File-Sharing Network Comes Under Attack

L By Jon Healey

lOS ANGELES – Sharman Networks Ltd., operator of the popular Kazaa online file-sharing network, is incorporated in the South Pacific tax haven of Vanuatu and runs its business primarily through contractors in Australia.

But on Monday its lawyers were in U.S. District Court in Los Angeles, fighting an effort by the major music and movie companies to sue Sharman and one of those contractors on these shores.

The question before Judge Stephen Wilson is whether Sharman has established enough of a presence in the United States to be sued here. It’s a potentially critical issue for the labels and studios, which are eager to use recent federal court rulings against the Napster Inc. and Madster file-sharing services to combat the rampant piracy by Kazaa users.

While U.S. courts have held file-sharing companies responsible for their users’ actions, it is unclear whether a judge overseas would agree. An appeals court in the Netherlands, in fact, turned aside a separate legal challenge to Kazaa, although it did so without a full-blown trial.

Wilson said he would rule as quickly as he could. He opened Monday’s hearing by saying he was inclined to allow the lawsuit against Sharman to proceed, but that remark came before he heard arguments from lawyers on both sides.

Citing an estimate by one of Sharman’s vendors, the copyright holders argue that more than 20 million people in the United States use Kazaa software. Wilson said that argument was “compelling.”

Kazaa is the most popular of the many online file-sharing networks, which let users find and copy the music, movies and other digital goodies stored on each others’ computers. About 3.5 million people are logged onto the network on the typical afternoon, with more than 600 million files available for copying.

But Kazaa has also been a moving target for the record companies, movie studios and music publishers. In October 2001 they sued Consumer Empowerment, a Dutch software company that was distributing the Kazaa software and licensing the underlying technology to two other companies, Streamcast Networks Inc. and Grokster Ltd.

Consumer Empowerment stopped contesting the lawsuit earlier this year, saying it cannot afford the legal fees. Before doing so, however, it licensed the technology to Sharman, which also took over the Kazaa Web site and brand name.

The labels, studios and music publishers moved in July to add Sharman and LEF Interactive, an Australian management company that’s led by Sharman Chief Executive Nicola Hemming, to the lawsuit it had brought against Consumer Empowerment, Streamcast Networks and Grokster. But Sharman and LEF asked Wilson to dismiss them on the grounds that U.S. courts don’t have jurisdiction over them.

Lawyers for the copyright holders told Wilson Monday that Sharman has entered into more than 20 contracts with U.S. advertising agencies, law firms and other companies, and that several of those contracts were negotiated by LEF. Moreover, they argued that LEF was merely Sharman’s alter ego, and that it engaged in the same activities that infringed on their copyrights.

Roderick R. Dorman, an attorney for Sharman, countered that none of the U.S. contracts were directly related to the file sharing that allegedly violated copyrights. And David B. Casselman, an attorney for LEF, argued that Sharman was legally responsible for all of his client’s activities, so there was no point in including LEF in the case.