The ruling is a defeat for the Recording Industry Association of America (RIAA), which had filed suit last October seeking to prevent Diamond from manufacturing and shipping the device, and had appealed to the circuit court after a lower court had rejected its request for a preliminary injunction.

The decision clears a path for MP3 players that are set to hit the market this year, but industry sources said the ruling is also likely to have a long-term impact on the digital music market, the size and viability of which hinges on the wide availability of content controlled by the recording industry.

The task of creating a large legitimate market for the secure download and sale of digital music from the Internet for devices that play protected music has been taken up by the Secure Digital Music Initiative, a group formed in December 1998 to head off the piracy of MP3 music files over the Internet. Comprised of record industry, software, computer and consumer electronics companies , SDMI is working to develop an open, secure architecture and specification for digital music. SDMI expects to have a specification for player devices ready by the end of this month.

In its ruling in the Diamond case, the court found that the Rio player was not primarily a recorder and so was not subject to the 1992 act.

"The Rio's operation was consistent with the act's main purpose — the facilitation of personal use," wrote Judge Diarmuid F. O'Scannlain in his decision, suggesting the device would allow consumers to record copyrighted music for private, non-commercial use.

The court's decision is a boon for Diamond and other manufacturers building and shipping MP3 music players. New MP3 players are expected to hit the market this year from Saehan, Thomson Multimedia, Creative Labs, Dynamic Naked Audio, Frontier Labs of Hong Kong, I-Jam Multimedia and others.

David Watkins, president of RioPort Inc., the Internet music subsidiary of Diamond Multimedia, said in a statement that the decision "opens a host of new opportunities for us. We have always believed that the Rio line of devices operated well within the law . . . as a playback-only device for the thousands of legitimate music and audio tracks on the Internet."

The RIAA said it was disappointed with the court's decision. In a statement released after the ruling, the association said it had filed the lawsuit because "unchecked piracy on the Internet threatens the development of a legitimate marketplace for online music, a marketplace that consumers want."

But sources said the decision is not expected to have much of an impact on the development of a market for digital music players, which is limited by the availability of legitimate digital music, most of which is under the control of major record labels that are RIAA members. The player market won't reach its potential until SDMI-compliant devices are available, these sources said.

SDMI's Portable Device Working Group plans to release specifications for portable devices that play copy-protected digital music later this month. The specs are expected to include digital watermarking technology to protect copyrighted content. The watermarking technology selected by SDMI may well be the same technology chosen by the 4Cs (IBM, Intel, Matsushita and Toshiba) to protect DVD-Audio content in DVD systems.

Gary Johnson, head of an audio design engineering group at Texas Instruments Inc., doesn't think the circuit court's decision in the Rio player case will make a difference in the market for players. "We've already planned to solve the problem without a court battle," said Johnson. "We think SDMI will take care of everything." TI plans to offer a reference design for digital music players based on a TI programmable DSP after the SDMI specification becomes available June 30.

"This business was started with one company that could make money on one-million-unit business, but with SDMI it can be a 100-million-unit business," said Johnson.

Diamond has already dropped prices on its Rio players, "so you know that the market is very small," Johnson said. "This is a very small bootleggers market without more music content."

But SDMI's June 30 release date for specs doesn't leave manufacturers much time to get SDMI-compliant products ready for the upcoming Christmas shopping season.

Johnson said that companies that use TI's reference design won't get the design until June 30 at earliest. They will have to settle on a player design, buy parts and ramp production. That may not happen before the Christmas selling season, he said.

"It looks like there will be a flood of MP3 players this year and SDMI-compliant devices next year," said Johnson.