Hollywood studios lost the first round of a legal case they brought against Australian Internet Service Provider iiNet, after Federal Court Justice Dennis Cowdroy found that the ISP was not liable for the downloading habits of its customers.

The Federal Court of Australia today found that despite findings of copyright infringement by iiNet customers, iiNet - Australia?s third ranked ISP - did not authorise the acts of its customers. The court said that iiNet was not liable for the copyright infringements by its customers on its network.

The ruling came after film companies including Village Roadshow, Universal Pictures, Warner Bros Entertainment, Paramount Pictures, Sony Pictures Entertainment, Twentieth Century Fox Film Corporation, Disney Enterprises, Inc. and the Seven Network, the Australian licensee of some of the infringed works, filed a legal action against iiNet in November 2008.

They commenced action against iiNet following a 5 month investigation that uncovered instances of copyright infringements by users of iiNet?s services.

34 film companies representing the Australian and US film industries expressed their disappointment.Speaking on behalf of the Australian and US film companies that launched the action, Australian Federation Against Copyright Theft Executive Director Neil Gane said he was disappointed by the Court?s decision.

"Today?s decision is set back for the 50,000 Australians employed in the film industry," he said.

"But we believe this decision was based on a technical finding centred on the court?s interpretation of the how infringements occur and the ISP's ability to control them.

"We are confident that the Government does not intend a policy outcome where rampant copyright infringement is allowed to continue unaddressed and unabated via the iiNet network.

"We will now take the time to review the decision before making further comment on next steps," he said.

iiNet welcomed the judgment. "Today?s judgment is a vindication of that and the allegations against us have been proven to be unfounded," the company said in a statement.

"In relation to copyright holders, we conclude by again saying we do not, and never have supported, encouraged or authorized illegal sharing or downloading of files in breach of the copyright laws. ?We are eager to engage with the film industry and copyright holders to make this material legitimately available."