The US Supreme Court has found against file-sharing software provider Grokster in a ruling that potentially leaves other peer-to-peer networks liable for any illegal content shared by users.

In the case of MGM et al versus Grokster et al the court ruled unanimously in favour of the studios, stating that Grokster, StreamCast Networks and others can be held liable for any illegally copied material on members' PCs if they encourage users to break copyright law. The lower courts will now decide the fate of the P2P companies.

"The record is replete with evidence that from the moment Grokster and StreamCast began to distribute their free software, each one clearly voiced the objective that recipients use it to download copyrighted works, and each took active steps to encourage infringement," said Justice Souter in his final report.

The proceedings hinged around the 1984 Sony versus Universal Studios case which focused on sales of video recorders. The court ruled at the time that, although video recorders can be used to commit piracy, that is not their primary use.

This ruling still stands and it is up to the lower courts to decide whether software providers are actively inducing users to break the law by providing P2P software which, like video recorders, can be used to violate copyright laws.

"This decision shows that the court is willing to look to substance over form," said Michael Graif, counsel at Chadbourne & Parke, an international law firm which was not involved in the case. 

"Although the Grokster service was technically capable of being used in a substantially non-infringing way, which was the standard laid down by the Court in the Sony case in 1984, the fact is that the Grokster service was being used substantially to infringe copyrights with the full knowledge of Grokster."

Meanwhile, the recording industry can continue to prosecute users of P2P software. The British Phonographic Industries has already signalled that it will continue to demand P2P users' details and levy fines against them.

"This decision will not kill P2P sharing," said Cory Doctorow, European affairs co-ordinator at US pressure group the Electronic Frontier Foundation.

"Engineering students write P2P software in 11 lines of code as class assignments. The majority of internet users use file-sharing software, and that's not going to stop, no matter how many lawsuits against customers and companies the labels win."