The 2nd U.S. Circuit Court of Appeals on Thursday reversed a June 2010 lower court decision in favor of YouTube, which had been considered a landmark in setting guidelines for how websites could use content uploaded by users.

"It's hard to characterize this as anything other than a loss for Google, and potentially a significant one," said Eric Goldman, director of the High Tech Law Institute at Santa Clara University School of Law. "It has given new life to a case that Google thought was dead."

The original $1 billion lawsuit filed by Viacom in 2007 went to the heart of a major issue facing media companies, specifically how to win Internet viewers without ceding control of TV shows, movies and music.

It was seen as a test of the Digital Millennium Copyright Act, a 1998 federal law making it illegal to produce technology to circumvent anti-piracy measures, and limiting liability of online service providers for copyright infringement by users.

Writing for a two-judge panel of the 2nd Circuit, Judge Jose Cabranes concluded that "a reasonable jury could find that YouTube had actual knowledge or awareness of specific infringing activity on its website."

A YouTube spokeswoman said in an e-mailed statement: "All that is left of the Viacom lawsuit that began as a wholesale attack on YouTube is a dispute over a tiny percentage of videos long ago removed from YouTube. Nothing in this decision impacts the way YouTube is operating."

Viacom, in a statement, said the appeals court "delivered a definitive, common sense message to YouTube: intentionally ignoring theft is not protected by the law."

Other plaintiffs also welcomed the decision.

"Needless to say, my clients are delighted with the reversal," said Charles Sims, a lawyer for the Premier League, which is Britain's top soccer league, and several other plaintiffs. "YouTube willfully blinded itself to specific infringement, and had ample ability to control infringing activity within the meaning of the copyright law."

New York-based Viacom is controlled by Sumner Redstone and owns cable networks such as MTV and Comedy Central as well as the Paramount movie studio.

Viacom and Google are not always adversaries. On Wednesday, YouTube announced a partnership to offer online rentals of nearly 500 Paramount films, such as "The Godfather."

JON STEWART, SPONGEBOB AND RED FLAGS

Plaintiffs in the 2nd Circuit case collectively accused YouTube of improperly broadcasting about 79,000 copyrighted videos on its website between 2005 and 2008.

Viacom, which is based in New York, had contended that YouTube did nothing to stop of infringements relating to such programming as "The Daily Show with Jon Stewart," "South Park" and "SpongeBob SquarePants."

The 2nd Circuit found that while YouTube was entitled to a "safe harbor" provision of the copyright law, it was an open question as to whether they had "actual knowledge or red flag awareness" of specific instances of infringement.

It also said the lower court should consider whether YouTube demonstrated "willful blindness" in allowing copyrighted videos to remain on its website.

Goldman said the decision could add to the costs of online service providers, even small ones, to keep websites running.

"It is not easy for a well-meaning company to establish it is protected under the safe harbor part of the copyright law, even if its service adds significant social value," he said. "It will make start-ups more hair-trigger on taking down news or content, for fear that failure to do so will be held against them by content providers."

Based in Mountain View, California, Google bought YouTube in November 2006 for about $1.65 billion.

The 2nd Circuit normally hears cases in three-judge panels. The third judge on the YouTube case died while the case was pending.

In afternoon trading on the Nasdaq, Google shares fell $2.28 to $632.87, while Viacom rose 42 cents to $46.82.

The cases are Viacom International Inc et al v. YouTube Inc et al; 2nd U.S. Circuit Court of Appeals, No. 10-3270; and The Football Association Premier League Ltd et al v. YouTube Inc in the same court, No. 10-3342.

(Reporting By Jonathan Stempel and Yinka Adegoke in New York; Editing by Gerald E. McCormick, Tim Dobbyn and M.D. Golan)

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