Kazaa Must Pay $115 Million, Introduce Filters

By Charles Duhigg and Dawn C. Chmielewski
Times Staff Writer

5:05 AM PDT, July 27, 2006

The world's major music and film companies have settled a lawsuit against one of the largest unauthorized peer-to-peer networks, Kazaa, entertainment industry representatives announced today.

The settlement with Australia-based Sharman Networks Ltd., Kazaa's operators, concludes years of litigation against a company that studios and labels claim was responsible for massive copyright infringement. Kazaa, like Napster before it, had been emblematic of music and film piracy to computer users worldwide.

Under the terms of the settlement, Kazaa will introduce filtering technologies to ensure that users can no longer share copyrighted music, film or software files. Sharman will also pay $115 million to the recording industry, according to sources familiar with the negotiations. Future payments to the film and software industries may be forthcoming.

Kazaa is one of the world's most popular peer-to-peer networks for unauthorized trading of music, movies and software, with at times more than 4.2 million simultaneous worldwide users. In 2003, Sharman announced that Kazaa users had downloaded various software programs 239 million times.

The entertainment industry's battle against Kazaa has spanned both years and continents.

The brainchild of Niklas Zennstrom and Janus Friis, Kazaa emerged as the most popular of the underground file-swapping networks after the demise of Napster. But unlike Napster, it wasn't limited to music. Computer-users who downloaded the software could also trade movies, video games and computer software, as well.

By early 2004, Kazaa claimed that over 317 million people worldwide had downloaded the file-trading software onto their computers. An internal company document claimed it was responsible for 79 percent of all file-sharing activities, worldwide.

Kazaa has proved an elusive target for the entertainment industry. The music industry sued it in the Netherlands, but a Dutch appeals court found it could not be held liable for consumers' potential illegal use of the software.

Zennstrom and Friis eventually sold Kazaa to Sharman Networks, a company incorporated in the Pacific island nation of Vanuatu but operating out of Australia.

It wasn't until September 2005 that the Federal Court of Australia found Sharman, its chief executive Nikki Hemming and other affiliated businesses had infringed copyrights and ordered it to halt the unauthorized distribution of copyrighted works.

That ruling came in the wake of the June 2005 decision by the U.S. Supreme Court – which found that file-swapping companies could be held liable when they induce people to take copyrighted works. And it set the stage for settlement talks.

"A little more than a year ago, the U.S. Supreme Court struck a wise balance between protecting innovation and the rights of creators," said Recording Industry Assn. of America chief executive Mitch Bainwol in a statement released today. "Services based on theft are going legit or going under, and a legal marketplace is showing real promise. That's encouraging news for the industry's ability to invest in new music."