"The court has ruled the current Kazaa system illegal. If they want to continue, they are going to have to stop the trade in illegal music on that system," record industry spokesman Michael Speck said outside the court.
"It's a great day for artists. It's a great day for anyone who wants to make a living from music."
The Federal Court ruling culminated a long-running court battle between Australia's record industry and Kazaa.
The 10 defendants in the case include Kazaa's owners, Sharman Networks Ltd. and Sharman's Sydney-based chief executive officer, Nikki Hemming, as well as Altnet, a company that provided some of the software for the Kazaa website.
Federal Court Judge Murray Wilcox found six of them, including Hemming, Sharman Networks Ltd. and Altnet, infringed copyright and ordered them to pay 90 per cent of the record industry's costs in the case. A hearing will be held at a later date to establish damages.
"These people have crowed for years about the downloads - 270 million downloads of somebody else's work each month," said Speck. "We will ask the court when it comes to damages to reflect the value of the music these people ripped off."
Lawyers for Kazaa said they would appeal but made no immediate detailed response to the ruling.
They had argued that the software is no different from a tape recorder or photocopier - and that Kazaa could not control copyright infringement by users of the network.
But Wilcox said that they actively encouraged users to share files, the vast majority of which were copyrighted material.
Wilcox said that Sharman and Altnet should stop authorizing Kazaa users swap copyright material.
If it wants to continue its operations, Wilcox said Kazaa's owners have to ensure that new versions of the software filters unlicensed copyright material and he ordered them to press existing users to upgrade their software to a new version that filters unlicensed material.
Speck said the ruling would have global effects.