Court Rules Napster Users Infringe on Copyrights

Napster Inc. was dealt a serious legal setback today, as a federal appeals court ruled that the millions of people who exchange music on its online service were infringing on copyrights and that the company needed to stop this infringement.

The decision could allow a lower-court judge to shut down Napster, but the appeals court temporarily continued the company's reprieve from the judge's injunction that would cease its operations.

Still, Napster warned that today's decision could ultimately lead to its closure and said it would continue to appeal. "Napster is not shut down, but under this decision it could be," the company said in a statement.

Indicating that it believes more users will swarm to Napster's Web site to download copyrighted works, a three-judge panel of the United States Court of Appeals for the Ninth Circuit in San Francisco encouraged Federal District Judge Marilyn Hall Patel to quickly rewrite her injunction, which it described as overly broad.

"A preliminary injunction against Napster's participation in copyright infringement is not only warranted but required," the appeals court said in its ruling.

Judge Patel's original injunction would have shut down Napster as it awaited a trial over a copyright-infringement lawsuit filed by the nation's recording industry.

"This is a clear victory," said Hilary Rosen, president of the Recording Industry Associations of America. "The court of appeals found that the injunction is not only warranted, but required. And it ruled in our favor on every legal issue presented."

David Boies, a lawyer for Napster, said that if an injunction was imposed, the harm to the company and its users would be "very real and substantial."

But he said he did not think there was the threat of an "immediate shutdown" because the case would have to return to federal district court for Judge Patel to come up with a new injunction.

Mr. Boies said the company would appeal the ruling, including possibly seeking a review by the entire panel of the Ninth Circuit Court of Appeals.

The original injunction, issued by Judge Patel in July, held that by providing the file-swapping service, Napster was participating in wide-ranging music piracy. Painting in broad strokes in an apparent effort to refine case law pertaining to the two-year-old Digital Millennium Copyright Act, the appeals court continued the stay against the injunction, granted two days after it was issued, while the judge revised it.

But the new injunction described by the court would be negligibly kinder to Napster. It would hold the company liable for failing to act when Napster "knows or should know" copyrighted works are being traded on its system. The attraction of Napster, and the first thing most people know about it, is that copyrighted works are being traded on its system.

Napster has been notified by musicians and by the industry that thousands of its files infringe upon copyrights. And just as Microsoft saw itself damaged in court by its own e-mails, Napster executives saw their internal correspondence quoted back to them in the court's order. The court cited a warning by Sean Parker, a Napster founder, that the company had a "need to remain ignorant of users' real names and IP addresses since they are exchanging pirated music."

In its arguments to the court, Napster compared itself to Internet service providers, which are allowed by the law to provide links to mp3 files unless they are notified by a copyright owner that the files infringe on a copyright.

In perhaps its most blunt rejoinder to Napster, the appeals court upheld Judge Patel's finding that the availability of music files through Napster probably upsets the compact disk market and certainly chokes the record companies' ability to develop digital markets for their products. If the court had accepted Napster's argument that it was legally unaware of piracy practiced by a sea of third parties, this point would be academic.

The federal appeals court did rule that the crux of Napster's argument -- that it merely enables computer users to transfer music files online -- is valid. But though it declined to hold the company liable for simply allowing the service to exist, the appeals court also quashed Napster's ability to use intentional ignorance of its users' actions as a defense.

"The contributory liability may potentially be imposed only to the extent that Napster: (1) receives reasonable knowledge of specific infringing files with copyrighted musical compositions and sound recordings; (2) knows or should know that such files are available on the Napster system; and (3) fails to act to prevent viral distribution of the works," the court wrote.

Making its debut in May 1999, Napster enables its users to trade music files in the MP3 format that first made it possible for ordinary musicians and fans to capture full songs in compact memory space and with listenable audio quality. New members are asked whether the service can scan their computer drives for music files. If they grant permission, any other user who logs into the same server can gain access to the files.

Unlike such predecessors as mp3.com, the Napster service is fast, simple and free. Rather than instructing users to create a Web page promoting their own music, Napster let its users scan a compact disk into a computer file and post the music in cyberspace, creating an apparent windfall for music fans. They quickly discovered that the company would make no effort to intervene in their transactions, whether they involved atmospheric sounds, Woody Guthrie's protest songs or the latest moneymaker from the Backstreet Boys.

But this presented a problem for Napster. The Digital Millennium Copyright Act, Congress's attempt to govern the old-fashioned disputes raised by new technology, appears to hold companies increasingly liable for materials traded on their Web sites in proportion to the amount of control they attempt to exercise.

To the music industry establishment, the problem seemed as old-fashioned as cassette dubbing and before that the reproduction of sheet music.

As all that music flitted from PC to PC, record companies had no way to track the song-swapping, much less to collect royalties on music they owned. On Dec. 7, 1999, seven months after Napster's debut, the top five companies -- BMG, a unit of Bertelsmann, Sony Music, the Warner Music Group, Universal Music and the EMI Group -- filed suit, joined by the Recording Industry Association of America.

Aspects of the dispute hearkened thoughts of David and Goliath and attracted sympathizers to Napster, founded in 1999 by a college freshman and his uncle. But the company also found itself at odds with some musicians, the longstanding Davids of the business.

The heavy metal rock group Metallica and the rap singer Dr. Dre filed their own separate copyright infringement claims against Napster in April. Chuck D, leader of the rap group Public Enemy, has publicly supported the sompany's service.

Seeking publicity for like-minded musicians' ire, Lars Ulrich, the drummer for Metallica, tried to appeal directly to fans -- by attacking them. On May 3, he and a lawyer for his band showed up at the company's headquarters in San Mateo with a list of 317,377 screen names, saying they represented users who had stolen Metallica's intellectual property, namely its rock.

Two days later, Judge Patel ruled that Napster was not protected by the safe harbor provisions of the copyright act, essentially telling the company it could not simply hear no evil. The company closed most of the accounts that Mr. Ulrich specified, but that was largely a symbolic move. Anyone can register for the service with any screen name.

In July, Judge Patel granted the industry's request to shut down the service, but her preliminary injunction was quickly stayed by the appeals court. A three-judge panel of that court heard oral arguments in October.

Bertelsmann A.G., the German entertainment conglomerate forged in November an agreement with Napster, dropping its suit and making its catalog available on the service in exchange for the right to buy a stake in the company. Financial terms were not disclosed.

"File-sharing is here to stay, and we will continue working to build a membership-based Napster service that will be supported by the music industry," Andreas Schmidt, chief executive of Bertelsmann's e-commerce group, said in a statement today.