The New Zealand Appeals Court rejected an application from the attorney general, acting on behalf of the Government Communications Security Bureau (GCSB), to exclude the agency from the lawsuit. New Zealand's High court ruled last year the agency could be held liable for illegally spying on Dotcom.
Dotcom is seeking damages from the government for its role in a raid in January 2012, when New Zealand police helicopters swooped on the flamboyant entrepreneur's mansion at the request of U.S. authorities.
The U.S. Federal Bureau of Investigation accuses Dotcom of leading a group that netted $175 million since 2005 by copying and distributing copyrighted content without authorisation.
The GCSB was found to have spied on Dotcom in the run-up to the 2012 raid, prompting an apology from the prime minister. Also known as Kim Schmidt, Dotcom is a German national but with residency in New Zealand, which made it illegal to spy on him.
Lawyers had argued that the government should not be required to be named twice as a defendant in the compensation suit, given that it is already listed as representing New Zealand police.
"It is preferable to require the addition of the Attorney-General as a separate party in respect of each Government entity in respect of which he or she is sued," the Appeals Court said in a statement.
But the court limited the amount of GCSB evidence that Dotcom and his associates could access, saying that only evidence relevant to the case that was given to police would be passed on to his legal team.
"This will strengthen our case in so far as GCSB remains a party to the proceedings," William Akel, one of Dotcom's lawyers, said of the ruling.
Dotcom and his colleagues are fighting extradition to the United States to face charges of online piracy, fraud and money laundering in relation to their file-sharing site Megaupload, which housed everything from family photos to blockbuster films.
He maintains that Megaupload, one of the world's most popular websites before it was shut down last year, simply provided online storage services, and should not be held responsible for stored content.
His case suffered a setback last week when a New Zealand court ruled that Washington did not have to hand over all of its evidence against him.
© Thomson Reuters 2013
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