U.S. judge allows criminal case against Megaupload to proceed

Megaupload founder Kim Dotcom arrives at the New Zealand Court of Appeals in Wellington September 20, 2012.

WASHINGTON (Reuters) - The U.S. government's criminal case against the shuttered file-sharing website Megaupload will go forward for now, a federal judge ruled in an order made public on Tuesday.

The ruling deals a setback to Megaupload as the company and its chief executive, Kim Dotcom, fight allegations that they encouraged global copyright theft.

U.S. District Judge Liam O'Grady, in the order, agreed with prosecutors that there was no procedural error in their inability to serve papers in the United States to Megaupload, which is based in Hong Kong.

But the judge left open the possibility he could later dismiss the case on other grounds, like an argument that delays have denied the company its right to "due process."

Megaupload lawyer Ira Rothken told Reuters he plans to file such a request soon.

O'Grady signed the order allowing the case to go forward on Friday. Monday was a holiday for the U.S. government, so the order was not posted online until Tuesday.

Megaupload was one of the world's most popular websites, allowing users to store and share data, until a U.S.-led operation shut down the company in January, seized its assets and raided Dotcom's luxury estate in New Zealand.

U.S. prosecutors accuse Dotcom and seven others of organizing a criminal enterprise that made more than $175 million. They are asking New Zealand to extradite Dotcom.

Dotcom, a German national also known as Kim Schmitz, denies the charges and has tried to rally Internet users to his cause.

In May, Megaupload lawyers asked that the indictment against the company be thrown out because they said it had no address in the United States and could not be served with court papers.

O'Grady rejected that idea, writing that a foreign company violating laws within the United States cannot "evade the jurisdiction of United States courts by purposefully failing to establish an address here."

Prosecutors may eventually serve one of the company's executives if he is extradited, the judge wrote.

In a footnote, O'Grady added that he "leaves open the possibility" of a future argument that Megaupload "has been denied due process" by the failure to serve the company. The U.S. Constitution guarantees "due process of law" for criminal defendants and others.

Megaupload's Rothken said the company respectfully disagrees with the result of the judge's order but appreciates "the court implicitly allowing" a new motion. "We will be filing such a motion shortly," he said.

A spokesman for federal prosecutors in Alexandria, Virginia where the case is proceeding, had no comment.

(Editing by Leslie Gevirtz)