The Panama City, Fla.-based porn company allegedly played a pivotal role in illegally disseminating the famous homemade sex tape over the Internet that Hilton and then-boyfriend Rick Salomon made in 2001.
Hilton's lawsuit had been based on the argument that the 45-minute sex tape had been made for "personal use" only.
The lawsuit claimed violation of privacy, illegal business practices, and infliction of emotional distress. Hilton originally went after $15 million in actual damages and $15 million in punitive damages. The lawsuit was filed in Los Angeles Superior Court in February.
But for reasons that are undisclosed, the judge dismissed Hilton's case against Kahatani.
In the meantime, Hilton has reportedly settled her own legal dispute with Salomon and will share in the profits from the sale of the sex tape via production and distribution company Red Light District.
The New York Daily News reports that Red Light and Solomon will pay the heiress $400,000 against sales pertaining to the release of "One Night in Paris," a digital remake of the original tape that first circulated over the Internet.
Salomon sold the publishing rights to Red Light in April to market and distribute the VHS and DVD release.
Red Light told XBiz that this is the first time the rights have been secured to package the content in additional formats. Red Light specializes in producing its own hardcore "gonzo" films.
Hilton was quoted as saying that she intends to donate a substantial portion of Red Light profits to a charity organization of her choice, although she had not yet elaborated on which organization she has chosen for her donations.
Salomon also agreed to drop his own defamation lawsuit against the Hilton clan that he filed when news of the tape's existence first hit the media and the Hilton family accused Salomon of drugging and taking advantage of their daughter.
After acquiring the rights to the film footage, Solomon, the primary copyright holder of the sex footage, launched his own website, TrustFundGirls.com, through which he marketed a version of the sex romp for $50 per download.
Aside from her fifteen minutes of fame with the sex tape, Hilton is also the co-star of the Fox television show "Simple Life."
