In a historic decision, the United States Supreme Court yesterday ruled that file sharing companies are liable for copyright infringement if their services encourage users to illegally trade music, movies, and other content. The ruling came as part of the Metro-Goldwyn-Mayer (MGM) Studios v. Grokster case, and is seen as a major victory for record and movie companies. Grokster, like Napster before it, runs an infamous file sharing service which is primarily used to distribute stolen content. A similar file sharing service called StreamCast Morpheus was also part of the ruling.

In the unanimous ruling, the Supreme Court wrote that Grokster and StreamCast had purposefully set up their services so that users could "cause copyright violations." These services arose as the most popular peer-to-peer (P2P) file sharing services in the wake of Napster, which was taken down by numerous lawsuits. Unlike Napster, services such as Grokster and Morpheus didn't maintain central servers, a technicality the companies hoped would save them from Napster's fate.

Previously, that tactic worked. After a series of legal battles, a US District Court of Appeals ruled that file sharing networks were not liable for copyright infringement claims if their services could be used for legal purposes, a nod to the precedent-setting 1984 Sony Betamax case. However, the Supreme Court noted that it found "substantial evidence" that Grokster and StreamCast encourage their users to illegally trade music and movies.

That said, the Supreme Court was also careful not to stomp on the precedent of the Sony case. The Court noted that Sony's device had substantial legal uses, something that can not be said for P2P file sharing networks, and that Sony promoted Betamax for personal use. Grokster and StreamCast, meanwhile, were promoting their services for illegal use. They are "significantly different" cases, the Court ruled.

Predictably, companies that provide legitimate music and video services, including Apple Computer and RealNetworks, reacted positively to the ruling. "We think it's a very good thing for Apple," Apple CEO Steve Jobs said. Too, plaintiffs in the case--including MGM and the Motion Picture Association of America (MPAA) were ecstatic with the ruling. "If you build a business that aids and abets theft, you will be held accountable," MPAA CEO Dan Glickman said.

So what happens next? The Supreme Court ruling reinstates copyright infringement suits against Grokster and StreamCast, so those cases will head back to court. Their fate is pretty much sealed at this point, however: In its ruling, the Supreme Court stopped just short of finding the companies liable for vast amounts of copyright infringement, and we can expect that ruling to be referenced in the newly reinstated cases. Indeed, Justice David H. Souter wrote that the evidence against Grokster and StreamCast was so strong that plaintiffs should simply request a summary judgment in the case. In short, the companies are probably doomed.