Companies providing wide access to the Web are merely "intermediaries" who are not bound by Canadian copyright legislation, the court said in a 9-0 ruling.
At issue was an effort by the Society of Composers, Authors, and Music Publishers of Canada, or SOCAN, to force Internet service providers to pay a tariff.
SOCAN also wanted to extend Canadian copyright law beyond the country's borders and apply it to offshore Web sites that serve Canadians.
Opposing the effort was the Canadian Association of Internet Providers, including the Canadian subsidiaries of some of the world's high-tech giants, like Sprint Corp., America Online Inc., MCI, IBM Corp. and Yahoo! Inc.
The service providers argued that artists should seek royalties directly from Web sites offering their work, not from companies providing wider-ranging access to the Web.
The case was closely watched abroad because of the international implications for the computer and music industries. The music industry says it has lost billions of dollars in revenue in recent years as people shunned traditional stores and downloaded music from the Internet.
SOCAN's effort contrasted with the legal route taken by the recording industry in the United States, where the usual tactic has been to sue individual file-sharing services and customers who download music.
The Recording Industry Association of America has launched about 2,000 lawsuits against file swappers since last year. The RIAA has settled hundreds of those cases, generally for a few thousand dollars each.
The attempt to collect instead from service providers was significant because they provide an easier target for litigation than tracking down a myriad of individual Web sites and customers.
The Canadian Recording Industry Association lost a Federal Court challenge in March to force five Internet service providers, including Bell Canada, Rogers Cable, and Shaw Communications, to hand over the names and addresses of 29 people who allegedly shared hundreds of songs with others in November and December.
The recording industry association wanted the names of subscribers who are currently identifiable only through a numeric Internet address and user handles. The association could not begin civil litigation until the alleged offenders were identified.