By Victor Godinez and Crayton Harrison,The Dallas Morning News

The Supreme Court gave copyright holders the upper hand Monday in their lawsuits against file-sharing companies.

But there are signs that consumers are already turning away from file-sharing networks, increasingly preferring legal download sites. The court decision won’t help music and movie companies completely stamp out pirated content, but it could persuade even more consumers to pay for their downloads, experts said.

The Supreme Court case – which pitted Metro-Goldwyn-Mayer Studios Inc. vs. file-sharing services Grokster Ltd. and StreamCast Networks Inc. – turned on the Court’s unanimous finding that the companies were deliberately marketing their software as a way to illegally download copyrighted music, games and movies.

“We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties,” Justice David Souter wrote.

The case has been sent back to U.S. District Court in California to be tried.

Grokster and other groups had argued that granting copyright holders the power to sue file-sharing services would dampen innovation for products such as digital video recorders and MP3 players that let users copy and replay television shows and music.

But the decision appears to have struck a reasonable balance between innovation and copyright protection, said Mark Cuban, the Dallas Mavericks owner and technology entrepreneur who contributed to Grokster’s legal fund.

“The great news in the decision, from what I can tell, is that it gave both sides something,” he said via e-mail. It protected innovation “while leaving the bad actors, people, companies and innovation (that) encourage copyright theft, out to dry.”

Grokster itself was never a concern, Cuban said.

“I didn’t care about Grokster the company, or Grokster the service,” he said. “I cared about protecting technological innovation.”

The ruling – like the 2001 federal court ruling that effectively decapitated online music pioneer Napster – doesn’t mean the death of pirated music, movies and video games.

“Piracy is still thriving,” said American Technology Research analyst PJ McNealy.

He noted that so-called peer-to-peer file-sharing companies can easily relocate outside the U.S., beyond the reach of American law enforcement.

“It’s hard to truly suppress piracy on a global level, and there will always be a market for pirated content,” he said.

Jeffrey Neuberger, chair of the Technology, Media and Communications Department at Brown Raysman Millstein Felder & Steiner LLP in New York, said some of the file-sharing services that could now be sued might disappear.

“For individuals who download, the most likely effect as a practical matter is that it’s harder for them to find services to use to download. . . The services will become much more low-key,” he said.

But he agreed with Cuban that technological innovation in the world of consumer electronics probably won’t slow down.

“I don’t think the decision chills technology at all,” he said. “The iPods of the world are safe.”

But companies that make products that could be used to play pirated content will be careful not to appear to promote such uses for their products, Neuberger said.

For example, an MP3 player might be marketed with the words “listen to your music,” rather than “rip your music from a CD,” he said.

Alan D. Rosenthal, a partner at Haynes & Boone in Houston, agreed that companies will be much more careful in their advertising.

“What the court is focusing on is intent,” he said. “Evidence that would strongly show a deliberate intent to promote infringement by third parties is what’s going to be critical.”

But some data indicates many consumers are already drifting away from pirated download services in favor of legally buying and downloading music and other works through official portals like Apple’s iTunes service.

A survey recently done in Europe found that 40 percent of music listeners had pirated music, but 35 percent have downloaded music legally through iTunes or other programs, and 23 percent said they plan to start using legal downloads soon.

Even the peer-to-peer firms themselves claim to want to convert to a business model sanctioned by the copyright holders.

Mark Lafferty, chief executive officer of the Distributed Computing Industry Association, said about 2 billion files are downloaded each month through file-sharing services, with the vast majority being pirated.

“The issue is, of those 2 billion files being distributed, what percentage are authorized?” Lafferty said. “Those numbers look to be around in the 50 million per month range right now.”

He said members of the DCIA – including Grokster – would like to legally distribute copyrighted files by licensing them from the copyright holders.

The services would then charge a monthly subscription, charge per file, or use advertising to pay for the right to distribute the songs, movies and other copyrighted works.

“The P2P software distributors and developers want to be licensees of that content,” Lafferty said. “They are ready to welcome the major labels to the table to finish the job of fully legitimatizing their channel.”

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AP-NY-06-27-05 2119EDT