In a closely watched digital copyright lawsuit, a panel of five judges in the New York State Supreme Court of Appeals on Tuesday reversed a lower state court decision favoring Escape Media Group Inc., the operators of the music streaming site Grooveshark.

The lawsuit, filed by Universal Music Group, alleged that Grooveshark had violated copyrights laws by hosting unlicensed music from Universal’s catalog that was recorded prior to 1972.

The date is significant because recordings from 1972 and onward explicitly fell under the DMCA, which granted online service providers such as Grooveshark a “safe harbor” against copyright litigation, provided that they meet certain obligations, including a process for taking down infringing content uploaded by users. Universal argued that, when it came to copyrighted songs recorded before 1972, Grooveshark enjoyed no such safe harbor and was liable. The latest court ruling agreed with Universal.

The decision has the potential to send a number of social networks that rely on user uploaded content scrambling to scour their systems for copyrighted material recorded prior to 1972 in order to minimize their potential liability, including YouTube, SoundCloud and others.

“As a practical matter, this means that service providers who permit users to upload pre-1972 sound recordings are liable for copyright infringement,” said Lawrence Iser, a copyright attorney with Kinsella Weitzman Iser Kump & Aldisert. “It places the burden on the service provider to police its servers and remove pre-1972 sound recordings. Copyright owners no longer have the obligation to notify the service provider. Instead, the copyright owner can simply file suit.”

Grooveshark’s attorney, John Rosenberg, said his client plans to appeal the decision and also “seek legislative action…not only for its own interests but for the industry as a whole.”

“The Court’s decision, if it stands, will significantly undermine the Safe Harbor protections of the Digital Millenium Copyright Act and may severely disrupt the operations of all Internet Service Providers who, like Groovehark, permit access to user-generated music content,” Rosenberg said in a statement.

Universal declined to comment.

Grooveshark, whose chief executive Sam Tarantino told Mashable this week that he was “broke,” seemed to have gotten a reprieve last July when New York State Supreme Court Judge Barbara R. Kapnick initially ruled in favor of the New York music service. She cited a previous case, Capitol Records Inc. vs. MP3Tunes, in concluding that all songs, even those made prior to 1972, fell under the DMCA’s safe harbor provision.

Judge Kapnick’s ruling was reversed Tuesday when New York’s Supreme Court Appellate Division sided with Universal.

When “the Copyright Act was amended in 1971 to include sound recordings, Congress expressly extended federal copyright protection only to recordings ‘fixed’ on February 15, 1972 or after,” the judges wrote.

Taking a literal stance, the judges said that if Congress had meant for the DMCA to extend to copyrighted material prior to 1972, it would have stated that in the law. Instead, the DMCA stated just the opposite, the court concluded.

“Under such circumstances, it would be far more appropriate for Congress, if necessary, to amend the DMCA to clarify its intent, than for this Court to do so by fiat,” the judges wrote.

Iser predicts this decision will open a can of legal worms with much wider implications that could take years to sort out.

“The latest ruling conflicts with the 2001 U.S. District Court decision in Capitol Records Inc. vs. MP3tunes, in which the United States district court tackled precisely the same issue and found that the DMCA embraced sound recordings fixed before February 15, 1972,” Iser said. “Because different courts have come to different results on the question, we can expect further litigation on this issue.” [Billboard.biz]