Google’s latest algorithm update aims to protect copyright owners and penalize websites with large amounts of copyrighted material. Every week, over 1.5 million URLs are requested to be removed by Google (Aug, 2012). This adjustment by Google can hopefully help users find legitimate, quality sources of web content more easily. Here is how copyright issues will be handled:
Websites with a high number of valid copyright removal notices may be penalised, removed from Google or appear lower in the search results. However, Google are not going to remove any pages unless valid copyright removal notices from the rights owner have been submitted.

Which websites will be targeted?

Websites with a large number of valid copyright removal notices might appear lower in the search results.
Not surprisingly, many of the sites at risk include file sharing and torrent related websites such as FilesTube.com, Torrenthound.com and ExtraTorrent.com. Other groups with frequent copyright issues reported to Google include blogs, music download sites, forums and warez sites.

How is copyright issues reported?

Many in the music and multimedia sector seems to use Degban or British Recorded Music Industry (BPI) for copyright protection, while publishers seems to prefer using Publishers Association. You can report valid copyright infringement issues here.
Choose “Web Search” if the issue is related to Google search.

Is copyright penalty anything to be concerned about?

Unless you’re stealing content from other web properties there is no need to worry. However, Google are likely going to improve how they view valuable content and enhance their algorithms to credit the first publisher. Google authorship is obviously the first step in this direction. Anyway, for those with content that’s been wrongly removed there is Chilling Effects.