The Frankfurt judges have since rejected this request, because it contains insufficient evidence. The US legal team failed to demonstrate that a web hosting service for the illegal upload of copyrighted files, amounts to a criminal offence.

According to the German 'Telemediengesetz' (communications legislation), a hosting service for foreign files will generally not be accountable unless the host had active knowledge of illegal activity. The judges also emphasised that the concept of knowledge is limited to positive knowledge. Therefore if the service provider believes that it is possible or likely that a specific piece of information is stored on their server, this is not sufficient evidence of knowledge of abuse.

According to the court ruling, there is no legal obligation to monitor the transmitted data or stored information or to search for any illegal activity.

[Judge O'Grady] noted that the "plain language" of the law required sending notice to the company's address in the United States. "You don't have a location in the United States to mail it to," he said. "It's never had an address" in the United States.

Not only that, but the government believes it can continue to freeze Megaupload's assets and paralyze its operations even if the judge grants the motion to dismiss. That's because in the government's view, the assets are the proceeds of criminal activity and the prosecution against founder Kim Dotcom will still be pending. The fact that the assets are in the name of Megaupload rather than its founder is of no consequence, the government claimed.

Pearson added Thursday, “If all goes well, I intend to put the domain name up for auction before the holiday break begins tomorrow, though I have not yet made a firm decision as to where the domain will be auctioned.”