SYDNEY, AUSTRALIA – In a legal battle that originated nearly three years ago, an Australian court ruled on Monday that the directors of peer-to-peer file sharing software Kazaa had violated Australian music copyrights and “authorized users to infringe” on music copyrights, and directed the company to modify their application so as to reduce the practice of copyright infringement.In the summary of his judgment, Justice Murray Wilcox of Australia’s Federal Court wrote “The respondents authorized users to infringe the applicants’ copyright in their sound recording. The respondents have long known that the Kazaa system is widely used for the sharing of copyright files.”

The Australian ruling is consistent with a June ruling by the United States Supreme Court that the file-sharing services Grokster and Morpheus could be held liable for contributing to the infringement of copyrights. The Supreme Court also rejected the argument that file-sharing services should be protected if they have some legitimate use (such as a typical search function), and referred the case back to trial to examine whether the P2P networks actively encouraged users to steal and distribute copyrighted material.

The case was not a complete loss for Kazaa, which is owned by Sharman Networks. Judge Wilcox dismissed the music industry’s claims that the Kazaa parties had disregarded Australia’s Trade Practices Act and engaged in conspiracy, and characterized the industry’s assertion that Kazaa’s managers were directly engaged in copyright infringement themselves as “overstated.”

“The more realistic claim is that the respondents authorized users to infringe the applicants’ copyright in their sound recordings,” Wilcox said. In his summary, however, Wilcox noted that most of the files swapped using Kazaa were in fact copyrighted music, that Kazaa was aware of it, but had done too little to discourage it.

Attorneys for Kazaa had argued the company’s software was no different in function from a photocopier, and Kazaa bore no responsibility for how its software was used by the end users who downloaded it.

Kazaa’s attorneys also noted that the Kazaa Web site does not specifically instruct or advise users on how to share copyrighted music and pointed out that the site admonishes users not to violate copyrights in its end-user license agreement.

Judge Wilcox, however, countered that Kazaa’s various disclaimers and admonitions to users that they should not engage in copyright infringement were “inadequate”, and that the company had failed to take available technical measures to reduce copyright violations enabled through use of their software. On the contrary, the company proclaimed a “Kazaa Revolution” directed against record companies.

“The effect of this Web page would be to encourage visitors to think it ‘cool’ to defy the record companies by ignoring copyright constraints,” Wilcox said.

Not surprisingly, the Recording Industry Association of America (RIAA), which has been a major backer of the effort to curb illegal music file sharing, was very pleased with the Australian ruling.

“This judgment is first and foremost a global victory for legitimate online music services, the creative community that gives those businesses life and the fans who look forward to a constant array of new music,” said Mitch Bainwol, RIAA Chief Executive, in a statement released by RIAA. “On the heels of the unanimous Grokster ruling by the U.S. Supreme Court, this decision reflects a growing, international chorus: those who promote theft can be held accountable no matter how they may attempt to escape responsibility.”

Under the ruling, Kazaa can remain in operation, if the software maker meets either of two conditions. First, “non-optional key-word filter technology” has to be included in versions of the software received by new users, and in future versions of the software, “maximum pressure” must be exerted on existing users to upgrade to a new version containing such technology. The alternative option was that the associated Altnet search software (called “TopSearch”) be restricted to return lists of non-copyright-infringing works only.

In a statement issued after the ruling, Sharman Networks claimed a partial victory, and vowed to appeal unfavorable portions of the decision.

“In the judgment handed down today, both parties have had a win, although neither side has had a complete victory,” the company said in its statement. “Sharman Networks is obviously disappointed that we have not been completely successful. But we will appeal those parts of the decision where we were not successful and are confident of a win on appeal.”