A court ruling Monday allows Napster users to continue swapping music for now but opens the door to millions of dollars in damages that could cripple the service.

A three-member panel of judges from the 9th U.S. Circuit Court of Appeals in San Francisco stopped short of immediately halting the music swapping, as a lower court had done in July. Calling the earlier decision by U.S. District Judge Marilyn Hall Patel "overbroad," they sent it back to the district court with instructions for creating a narrower injunction that would still require Napster to block the trading of copyrighted music.

But the judges also warned that Napster could be liable for huge damages, which could lead to sweeping changes in the way it operates its service. "We affirm the district court's conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the contributory copyright claim," the judges wrote. Some form of injunction is "not only warranted but required," the judges continued.

That means Napster must halt the trading of specific files it is told to block by record companies. But that could be millions of songs, and it sets the stage for new, sweeping restrictions on what can be traded through the service.

The ultimate fate of the controversial technology may hinge on whether it is possible--or impossible--to effectively police on the labyrinthine networks created by file-swapping software.

Monday's appellate court ruling ordered Napster to police its networks "within the limits of the system." As it has in the past, Napster will likely argue in its next appeal that it is technologically impossible to conduct this policing at the massive level demanded by the recording studios.