Universal Music Group was dealt a heavy loss today in its long-running copyright lawsuit against Veoh, a now-defunct video hosting site, with a federal judge upholding a previous ruling that the Digital Millennium Copyright Act's safe harbor provision protected Veoh from liability when users uploaded videos that infringed on UMG's intellectual property.

The Electronic Frontier Foundation, which filed an amicus brief on behalf of Veoh, called it "a bittersweet and crucial victory" for the Internet as a whole. Veoh went out of business from the cost of defending the case, but the ruling by the US Court of Appeals for the Ninth Circuit in San Francisco rejects UMG's reasoning for filing takedown notices. The question of whether user-generated content on video hosting sites qualify for DMCA safe harbor protection was also crucial in Viacom's similar $1 billion lawsuit against YouTube, in which a judge ruled against Viacom last year.

In today's ruling, the EFF explains, "The appellate court squarely rejected UMG's assertion that the DMCA safe harbors do not apply to any service that 'displays' or 'distributes' copyrighted material rather than simply 'storing' it. As EFF (with several other public interest groups) pointed out in an amicus brief on which the court expressly relied, every Web hosting service 'displays' and 'distributes' the material that its users upload—that's how the Web works."

The ruling upholds a 2009 verdict in which federal judge Howard Matz ruled that safe harbor protections apply to Veoh. "We agree with Judge Matz that 'Congress could not have intended for courts to hold that a service provider loses immunity under the safe harbor provision of the DMCA because it engages in acts that are specifically required by the DMCA,'" the Ninth Circuit ruling states (full text).

The court remanded the question of whether Veoh is entitled to reimbursement for costs (excluding attorney's fees) back to the US District Court. Viacom's appeal of the YouTube ruling is still being considered by an appeals court in New York.

While the Veoh battle has gone on since 2007, UMG started a new battle last week by filing a takedown notice against the site Megaupload.