I think the biggest legal problem with linking to copyrighted material is that it's providing people with a way to break the law just by clicking a link.
It's an issue completely outside of copyright.
The combination of mechanical copyright for audio records (itself a bizarre law) and easy networked digital copying just happens to be easiest law to break on the web.
If I had a website with a link on it that said "clicking this link will kill a person, clicking it will mean you have committed murder" and someone clicked it, who is liable?
On the surface it's entirely the fault of the person clicking the link, and yet, what moron provides a link that will kill someone just by clicking on it?
If I had a website that just let people add links, and someone added the link described above, who is liable if someone clicks that link?
Maybe we'll find out in Saw 4.
Or a much better example... lets say I created a link that when clicked, posted an anonymous article on a public contribution blog or mailing list which was libellous. Who gets sued for libel?
The Age article has presumably spawned from the LawFont commentary posted yesterday.
From The Age article:
The statement by Justice Catherine Branson, which points to a potentially huge legal problem for Google and other search engine operators, came as a full bench of the Federal Court upheld a finding that Australian website operator Stephen Cooper was liable for "authorising copyright infringement".[...]
"What is striking is that a statement as potentially momentous as this, that the activity of running a search engine, one of the fundamental activities that makes the internet work these days, could well be infringement, we don't know, can be said without the merest bat of a judicial eyelash," Ms Weatherall wrote on specialist intellectual blog lawfont.com.
To be fair on Google I think it's unfair to compare Google to MP34Free.net. Google searches and indexes the entire internet regardless of content. As a side effect of that it's possible to find copyrighted material with Google because people have posted copyrighted material on the internet. Google's cache and image search complicates things but it's ultimate advertised aim is to "find stuff", not "find music".
Update: LawFont agrees (includes screenshots of the site)
A website called MP34Free.net only has so much room for denial... I'm surprised at how little reference is made to the URL of the site in the judgement. Sure, technically the technology behind the website is little more than a user created index to music, most of which happened to be copyrighted.
You can argue until you're blue in the face that the website itself wasn't doing anything illegal, but it's stated purpose (in the name of the site) was to provide "mp3s for free". The site is obviously doing something wrong in the spirit of copyright, but there doesn't appear to be a law which specifically covers "incitement of illegal copying" as separate from the act of copying.
Personally I still hold to the idea that linking to a file isn't in itself an illegal act. "Copyright" is about the right to copy. Linking to an MP3 is like saying "that CD you want is over there" or at worst "I saw a bootleg of that CD you wanted at stall 20 at Dandenong market".
The act of downloading that file for the purpose of keeping a copy of it is "copying" in the legal sense of copyright. As is the act of copying a copy of that file on a server.
You might argue that if you didn't link to it, it doesn't exist. That providing a link makes a file visible to the public. If that's so, a new law is still required that covers the space between song copyright and mechanical copyright.
Even in such a case, the users of MP34Free.net should be liable, not MP34Free.net themselves as they only provided a place to put links and did not create the links themselves. The idea that the ISP is also liable in this case is even harder to grasp.
However...
Imagine the CD fair that happens every 3 months around Melbourne. Store holders pay the fair organisers, who then pay for a room (such as Camberwell Town Hall) to host the event. If one of those stalls is selling bootlegs, is Camberwell Town Hall legally liable? Should the Hall, or at least the fair organisers checked every CD being sold for infringement? You could compare this to an ISP checking for hosted MP3 files on it's servers.
Imagine one of the stalls was called "music for free". The stall had nothing but a computer with a CD burner and lots of hard disk space. The owner of the stall does nothing but turn his back.
Imagine by the end of the fair the computer has been used by fare goers to copy hundreds of CDs.
Who is liable?
Now imagine elsewhere there is a stall with a computer that can be used to copy music but they're called "CD burning service".
Who is more liable? "Music for free" or "CD burning service"?