Peer-to-peer file-sharing services Morpheus and Grokster are legal, a federal appeals court ruled Thursday.

The decision is a blow for record labels and movie studios which sued the peer-to-peer operators claiming that the services should be held liable for the copyright infringement of their users.

The Recording Industry Association of America and the Motion Picture Association of America have long argued that rampant trading of copyright songs and movies on these file-swapping networks has crippled their businesses.

The decision upholds an April 2003 U.S. District Court decision that these services should not be held liable for the illegal behavior of their users. The studios and labels appealed the decision and the appeals court heard oral arguments on the case in February.

The district court correctly applied the law, wrote Judge Sidney Thomas, a member of the three-judge panel for the 9th U.S. Circuit Court of Appeals.

"History has shown that time and market forces often provide equilibrium in balancing interests, whether the new technology be a player piano, a copier, a tape recorder, a video recorder, a personal computer, a karaoke machine, or an MP3 player," Thomas wrote. "Thus, it is prudent for courts to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent present magnitude."

Michael Weiss, CEO of StreamCast Networks, operator of Morpheus, said in a statement, "Not only is today's ruling a victory for Morpheus, a hard-fought one at that, but this is a victory for our fellow P2P developers, a victory for American innovation and, perhaps more importantly, history will prove this to be a bigger win for the entertainment industry. Hopefully they will now embrace new technologies, like Morpheus, to seek new opportunities for artists and creators in the digital domain rather then spend their time and money trying to stifle progress."

"This is a major victory -- a victory that goes far beyond peer-to-peer and is relevant to technology innovators of all kinds," said lawyer Fred von Lohmann, who argued the case for Grokster and StreamCast before the court. "The reason we took this case is to make it clear that people who develop new technologies should not have to face endless expensive litigation from Hollywood even where those technologies may disrupt existing business models."

The RIAA and the MPAA did not immediately respond to request for comments on the decision.

In the decision, the judge also cautioned against copyright owners' request to re-examine current copyright law, "expanding exponentially the reach of the doctrines of contributory and vicarious copyright infringement."

"Not only would such a renovation conflict with binding precedent, it would be unwise," Thomas wrote. "Doubtless, taking that step would satisfy the Copyright Owners' immediate economic aims. However, it would also alter general copyright law in profound ways with unknown ultimate consequences outside the present context."

The judge also wrote that in the 1984 Sony Betamax case -- a landmark decision that ruled devices like the VCR are legal -- the Supreme Court "spoke quite clearly about the role of Congress in applying copyright to new technologies."

Von Lohmann said that the entertainment companies will likely turn to Congress for help.

"It's far from over. I'm sure the plaintiff will seriously consider appealing and I'm sure they will run to Sen. (Orrin) Hatch and encourage him to step in as well," von Lohmann said.

Hatch (R-Utah), along with Sen. Patrick Leahy (D-Vermont), introduced the Inducing Infringement of Copyrights Act (SB2560) in June. The bill would hold technology companies liable for any product that might "induce" or encourage people to steal copyright materials. The Senate Judiciary Committee heard testimony on the bill last month.

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