Embattled Megaupload is dropping a lawsuit against Universal Music that accuses the label of unlawfully removing from YouTube a four-minute video Megaupload produced featuring Kanye West, Mary J. Blige, will.i.am and others praising the notorious file-sharing service.

In dropping the suit, Hong Kong-based Megaupload is shifting its attention to criminal charges in the United States where its founder, Kim Dotcom, and top employees are accused of being responsible for facilitating wanton copyright infringement. Dotcom and four others were arrested in New Zealand in January, where they remain free pending possible extradition to the United States to face charges in one of the government's largest criminal copyright-infringement cases.

"We have the criminal defense. We have the extradition proceedings," Dotcom attorney Ira Rothken said in a telephone interview.

Rothken added that Megaupload is also facing a possible copyright infringement lawsuit for monetary damages from the Motion Picture Association of America.

"This is all incompatible with us maintaining the civil action," Rothken said.

The Universal Music lawsuit being dropped (.pdf) was lodged a month before the January criminal indictments that were filed in a Virginia federal court. Megaupload was seeking damages in a California federal court on claims the removal of the $3 million video from YouTube soiled its "reputation as a responsible provider of file services – the very reputation that Megaupload's investment in the Megaupload video and its numerous endorsements was designed to enhance."

The Justice Department has seemingly turned the lawsuit's allegations on its head.

The authorities shuttered Megaupload in January, seized all user data and indicted seven high-ranking Megaupload employees. Megaupload allowed users to upload large files and share them with others. The government alleges that the service was an excuse to encourage uploading of copyrighted movies, which Megaupload profited from via ads and premium subscriptions.

The government said the site facilitated copyright infringement of movies "often before their theatrical release, music, television programs, electronic books, and business and entertainment software on a massive scale." The government said Megaupload's "estimated harm" to copyright holders was "well in excess of $500 million."

For the moment, Dotcom and the others are fighting the government's extradition request and arguing about evidentiary issues.

In the now-scuttled lawsuit targeting Universal, Megaupload claimed the five-day takedown of the YouTube video in December was a sham designed to chill free speech. The suit sought unspecified damages and alleged the label had violated a provision in copyright law that forbids bogus copyright claims. The video has been viewed more than 16.6 million times.

YouTube, meanwhile, claimed Universal Music abused the video-sharing site's piracy filters when it used them to take down the spot.

YouTube has engineered a filtering system enabling rights holders to upload music and videos they own to a "fingerprinting" database. When YouTube users upload videos, the system scans the upload against the copyright database for matches. If a full or partial match is found, the alleged rights holder can have the video automatically removed, or it can place advertising on the video and make money every time somebody clicks on the video.

Under the Digital Millennium Copyright Act, online service providers like YouTube lose legal immunity for their users' actions if they don’t remove allegedly infringing content if asked to by rights holders. If the content is not removed, internet service providers could be held liable for damages under the Copyright Act, which carries penalties of up to $150,000 per violation.