In a unanimous decision, the highest US court overturned lower court decisions that developers of technology are immune from liability for piracy by third parties.
The case had been watched as a battle of free technological innovation in an age of rampant digital piracy of music and films.
It marked the first major interpretation of copyrights since a 1984 ruling involving the Sony Betamax video recorder that had set the standard for the past two decades.
The justices overturned an appeals court decision that dismissed MGM v Grokster, in which the major Hollywood studios and global music labels were suing the free file-swapping sites Grokster and the StreamCast Networks’ site Morpheus.
The court said that there was “substantial evidence in MGM’s favor” on the question of “inducement,” or the question of whether the technology was used to induce people to make unauthorized copies, and sent the case back for a full trial in a lower court.
The court said that the case is “significantly different” from the Sony Betamax case because of evidence that file-sharing sites were seeking “to cause and profit from” copyright infringement by their customers.
Hollywood’s main lobby organisation, the Motion Picture Association of America, hailed the decision as an historic victory.
But tech industry leaders said the ruling leaves the door open to more litigation with a vague standard for liability.
The case stems from legal action filed by 28 Hollywood studios and music firms in 2001, arguing that the free swapping of digital content threatens creators of virtually any creative work that can be illegally copied.
Kazaa, a popular Australian-owned file-swapping network, is also a defendant but its case is being heard separately.