An Australian court has ruled that the popular file-swapping program Kazaa urged its users to breach copyright.
File-sharing accounts for a large chunk of internet usage
The Federal Court ordered Kazaa's owners, Sharman Networks, to modify the software to prevent further piracy.
The ruling comes after months of legal wrangling between Sharman Networks, and a group of record labels.
The case is the latest courtroom battle between peer-to-peer networks and copyright holders, such as record labels and music studios.
Although the ruling is only enforceable in Australia, the record industry has hailed it as a victory that would resonate around the world.
"Today's judgement shows that Kazaa, one of the biggest engines of copyright theft and the biggest brand in music piracy worldwide, is illegal," said John Kennedy, chairman of the International Federation of Phonographic Industries.
"This is a milestone in the fight against internet piracy worldwide."
The defeat for Kazaa comes two months after the Supreme Court in the US ruled that file-sharing services could be held liable for copyright infringement under certain circumstances.
The lawsuit was brought by five record labels - Universal, EMI, Sony BMG, Warner and Festival Mushroom - who said that Kazaa technology helped copyright infringement on a huge scale.
The defendants in the case argued they had no control over how people used their technology, comparing it to a photocopier or tape recorder.
Two months to change
In his ruling, Federal Court Judge Murray Wilcox said the owners of Kazaa had "long known that the Kazaa system is widely used for the sharing of copyright files".
He went on to say that the effect of the Kazaa website was "to encourage visitors to think it 'cool' to defy the record companies by ignoring copyright constraints".
Kazaa website 'suggested it was 'cool' to defy the record labels'
The judge dismissed as "overstated" accusations that Kazaa's owners were infringing copyright themselves.
"The more realistic claim is that the respondents authorised users to infringe the applicants' copyright in their sound recordings," he said.
Kazaa's owners were ordered to modify the software within two months to include filters designed to stop the sharing of copyright material.
A fresh round of hearings will now be held to determine the level of damages, which could run into the millions of dollars.
"The court has ruled the current Kazaa system illegal," said record industry spokesman Michael Speck said outside the court.
"These people have crowed for years about the downloads, 270 million downloads of somebody else's work each month. We will ask the court when it comes to damages to reflect the value of the music these people ripped off."
Lawyers for Kazaa said they would appeal against the decision.
The victory for the record industry may be too little, too late. Research shows that file-sharers have already moved from Kazaa to other peer-to-peer software.
"It just isn't as big a player as it once was, as BitTorrent and eDonkey are now far more important to file sharers," said Professor Michael Geist, an e-commerce expert at Ottawa University.
"This has been a common trend for years as file sharers move between services."
According to internet analysis firm CacheLogic, 60% of the traffic on the net by the end of 2004 was made up of peer-to-peer activity.
It found that eDonkey has become the dominant peer-to-peer file-sharing network in countries such as South Korea, Italy, Germany and Spain.
In Australia, BitTorrent accounts for more than half of all file-sharing, followed by eDonkey, CacheLogic figures show.
FastTrack, the network used by Kazaa, makes up about 10% of all peer-to-peer traffic.