The powerful interests of the entertainment and high-tech industries clashed at the US Supreme Court in Washington today in a case pitting the freedom to innovate against the battle to control digital piracy.

The nine judges heard oral arguments in a case that seeks to determine if companies that distribute file-sharing software (also known as peer-to-peer or P2P programs) can be held liable for copyright infringement if their networks are used for illegal copying of songs, movies and software. Legal analysts have said the case, which is likely to be decided in June, has broader implications for the growth of new technologies and the battle against rampant online piracy.

Activists on both sides demonstrated outside the court. Some carried signs reading, "Hands off my iPod." Others, highlighting the losses for artists, carried banners reading, "Feed a Musician."

Donald Verrilli, who represents the film and music industries, said the companies being sued for the file-sharing systems built their businesses on the theft of copyrighted material. He said that allowing the defendants, Grokster and Streamcast Networks, to continue unchecked, "gives them a perpetual free pass" to facilitate illegal swapping of music and films.

"The recording industry has lost 25 percent of its revenue since the onslaught of this," Verrilli told the court, saying that the distributors of peer-to-peer software "are draining all the money out of the system."

But Richard Taranto, arguing for the defendants and a broad coalition of technology firms and others, said the court should reaffirm a standard set in a 1984 case involving the Sony Betamax video recorder, when it upheld the use of technology that could be used both legally and illegally.

"Any alternative would be worse," Taranto said, adding that if the Betamax legal standard were overturned, "virtually every business (involved in new technology) would be subject to litigation."

Taranto added that while peer-to-peer networks may be used for illegal copies, this applies to other technology, "including the personal computer, the modem, the internet service provider. Every piece in this chain is essential."

Verrilli cited studies showing that 90 percent of the use of Grokster and Streamcast were for illegal copies, but said it is "not a numerical question," but a question of what the companies set out to do.

But Justice Stephen Breyer said such a standard could spell the end for many types of technology. "Would we ever have a VCR" under the terms proposed by the plaintiff, he asked. "Would we have the Xerox machine? Would we have an iPod? Or for that matter the Gutenberg press? ... In each of those cases there would be vast amounts of infringing uses."

Justice David Souter made a similar point, saying, "If a guy is sitting in his garage figuring out whether to invent the next iPod, how do we know in advance anything that would give the inventor the confidence he would not be sued?"

Justice Anthony Kennedy, appearing to give some weight to the plaintiffs' arguments, said something is amiss about a company building a business around distribution of unauthorized copies. "Expropriated property can be used as part of the start-up capital" of these firms, he said. "That sounds wrong."

Taranto argued that this case is different from that involving Napster, which had some 60 million users downloading mostly illegal copies of songs from its central servers. He said Napster, which was eventually shut down by the courts, encouraged people to copy songs from its own computers. Moreover, he said, peer-to-peer networks have many legal uses and should be no different from iPods or photocopy machines.

In order to shut down Grokster and Streamcast, Taranto argued, the plaintiffs would have to show they encouraged piracy or were guilty of "wilful ignorance."

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 over digital networks.

The case has attracted widespread interest, with more than 50 supporting briefs filed on behalf of prominent firms including Intel, Yahoo, Apple, the US government, the Business Software Alliance and musicians such as Elvis Costello and Avril Lavigne.

Up to now, lower courts have ruled in favour of the technology industry.

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