Attempts by the record industry to fight music piracy on the internet have suffered a double setback.
Millions of tracks are downloaded over the net
A US court said that the recording industry's methods to find music swappers are not allowed by the law.
In a separate ruling, the Dutch Supreme Court decided that the popular file-sharing program, Kazaa, is not breaking the law
The rulings are a blow to the record industry, which is trying to stop the illegal sharing of music online.
The music industry says the widespread copying of music over the internet is partly to blame for a drop in CD sales worldwide.
It has turned to the courts to try to stop people downloading music for free over the internet.
One of the more controversial tactics was legal action against individuals accused of sharing music files online without permission.
The Recording Industry Association of America had issued hundreds of subpoenas to force internet providers, such as Verizon, to identify customers suspected of file-swapping.
But Verizon argued that existing copyright law did not give the recording industry the power to force it to hand over names and addresses of their subscribers.
A three-judge panel has now agreed with its interpretation of the law, overturning an earlier ruling that had approved the use of subpoenas.
The ruling by the US appeals court may force a change in tactics by the music labels.