Australian Federal Court orders Kazaa to alter its software

Sydney (Australia) - The Australian Federal Court for Sydney ruled that Sharman Networks, the operator of the Kazaa P2P file sharing system, and five other defendants involved in developing Kazaa, violated Australian copyright law in urging their systems’ users to trade unauthorized files. According to newspaper reports, the music industry will push for at least $760 million in damages.

In the text of his ruling, Justice Murray R. Wilcox - the senior associate judge of the Court - declared Sharman and five of the case’s nine co-defendants, including P2P engineer Altnet, guilty of enticing Australians to make and distribute unauthorized sound recordings without license, as well as collectively "entering into a common design" that enabled unauthorized trafficking, though stopping short of qualifying as a "conspiracy." The case against Sharman and nine other defendants (four of whom were dismissed) was brought forth in November 2004 by Universal Music Australia Pty. Ltd., later to be joined by 29 other applicants (plaintiffs) representing virtually the entire global recording industry.

The ruling orders that the Kazaa network be restrained from continuing to operate in Australia, but places a stay of continuation - a "hold" on implementing that order - for two months. This stay would grant Kazaa time to develop an updated version that implements revisions to its keyword search system to exclude copyrighted works, and to broadcast messages to current users compelling them to upgrade to this rights-managed version.

Justice Wilcox noted that Altnet had worked with Sharman to develop a TopSearch system, which marks authorized or licensed files matching a keyword search with a gold icon. Since before TopSearch’s debut, a blue icon has been used to denote entries in a catalog or in lists of other users’ shared files, to denote general keyword matches. The ruling implies that implementing TopSearch resulted in the creation of two tiers of downloads, for which the blue icon has come to represent unauthorized files, and also that even the term "blue file" has acquired its own special significance among users. Altnet shared the blame, therefore, for enabling a system in which these separate and self-defining tiers could come about.

Any determination of monetary awards and damages is also being withheld, pending how Kazaa responds to the order, or pending a very likely appeal to the High Court of Australia.

The ruling is not, however, a sweeping victory for the recording industry, as it stops well short of the criminal condemnation the 30 applicants were seeking. The detail portion of the ruling actually throws out many of the applicants’ claims, most notably whether Sharman’s conduct violated the Trade Practices Act. Some applicants claimed that trafficking in unauthorized files constituted Kazaa’s primary source of revenue. When a hearing determined that Kazaa’s revenue was obtained mainly through advertising, the applicants sought to have Sharman prove otherwise. "Contrary to an implication in the applicants’ submissions," states Justice Wilcox’ ruling, "it was not incumbent on Sharman to adduce evidence ’to substantiate the proposition that licensed files represent their main revenue source’. It was for the applicants to establish that the statement was misleading. They have not done so."

Interestingly, these circumstances contradict the evidence - as well as the outcome - of the MGM v. Grokster case in the US, whose ruling came last 27 June. There, plaintiffs alleged, and the US Supreme Court’s ruling upheld, that Kazaa’s advertising revenue was sweetened by Sharman’s having made Kazaa more popular through the direct promotion of illicit file trading, citing "evidence of active steps taken to encourage direct infringement...The more their [Kazaa’s] software is used, the more ads are sent out and the greater the advertising revenue."

Secondly in the Australian ruling yesterday, was the matter of whether unauthorized file trafficking meets the standards of "unconscionable conduct" under the Trade Practices Act. In its original complaint, Universal Music and other applicants alleged that not only Kazaa but its users were liable for copyright infringement ; and that Kazaa was apparently aware of that fact when it engineered an end-user license agreement (EULA) that indemnified Sharman for any improper conduct that may take place over the Kazaa network. But in a later filing, applicants amended their language to imply that Kazaa placed innocent users in danger by not adequately warning them of the legal consequences of their conduct over the network. Justice Wilcox decided that applicants could not have it both ways.

"The Kazaa website contained warnings about copyright infringement," writes Justice Wilcox. "The EULA was clear. These steps were substantially ineffective. However, that was not because users were not warned ; it was because they were unwilling to allow the warnings to affect their behaviour. The fact that this unwillingness was encouraged by other material on the Kazaa website does not mean there were no warnings."

This, too, contradicts the evidence and ruling in MGM v. Grokster . In the text of that ruling, Justice David Souter wrote, "In addition to intent to bring about infringement and distribution of a device suitable for infringing use, the inducement theory requires evidence of actual infringement by recipients of the device, the software in this case. There is evidence of such infringement on a gigantic scale." In other words, from Justice Souter’s perspective, rather than warning users not to break the law and users ignoring the warnings, Kazaa encouraged users to break the law, and they complied en masse .

But the respondents’ counter-arguments, including Sharman’s, apparently also failed Justice Wilcox’s standards. In his decision, he wrote that he studied the argument that "the Internet is here to stay," that P2P is a force unto itself, and that rather than fighting the natural course of evolution, the recording industry could adopt stronger safeguards and digital rights management procedures to protect themselves. If CDs couldn’t be ripped, stated the counter-argument, these proceedings wouldn’t be taking place.

Dismissing the respondents’ arguments as beyond his purview as a judge, Justice Wilcox wrote, "I understand the argument in favour of more widespread licensing of copyright works. No doubt that course would have commercial implications for sound recording distributors. Whether or not they should take it is a matter to be determined by them. Unless and until they do decide to take that course, they are entitled to invoke such protective rights as the law affords them." Perhaps CDs could be made less susceptible to ripping, he added, but facts to that effect were not brought into evidence, so he can’t draw any conclusions to that effect.

A spokesperson for Music Industry Piracy Investigations - a department of the Australian Competition and Consumer Commission, an agency of the Australian government - told the Sydney Daily Telegraph this morning that the recording industry will push for at least AUD$1 billion (about US$760 million) in damages. In its original filings, applicants representing the industry provided a "top 98" list of songs that tend to be pirated over P2P systems, including The Beatles’ "Sgt. Pepper," Norah Jones’ "Come Away with Me," and poignantly, Men at Work’s "Down Under." These songs would be used in formulas to determine the extent of damages to be awarded to applicants. But given that the industry actually lost the criminal portion of its case, applicants may find it too late to be making monetary threats at this point, unless they can attain an unprecedented limited reversal of Justice Wilcox’ ruling by the High Court. The ruling states that a hearing to determine "pecuniary relief" will be scheduled at a later date, presumably following an assessment of Sharman’s willingness to comply.

Although he is officially a Judge on the Federal Court, Justice Wilcox’s title comes by virtue of his simultaneous appointment as Chief Justice to the Industrial Relations Court of Australia.