movie studios who have called for stringent regulations and technological standardization to combat copyright infringement.

Proponents of peer-to-peer sharing, meanwhile, have said that a ruling against Grokster would take the wind out of technological innovation because of lawsuits.

Separately, the court ruled 6-3 in favor of letting cable companies keep exclusive rights to broadband networks. The decision reverses a lower court ruling that would have allowed competitors open access to the high-speed cable modem systems installed by cable companies.