Internet service providers BT and Talk Talk have lost an appeal over controversial measures to tackle copyright infringement online, which content providers claim costs £400m a year in lost revenue.
The appeal was made after a judicial review rejected claims by the internet service providers (ISPs) that government overstepped its authority with anti-piracy measures in the Digital Economy Act in April 2011.
The two ISPs argued that the Digital Economy Act (DEA), which requires ISPs to send warning letters to alleged infringers and impose sanctions including cutting them off, was incompatible with EU law.
Lawyers acting for Talk Talk and BT said the DEA measures could result in an invasion of privacy and run up disproportionate costs for ISPs and consumers, according to the BBC.
Talk Talk said it was considering its options but vowed to continue fighting to defend customer rights against what it called "ill-judged" legislation.
BT said it would study the judgment carefully to understand its implications and consider the ISP's next moves.
The decision has been welcomed by the Federation Against Software Theft (FAST). "This is a step forward in stakeholders taking on board to some degree some responsibility the fight against piracy," said Julian Heathcote Hobbins, general counsel, at FAST.
"We must not erode the perception of value in digital product to where all online product is considered ‘free’,” he said.
"As a matter of principle, this is a tremendous step forward and one that puts the provisions of the Digital Economy Act beyond this dog fight, dispelling legal confusion.”
All ISPs must now prepare to send warning letters to illegal file downloaders and keep lists of repeat infringers, which can be requested under established legal procedures.
Adam Rendle, a copyright specialist at international law firm Taylor Wessing, said ISPs now have a role to play, as well as rights owners, in identifying the wrongdoer, although the rights owners have to identify and prove the infringement.
"We now have to wait for the Ofcom Initial Obligations Code to be published and approved before the warning letters start arriving on file sharers' doormats," he said. Ofcom's Initial Obligations Code will detail how the process is to work.
The government had already announced that the more controversial website-blocking measures in the Digital Economy Act would not be introduced. But Rendle said it would not be surprising to see public outcry at the warning letters process, similar to that which greeted Acta and SOPA.