'Tangled' issue takes turn for file-sharing companies.

It's not exactly a fun time to be a file-sharing company in the Valley. Last week, in a decision that undoubtedly warmed the hearts of every music industry executive within a 1,000 mile radius, an Australian court ruled that Sharman Networks, the makers of popular file-sharing network Kazaa; Sherman Oaks-based Brilliant Digital Entertainment, and its subsidiary Sherman Oaks-based Altnet, Inc. violated Australian music copyrights and ordered the companies to modify their software to help prevent it.

The decision comes on the heels of the United States Supreme Court's June ruling that the makers of Morpheus, Woodland Hills-based Streamcast Networks, Inc. can be found liable for copyright infringement.

Brilliant Digital and Altnet were sued along with Sharman, which is based in Vanuatu, an island in the Pacific Ocean. While Sharman has vowed to appeal this decision, Altnet and Brilliant Digital have yet to speak publicly about the landmark decision. However, since many believe that Brilliant Digital CEO Kevin Bermeister is really in charge of Sharman, it's a safe bet that the Valley companies will also appeal the ruling.

In the meantime, a separate hearing is to be held for the music industry's claim for damages against the respondents. While it's likely that the music industry will cite a stratospheric dollar amount for the loss of revenues due to illegal file-sharing, legal experts believe that it may be tough to prove damages.

"It's a very tangled economic issue. If there are 100 million illegal downloads but 10,000 users went out and bought the albums due to these downloads, it's difficult to prove high damage figures," James Gibson, a professor of intellectual property and computer law at the University of Richmond School of Law said. "The record labels are going to try to show how many files were illegally downloaded and to assign some value to each file. It's difficult for an economist to come up with a huge answer because you really don't know what the exact losses are."

While there are no exact figures of how many files have been illegally downloaded on Kazaa, the company reported 800,000 downloads last week and in 2004, Kazaa said that 317 million people had downloaded its software.

The court did rule that Kazaa, Brilliant Digital, and Altnet can stay in business provided that they are able to alter their system in order to curb music piracy. But Gibson says that this might not be an easy task.

"They're going to have to really revamp their operations, either by implementing key word filtering, or just limiting their searches to just what they have licenses for," Gibson said.

That in effect would turn Kazaa into an iTunes-like business, rather than the current business model, which allows users to freely swap files with each other, both legal and illegal.

"The companies are obviously very focused on their appeal," said Marty Lafferty, the president of the digital computing industry association, a file-sharing advocacy group of which both Altnet and Brilliant Digital are members of. "Our organization is going to start looking more closely at the two types of filtering that the Australian court proposed. We're going to try to determine standards to develop that would be in compliance with those remedies."

Last week's decision was the latest shot fired in a battle that has gone on for more than three years. In 2002, Kazaa was the most popular file-sharing software on the Internet. The recording industry alleged that millions of copyright infringements were occurring each day on the network.

Then in February 2004, Music Industry Piracy Investigations, a division of the Australian Recording Industry Association, seized hard drive images and other documents from the Sydney offices of Altnet and the homes of Bermeister and Nikki Hemming, the CEO of Sharman, under a court-sanctioned civil search order.

The seized materials were seen as crucial to the record labels' case against Sharman in the subsequent Federal Court action, which began last November.

The labels alleged that Sharman and Altnet had conspired to attract copyright infringers to Kazaa and profited from advertising revenue. Altnet operates a search system within the Kazaa desktop. Sharman argued that it was merely the creators of the software, and unable to police what the users on the network did.

Regardless, the Kazaa/Brilliant Digital/Altnet software remains in the homes of millions of people worldwide, where they are still able to use it to trade files legally or illegally. Additionally, a next generation of file sharing services such as Limewire, eDonkey and BitTorrent have cropped up and garnered wide audiences. While the ramifications stemming from this decision might put Sharman, Altnet and Brilliant Digital out of business, it seems unlikely that it will do anything to stem the widespread proliferation of illegal file sharing.