Suspicious individuals are the ONLY ones monitored
"In times of unrest in a city or on suspicion of illegal or terrorist activities, the select individual could be monitored[...]"
This is what is being done, the general public's traffic is NOT being monitored, only those who have been confirmed distributors of infringing content, such as copyrighted music or movies.
"[...]but that also needs to be verified and approved for authenticity."
Again, that is how it works. The RIAA or MPAA work with law enforcement agencies. When you torrent and seed a file, you can see who else you are seeding/downloading the file to/from (your "peers"). That information is public if you are downloading the file; therefore, if an agent from the RIAA or MPAA download that file to see who is seeding their content, they now have proof (IP addresses of the seeders) that those people are distributing infringing content. Once they see your IP address on that list, the Fourth Amendment of the US Constitution comes into play. You see, if law enforcement (in this case anyone working with the RIAA/MPAA) has proof that you are involved in illicit activity (in this case, distributing infringing content; proof being your IP address), they now have the right to monitor your traffic to check for that material.
"ISP will be subject to lawsuits from individuals as well as groups, if they indulge in unlawful spying."
It is not against the law for them to do so, and we can't really complain, seeing as we broke the law. If they are, in fact "spying" on your traffic, then by all means, toss them a lawsuit. Your impact will still be minimal, as these are powerful and rich companies.
"As many others before me have said, paying for the service to use does not give them the right to analyze and oversee what I do with the service."
On the contrary, you are paying for the ISP to provide you with service, under their Terms and Conditions. It is against the ISP's Terms and Conditions to use their service to distribute or download infringing content, and under those Terms and Conditions, the ISP has the right to terminate your service if they hear that you are breaking their rules. When the RIAA/MPAA tells the ISP that you are distributing infringing material, the ISP monitors your traffic so they can find out if that is true.
"[...] In software parlance, I could relate it to a software vendor selling financial software to individuals, but all the date the individuals records can be seen by the software company!"
Your analogy doesn't hold up, friend. No where in the software vendor's Terms and Conditions can it say that they can take your personal information, as that is against the law. If the police come banging at your door with a warrant, then your financial information recorded in that software can be viewed.
You get these Cease and Desist letters in your inbox only when you've done something wrong, and after the RIAA/MPAA and a law enforcement agency has taken notice of you. It is illegal for an ISP to monitor someone's Internet traffic without reason provided to them by a law enforcement agency, or (but not "and") notification to the End User. If your traffic was always being monitored, you'd get a notice every time you visited The Pirate Bay or Demonoid, but you don't, do you?
Notice how the Cease and Desist emails mention perhaps an artist's name, say, Disturbed, followed by the record company, Warner Bros., then their lawyers, GrayZone Inc.? That's because these people have taken the proper legal steps necessary to implicate you as a distributor of their copyrighted content.
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