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The Copyright Alert System calls for ISPs to send a series of email notices to Internet subscribers whose accounts have been identified by content owners as illegally downloading music, movies or television shows.
After five notices, subscribers could be subject to "mitigation measures" by an ISP, including temporarily reducing their Internet speed or redirecting their account to a landing page with information about copyright infringement.
The voluntary agreement does not oblige the ISPs to take punitive action, however, which they have been reluctant to do in the absence of a court order.
ISPs will not provide customers' names to rights owners and subscribers can seek an "independent review," at a cost of $35, to determine the validity of an infringement claim.
The Center for Copyright Information, a new group founded by the ISPs and entertainment associations, stressed that the alert system "does not, in any circumstance, require the ISP to terminate an Internet subscriber's account."
But digital rights groups Public Knowledge and The Center for Democracy & Technology (CDT) warned that it "lists Internet account suspension among the possible remedies" to copyright infringement.
"Today's agreement has the potential to be an important educational vehicle that will help reduce online copyright infringement," Public Knowledge and the CDT said in a joint statement.
"A voluntary, notification-centric approach can sidestep many of the serious concerns that would be raised by government mandates, the adoption of new snooping or filtering technologies, or a draconian 'three strikes' approach centered on disconnecting Internet users," they said.
"But whether the agreement will meet its educational promise or instead will undermine the rights of Internet users will depend on how it is implemented," they said.
"We believe it would be wrong for any ISP to cut off subscribers, even temporarily, based on allegations that have not been tested in court."
Participating ISPs will begin sending out copyright alerts later this year and next year.
AT&T, Cablevision, Comcast, Time Warner Cable and Verizon signed on to the agreement along with the Recording Industry Association of America (RIAA), the Motion Picture Association of America (MPAA), Independent Film & Television Alliance (IFTA) and the American Association of Independent Music (A2IM).
US ISPs already forward copyright violation notifications from content owners to subscribers but the new agreement standardizes the practice.
The Center for Copyright Information and supporters said the escalating notification system will help reduce online copyright violations.
"We are confident that, once informed that content theft is taking place on their accounts, the great majority of broadband subscribers will take steps to stop it," said James Assey, executive vice president of the National Cable & Telecommunications Association (NCTA).
RIAA president Cary Sherman said the "groundbreaking" agreement ushers in a "fresh approach to addressing the digital theft of copyrighted works.
Verizon general counsel Randal Milch described the agreement as "a sensible approach to the problem of online-content theft and, importantly, one that respects the privacy and rights of our subscribers."
The Obama administration welcomed the agreement.
"The administration is committed to reducing infringement of American intellectual property as part of our ongoing commitment to support jobs, increase exports and maintain our global competitiveness," said Victoria Espinel, the US Intellectual Property Enforcement Coordinator.
"The joining of Internet service providers and entertainment companies in a cooperative effort to combat online infringement can further this goal and we commend them for reaching this agreement," Espinel said. "We believe it will have a significant impact on reducing online piracy."