In the same decision, the Copyright Board of Canada imposed a government fee of as much as $25 on iPod-like MP3 players, putting the devices in the same category as audio tapes and blank CDs. The money collected from levies on "recording mediums" goes into a fund to pay musicians and songwriters for revenues lost from consumers' personal copying. Manufacturers are responsible for paying the fees and often pass the cost on to consumers.
The peer-to-peer component of the decision was prompted by questions from consumer and entertainment groups about ambiguous elements of Canadian law. Previously, most analysts had said uploading was illegal but that downloading for personal use might be allowed.
"As far as computer hard drives are concerned, we say that for the time being, it is still legal," said Claude Majeau, secretary general of the Copyright Board.
The decision is likely to ruffle feathers on many sides, from consumer-electronics sellers worried about declining sales to international entertainment companies worried about the spread of peer-to-peer networks.
Copyright holder groups such as the Recording Industry Association of America (RIAA) had already been critical of Canada's copyright laws, in large part because the country has not instituted provisions similar to those found in the U.S. Digital Millennium Copyright Act. One portion of that law makes it illegal to break, or to distribute tools for breaking, digital copy protection mechanisms, such as the technology used to protect DVDs from piracy.
A lawyer for the Canadian record industry's trade association said the group still believed downloading was illegal, despite the decision.
"Our position is that under Canadian law, downloading is also prohibited," said Richard Pfohl, general counsel for the Canadian Recording Industry Association. "This is the opinion of the Copyright Board, but Canadian courts will decide this issue."
In its decision Friday, the Copyright Board said uploading or distributing copyrighted works online appeared to be prohibited under current Canadian law.
However, the country's copyright law does allow making a copy for personal use and does not address the source of that copy or whether the original has to be an authorized or noninfringing version, the board said.
Under those laws, certain media are designated as appropriate for making personal copies of music, and producers pay a per-unit fee into a pool designed to compensate musicians and songwriters. Most audio tapes and CDs, and now MP3 players, are included in that category. Other mediums, such as DVDs, are not deemed appropriate for personal copying.
Computer hard drives have never been reviewed under that provision, however. In its decision Friday, the board decided to allow personal copies on a hard drive until a fee ruling is made specifically on that medium or until the courts or legislature tell regulators to rule otherwise.
"Until such time, as a decision is made on hard drives, for the time being, (we are ruling) in favor of consumers," Majeau said.
Legal analysts said that courts would likely rule on the file-swapping issue later, despite Friday's opinion.
"I think it is pretty significant," Michael Geist, a law professor at the University of Ottawa, said. "It's not that the issue is resolved...I think that sooner or later, courts will sound off on the issue. But one thing they will take into consideration is the Copyright Board ruling."
Friday's decision will also impose a substantial surcharge on hard drive-based music players such as Apple Computer's iPod or the new Samsung Napster player for the first time. MP3 players with up to 10GB of memory will have an added levy of $15 added to their price, while larger players will see $25 added on top of the wholesale price.
MP3 players with less than 1GB of memory will have only a $2 surcharge added to their cost.
With a population of about 31 million people, Canada is approximately one-tenth the size of the United States. But Canadians are relatively heavy users of high-speed Internet connections, which make it easy to download music files. About 4.1 million Canadians were using a broadband connection at home as of the end of June 2003, according to U.K.-based research firm Point Topic. By comparison, U.S. cable and DSL (digital subscriber line) subscribers totaled 22.7 million at the end of September, according to Leichtman Research Group.
Canada has already raised the hackles of some copyright holders through its reluctance to enact measures that significantly expand digital copyright protection, as the controversial Digital Millennium Copyright Act (DMCA) has done in the United States. As a result, Canada could become a model for countries seeking to find a balance between protecting copyright holders' rights and providing consumers with more liberal rights to copyrighted works. For now, it remains unclear how other countries might be influenced by Friday's ruling.
Geist said he believes the tariff decision could be just the tip of the iceberg for hardware makers, as Canadian regulators grapple with the full implications of the policy. Other devices, including PCs, may eventually be brought under the tariff scheme, he predicted.
"Given that they've made a strong stand on (peer-to-peer matters), if the policy remains the same, there's little choice but to move ahead on personal computers," Geist said.
However, a representative of the Canadian Private Copying Collective (CPCC), the group of music copyright holders that typically petitions for new media types to be added to the list, said computers were not on its agenda.
"We have never sought a levy on computer hard drives and do not intend to do so in the future," Lucie Beaucheni, vice chair of the CPCC, said.