SAN FRANCISCO (Reuters) - A U.S. judge has thrown out a copyright infringement case against Veoh Networks Inc, an Internet video start-up with high-profile Hollywood backers, ruling that video-sharing companies are not solely responsible for policing piracy that may take place on their sites.

A screenshot of Veoh.com, taken on August 28, 2008. REUTERS/www.veoh.com

The California court dismissed a copyright infringement suit by adult entertainment company Io Group Inc against Veoh and granted summary judgment to the defendants. The complaint argued Veoh had not done enough to stop site users of its site from uploading unauthorized clips of 10 Io adult sex films.

Judge Howard Lloyd of the U.S. District Court for the Northern District of California found that Veoh worked actively to protect copyright owners and so qualified for “safe harbor” protections of the Digital Millennium Copyright Act (DMCA).

“The DMCA was intended to facilitate the growth of electronic commerce, not squelch it,” the judge said in siding with Veoh.

The Digital Millennium Copyright Act (DMCA) limits liability for Internet service providers that act quickly to block access to pirated online materials, once the copyright holder notifies a Web site of specific acts of infringement.

The ruling draws a line between Napster, the music-sharing service that enabled a wave of music piracy early this decade, and the new crop of video-sharing services that take steps to protect against piracy of copyrighted materials.

Io had argued that Veoh should be required to prescreen videos to prevent copyright infringement. “The court finds no reasonable juror could conclude that a comprehensive review of every file would be feasible,” the judge wrote.

The court rejected a technical argument used in many Internet copyright cases in which Io claimed Veoh infringed its copyrights by automatically converting user-submitted videos into easy-to-watch Flash videos, a process called transcoding.

But Lloyd stressed that he does not intend his decision to open the flood gates to Internet video piracy.

“The decision rendered here is confined to the particular combination of facts in this case and is not intended to push the bounds of the safe harbor so wide that less than scrupulous service providers may claim its protection,” Lloyd wrote.

Among other issues with Io’s lawsuit, the judge noted that Io had filed a lawsuit against Veoh instead of first providing the video company with notification of infringement.

Veoh had decided to bar all adult sexual content from its site and taken down the infringing Io videos before the suit was filed, Lloyd noted.

“We are very happy that the judge in this case recognized our compliance with the DMCA and our efforts to respect copyrights,” Veoh spokesman Gaude Lydia Paez said.

The Io-Veoh case featured similar arguments to those used in two high-profile cases against Google Inc unit YouTube, the world’s most popular video-sharing site.

Viacom Inc filed a $1 billion lawsuit in 2007 against YouTube calling it a site for “massive intentional copyright infringement” that had enabled hundreds of thousands of Viacom video clips to be pirated. A second suit filed against YouTube by English soccer’s Premier League and more than a dozen sports, entertainment and media plaintiffs is running in parallel in a New York federal court.

YouTube Chief Counsel Zahavah Levine hailed the Veoh ruling in a statement, saying that: “It is great to see the court confirm that the DMCA protects services like YouTube that follow the law and respect copyrights.”

Veoh ranked last week as the 17th most visited U.S. multimedia entertainment site according to Web measurement firm Hitwise Inc.

Financial backers include former Walt Disney Co Chief Executive Michael Eisner, former Viacom and MTV Networks Chief Executive Tom Freston, former Viacom Entertainment Group Chief Executive Jonathan Dolgen and investment bank Goldman Sachs.