The goal of the entertainment industry in Australia was to establish rules like those in countries such as France, New Zealand and South Korea, where repeat infringers are warned and eventually disconnected.

iiNet, which had about 641,000 broadband DSL customers last August, said on its website it has "never condoned or encouraged copyright infringements -- but we don't accept that threatening or disconnecting customers is the solution to infringements."

According to court documents, iiNet knew that half of the traffic on its network was data transmitted using BitTorrent, a peer-to-peer file sharing protocol, and that a substantial portion of that traffic infringed copyright. A "torrent" is a small information file used with a file-sharing application that enables content to be distributed among many users.

Australia has a "safe harbor" provision modelled after the U.S. Digital Millennium Copyright Act, where service providers are not liable for copyright infringement under certain conditions, such as if the material has been made available by another party other than the service provider.

In its terms and conditions, iiNet warns customers that it will terminate Internet access for those who repeatedly infringe copyright. But the copyright owners contended iiNet's implementation of that policy wasn't vigorous enough for it to be protected by the safe harbor protections.