For the first time anywhere in the world, a lawsuit filed by record labels against tech companies over unauthorized peer-to-peer file sharing has proceeded through trial.


For the first time anywhere in the world, a lawsuit filed by record labels against tech companies over unauthorized peer-to-peer file sharing has proceeded through trial.

Australian barristers completed their closing arguments March 23 in the Federal Court in Sydney, focusing on whether parties affiliated with a bundle of software known as Kazaa Media Desktop (KMD) should be liable to the major labels and 25 other record companies.

The parties' final written submissions to the court included more than 500 pages of briefs arguing the evidence presented in more than 2,000 documents submitted into evidence.

One issue that has drawn worldwide industry attention is the legal and financial relationship among the parties behind -- or somehow connected to -- Kazaa.

The following is a portion of the final submissions that the labels filed with the court. These points are arguments -- not yet proved as true since the case is still pending -- that there is a direct relationship between all of the "respondent" parties and Kazaa.

"The First Respondent Sharman License Holdings Limited ("Sharman License") was incorporated in Vanuatu on 6 June 2003. The second Respondent Sharman Networks Limited ("Sharman", "Sharman Networks" or "SNL") was incorporated in Vanuatu on 15 January 2002. The Third Respondent LEF Interactive Pty. Limited ("LEF") is an Australian corporation. It was incorporated on 21 February 2002. Each of Sharman License, Sharman Networks and LEF carries on business in Australia from premises located at ... Military Road, Cremorne, New South Wales.

The Fourth Respondent, Ms. Nicola Hemming, is described in various Sharman documents as the CEO of the Sharman companies. The Fifth Respondent Mr. Philip Morle is the Sharman technical director.

Understanding the relationship between the Respondents includes a consideration of the role of three other corporations, Joltid Limited ("Joltid"), Kazaa BV and Bluemoon Interactive ("Bluemoon").

The principal business carried on by Sharman is the supply of the Kazaa software to Kazaa users. That business commenced after Sharman Networks acquired Kazaa BV's (a Netherlands corporation formerly known as Consumer Empowerment BV) business described as "the provision of peer to peer Internet enabled software directly via the website to end users world wide to enable searching for and downloading files from other users of the software" on 7 February 2002.

In order to conduct its business Sharman requires the right to use, and sublicense others to use, the KazaaLib/FastTrack software.

On 15 January 2002 Kazaa BV and Sharman entered into a license agreement that recited that Kazaa BV had agreed to sell its business to SNL and that it held a perpetual license in respect of the KazaaLib/FastTrack and KMD software. The agreement provided for the grant by Kazaa BV to SNL of a perpetual license to use that software. The effect of the transfer of the Kazaa business by Kazaa BV to Sharman was that it went from being a BDE/Kazaa BV venture to a BDE/Altnet/Sharman venture.

On 18 January 2002 Joltid, which is a Virgin Islands company operating from Jersey and which was then known as Blastoise Ltd., granted to Sharman a non-exclusive, perpetual, irrevocable, transferable, worldwide license to use, and sublicense to Sharman's end users the FastTrack/KazaaLib technology. There is evidence which suggests that the principals of Kazaa BV are also the principals of Joltid.

In about October or November 2002, Joltid and Sharman entered into a Software License Agreement ("the Joltid License Agreement"). The agreement had a deemed commencement date of 18 January 2002. Thus it appears that this agreement was intended to replace the earlier license agreement of 18 January 2002.

Joltid is described in the agreement as the proprietor or licensee of certain peer to peer file sharing software known as "KazaaLib" or "FastTrack P2P Stack" including updates thereof. Pursuant to the Joltid License Agreement, Joltid granted to Sharman a non-exclusive, irrevocable, perpetual, worldwide, royalty-free license to use the software and to sub-license such software to its users. The agreement records that other software known as a "graphical user interface" is needed in order to use the KazaaLib/FastTrack software, that the graphical user interface is proprietary to Sharman (referred to in the evidence as the "Kazaa GUI" or "GUI") and that the software provides an "Application Programming Interface" or "API" which enables the GUI to issue commands to the KazaaLib/FastTrack software.

Pursuant to the Joltid License Agreement, Sharman Networks is entitled to cause the Estonian corporation Bluemoon Interactive ("Bluemoon") (and any other approved software developer), to modify and customize the KazaaLib/FastTrack software in accordance with Sharman's requirements. Joltid must provide source and object code, related materials and all reasonable assistance to Bluemoon in relation to such modifications.

The Joltid License Agreement can only be terminated by Joltid for breach or insolvency. However, termination does not affect the perpetual nature of any licenses granted pursuant to the agreement including the operation of clauses requiring Joltid to assist Bluemoon to implement Sharman's requested modifications.

On termination Joltid must co-operate to assist in the continuation of the Sharman business. The effect of the agreement is to vest practical ownership of the software in Sharman. It is a license in name only.

The principal significance of the Joltid License Agreement is that Sharman has effective control over modifications to the KazaaLib/FastTrack software which is integrated in the Kazaa software. A further significance is that the elaborate arrangements that can be reduced to that simple proposition have almost certainly been put in place to seek to avoid liability for copyright infringement. The termination provisions are a case in point: they enable Sharman to say they are merely a licensee 34 when in truth they are much more.

It is the Applicants' case that the attempt has failed; and that the Sharman parties' previous representations to this Court to the contrary were disingenuous to say the least.

The sixth Respondent Altnet, Inc. ("Altnet") is a Delaware USA corporation.

The seventh Respondent Brilliant Digital Entertainment, Inc. ("BDE") is a Delaware USA corporation. BDE owns 75.5% of the shares in Altnet and 100% of the shares in the eighth Respondent Brilliant Digital Entertainment Pty. Limited ("BDEPL"), an Australian corporation. Each of Altnet, BDE and BDEPL carries on business in Australia from premises located at ... Surry Hills, New South Wales.

The ninth Respondent, Mr. Kevin Bermeister, is the CEO of Altnet, President and CEO of BDE and a director of BDEPL. The tenth Respondent, Mr. Anthony Rose admits that he is the technical director of BDE; plainly he fulfills the same role for Altnet and BDEPL.

In practice, the Sharman business on the one hand and the Altnet/BDE business on the other hand operate extremely closely together and act as a single unit. The fact that Sharman and Altnet act as a single unit should come as no surprise. It is the inevitable outcome of pursuing a common objective, namely, maximizing the number of users of the KMD....

The Sharman business and Altnet/BDE business are linked together on every level. The businesses are bound by their legal, financial, operational, technical and personal relationships. The closeness of the relationship between the parties is demonstrated by their formal agreements, their financial statements, their internal memoranda and correspondence and by the relationships between their key executives.

The depth and extent of these relationships all lead to the conclusion that Sharman and Altnet are operating in effect as one and in pursuit of common goals.

The parties have entered into a number of formal agreements to document their relationship.

At the time that Kazaa BV sold its business to Sharman, Kazaa BV also assigned to Sharman two of its agreements with BDE. Those agreements are known as the "P2P Technology Bundle Agreement" and "Ad Selling & Serving Agreement".

Under the first agreement, BDE agreed to license its b3d technology to Consumer Empowerment BV (later replaced as a party by Sharman). Under the second agreement, BDE and Kazaa BV (again, later replaced by Sharman) agreed to share revenue in relation to advertising campaigns using the b3d technology on the Kazaa website and KMD.

On 13 June 2002, Sharman and BDE agreed to amend this agreement to include all advertising campaigns. The primary formal agreement governing the relationship between the Sharman interests and the Altnet/BDE interests is the Joint Enterprise Agreement ("JEA").

The recitals to the Joint Enterprise Agreement recite that Sharman "was created with the intention of working jointly with Altnet", that "the joint commercial goals of Altnet and Sharman could not be attained except through the use and contribution by each of their respective technologies to this joint enterprise" and that prior to the date of the written agreement the parties were "sharing revenue derived from the joint use of Sharman and Altnet's technology pursuant to an oral agreement".

There are a number of significant features of the JEA: (a) Sharman appointed Altnet as its exclusive representative (to the exclusion of Sharman and all others) for the commercial exploitation of search results displayed on the KMD; (b) Sharman granted to Altnet a worldwide license to use Sharman's Marks, including "Kazaa"; (c) Sharman granted Altnet the right to display Index Search Results (Gold Files) in the KMD and to deliver content to end users; (d) Sharman granted Altnet placement rights permitting Altnet the top three search results in response to TopSearch Keywords and one General Keyword result for every four other search results. Provision is made for an increase in the number of results TopSearch displays in certain circumstances; (e) The JEA's term is 3 years and automatically renews for additional 3 year terms. The JEA is terminable only on breach, insolvency or if certain revenue targets are not met; (f) Neither party is entitled to disclose (by way of press release, public announcement or otherwise) any concept, project or activity relating to either party's business or technology without the prior written approval of the other party.

Associated with the implementation of the Gold File system the subject of the JEA was the inclusion in the Kazaa software of additional software technology known as "PeerEnabler". PeerEnabler enables the transfer of "secure" computer files between peers.

That technology was licensed by Sharman from Joltid pursuant to a PeerEnabler Software License Agreement dated 20 June 2003....

The Sharman and Altnet/BDE parties are financially intertwined such that one party's financial success is dependent upon the other. The financial interrelationship between the entities has at least four features.

First, the parties share revenue. Clause 5.1 of the JEA provides that all Net Revenue shall be shared between the parties. Clause 4.1 of the Ad Selling & Serving Agreement provides that Kazaa shall pay BDE a proportion of advertising revenue received. Clause 4.2 of the same agreement provides that BDE shall be paid a sales commission for any campaigns that it sells on the Kazaa network.

Secondly, Altnet/BDE relies upon the continued operation of the KMD for almost all of its revenue. BDE's SEC filings show that for the twelve months until December 31, 2003, BDE generated approximately 90.9% of its revenue from activities dependent upon the availability of the KMD to computer users.

Thirdly, Sharman owns securities in BDE. On 23 June 2003, BDE issued to Sharman a warrant to purchase shares in BDE at a fixed price exercisable before 23 June 2008. Thus Sharman's balance sheet is directly influenced by BDE's share price.

Fourthly, Altnet and BDE are financially intertwined with Joltid, the company that licenses the PeerEnabler technology and KazaaLib file to Sharman. When Altnet was formed in February 2002, it was owned as to 51% by BDE and 49% by Joltid. In May 2003, BDE issued 8 million of its shares to Joltid (19% of the issued shares) in return for Joltid decreasing its interest in Altnet to 24.5% with BDE owning the remaining 75.5% and in return for an option to acquire from Joltid the remaining 24.5% for a consideration of a further 7 million shares in BDE."