The decision is a fresh blow to the media industry, which has fought to shut down file-sharing networks it says have created a massive black-market trade in free music, films and video games on the Internet.
"The victory by Kazaa creates an important precedent for the legality of peer-to-peer software, both in the European Union as elsewhere," Kazaa's lawyers Bird & Bird said in a statement.
The decision by the Dutch court, the highest European body yet to rule on file-sharing software, means that the developers of the software cannot be held liable for how individuals use it. It does not address issues over individuals' use of such networks.
The International Federation of the Phonographic Industry (IFPI), the music trade group representing independent and major music labels that include Warner Music Group, Sony Music Entertainment, BMG Entertainment, EMI Recorded Music and Universal Music Group, criticized the ruling as "one sided" and vowed to continue its legal crusade elsewhere.
"Today's ruling on Kazaa by the Dutch Supreme Court is a flawed judgment, but still leaves no doubt that the vast majority of people who are using file-swapping services like Kazaa are acting illegally--whatever country they are in," the group said in a statement.
Targeting the Kazaa user
The music industry in the United States, feeling the pinch of successive years of , has begun suing individual downloaders, many of whom are Kazaa users. The IFPI has said a similar legal campaign could be launched in Europe.
The High Court rejected demands by Buma Stemra, the Dutch royalties collection society, that distribution of Kazaa cease and that future versions be modified so that copyrighted materials cannot be exchanged over the network, lawyers representing Kazaa said.
Kazaa and other new breed peer-to-peer networks have argued they have no centralized servers and therefore cannot control what is exchanged by their users, a defense the IFPI and other media organizations challenge.
The IFPI maintained Kazaa could be modified to filter out copyrighted works. They also demanded the company warn Kazaa users that unauthorized distribution of such materials was illegal.
The Supreme Courtin which an appeals court sided with FastTrack, the Amsterdam-based company that developed Kazaa. the technology to Sharman Networks of Australia.
The media industry has launched a similar suit in the United States against Sharman, which many see as the crucial legal showdown for determining the legal future of file-sharing.
Kazaa has become the undisputed king of file-sharing networks. In October, Kazaa registered over 17.5 million European and American users, according to Internet measurement firm Nielsen/NetRatings.
In the Netherlands alone there are 3.6 million Kazaa users.
"This is a historic victory for the Internet and consumers," Niklas Zennstroem and Janus Friis, the founders of Kazaa, were quoted in the lawyer's statement as saying.