The Copyright Alert System is a "six strikes" system that notifies internet users that their account is being used to illegally download copyrighted content. The first offense simply sends the user an email letting them know their account is being used for illegal downloading and educating them about copyright law. The second offense is either another email which requires receipt or a phone call from your Internet Service Provider (ISP). From there, the consequences become more severe. The third and fourth offense require the user to watch a video before getting online. The fifth and sixth offense range from throttling your bandwidth (making your Internet slower) to redirection to a new landing page. Each ISP is free to implement a different policy, so check this Mashable page to see how your ISP is handling this system.
The Recording Industry Association of America (RIAA) and the Motion Picture Association of America (MPAA) are monitoring peer-to-peer networks for any of their content being shared illegally. When they find a copy of their content, they trace the IP address and send that information to the ISPs. If your ISP matches that information with your account, that's when the system is implemented.
One of the first things you should know is that this is completely voluntary on the part of the ISPs. This is not a government program, but is instead a partnership between the RIAA, MPAA, and participating ISPs. The participating ISPs won't give up any personal information unless they are required to through a subpoena or court order. This program was created to educate Internet users about the illegality of peer-to-peer downloading, not to put illegal downloaders behind bars. It was also created to help ensure that any users who may not know their networks are being used without permission for illegal downloading are starting to password protect their networks.
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