The UK trade group, the British Phonographic Industry (BPI), with member music labels Sony Music, EMI and Universal Music, took the Internet chain to court last year, charging it with copyright infringement.
EasyInternet suspended the commercial service in September, 2001, citing commercial reasons. In court it said it should not be held liable for customers downloading copyright-protected materials, a defense rejected by the judge, Justice Peter Smith.
The music industry, which has been fighting an all-out war on illicit CD-copying and Internet downloading, blaming it for falling CD sales, hailed Tuesday's decision.
"Illegal copying jeopardises the livelihoods of artists and song writers, as well as putting at risk the thousands of jobs directly and indirectly created by the recording and publishing of music," Peter Jamieson, BPI Chairman, said in a statement.
"We are delighted that we have won this ruling, which sets an important precedent in support of authorised licensing (music distribution) services."
Haji-Ioannou said his appeal would be based on "fair use" laws, which he said allows consumers to make copies of say music, film or software specifically for their personal use.
"There are exceptions to this copyright infringement business, and this is exactly what our customers were doing in our shops," Haji-Ioannou said.
The court must next determine penalties. In a previous statement on EasyInternet's Web site, the firm said the BPI demanded payment of "as much as one million pounds" in damages, which it called a form of extortion.
Last spring, an investigation initiated by the labels found hundreds of tracks, including those from Jennifer Lopez (news) and UK "boy band," Blue, on computer hard drives. It investigated eight EasyInternet locations in London, Glasgow, Edinburgh and Manchester, music industry officials said.
The music industry has been reeling from Internet music-swapping and CD-copying, two practices being blamed for three consecutive years of slumping music sales. Industry experts believe the industry will not recover until after 2005. ($1=.6125 Pound)