The long-awaited hearing followed FBI charges laid in January 2012 when the internet entrepreneur and three others - Mathias Ortmann, Bram van der Kolk and Finn Batato - were arrested on charges of criminal copyright violation.
Though the Auckland District Court case began this morning, the purpose of the sitting was to structure the next four weeks, with the extradition hearing proper to begin on Thursday.
Christine Gordon, QC, on behalf of the US government, said starting with the extradition eligibility hearing before hearing three different applications for a stay of proceedings was the "practical and rational" way forward.
But lawyers for the four respondents argued the stay applications should be heard, and ruled upon, first.
Dotcom's lawyer Ron Mansfield said even before that the key issue for Judge Nevin Dawson to decide was whether the defendant had breached New Zealand law.
He said Megaupload was effectively an internet service provider and as such, under the Copyright Act, was protected from prosecution.
It was the first time the issue had been raised in reference to Dotcom's case.
Mr Mansfield expected the Crown - on behalf of the US government - to forward a "competing interpretation" of the law but he said if the court saw it from Dotcom's point of view it would put the kybosh on extradition proceedings.
Ms Gordon was critical of the stay applications filed by defence counsel one of which contained "wide-ranging allegations against various New Zealand agencies and government departments revealing an alleged abuse of process warranting a stay of the extradition proceedings", according to Ms Gordon.
But she called them "mostly speculative and lacking an air of reality".
The application also contained a suggestion the US directed the New Zealand government to give Dotcom permanent residency so they knew where he was.
"All supposition and drawing of links without basis," Ms Gordon said.
Ortmann's lawyer Grant Illingworth, QC, debated that but focused on the point that he and other counsel had been deliberately restricted from accessing US expertise by Crown lawyers.
"This case is being touted as the biggest copyright case in the history of the United States," Mr Illingworth said.
"It inevitably involves the need for us to engage advisers in US law and advisers concerning the way cloud storage facilities operate. Those issues are embedded in the US case."
They had asked for clarification regarding funding to retain the overseas experts in April but only received a response from the Crown in September.
He said the amount involved was proportionately small compared to the large sums the on which the case was based.
Mr Illingworth called it a "deliberate tactical decision" to hinder their defence and was an abuse of process.
Mr Mansfield was keen to point out that Dotcom was not trying to avoid an impending extradition hearing.
"This prosecution both in the US and the application to remove him are false and misguided and for him the sooner the court can hear that application ... the better," he said.
Judge Dawson will now decide the order of proceedings to begin on Thursday.
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