Embattled Megaupload is dropping a lawsuit against Universal Music that accuses the label of unlawfully removing from YouTube a four-minute video Megaupload produced featuring Kanye West, Mary J. Blige, will.i.am and others praising the notorious file-sharing service.

In dropping the suit, Hong Kong-based Megaupload is shifting its attention to criminal charges in the United States where its founder, Kim Dotcom, and top employees are accused of being responsible for facilitating wanton copyright infringement. Dotcom and four others were arrested in New Zealand in January, where they remain free pending possible extradition to the United States to face charges in one of the government’s largest criminal copyright-infringement cases.

“We have the criminal defense. We have the extradition proceedings,” Dotcom attorney Ira Rothken said in a telephone interview.

Rothken added that Megaupload is also facing a possible copyright infringement lawsuit for monetary damages from the Motion Picture Association of America.

“This is all incompatible with us maintaining the civil action,” Rothken said.

The Universal Music lawsuit being dropped (.pdf) was lodged a month before the January criminal indictments that were filed in a Virginia federal court. Megaupload was seeking damages in a California federal court on claims the removal of the $3 million video from YouTube soiled its “reputation as a responsible provider of file services — the very reputation that Megaupload’s investment in the Megaupload video and its numerous endorsements was designed to enhance.”

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