Defunct Napster’s Saga Back in Court

The two biggest financial backers of the defunct online song-swapping service Napster appeared in federal court here for the first time Tuesday to defend themselves against a pair of copyright lawsuits from beyond the grave.

With Napster’s remains being liquidated in Bankruptcy Court, music copyright holders last year sued Hummer Winblad Venture Partners, a San Francisco venture capital firm that invested $13 million in Napster during its heyday in 2000, and Bertelsmann, the German media conglomerate that loaned Napster $85 million starting in late 2000.

Universal Music Group, EMI, other record companies and songwriters are seeking billions of dollars in damages. U.S. District Judge Marilyn Hall Patel, who oversaw the litigation that shut down Napster in July 2001, held a conference on the copyright suits Tuesday, after their transfer from other courts.

Patel said she would hear arguments June 14 on whether the cases should be thrown out, as Hummer Winblad and Bertelsmann have requested. She also asked the lawyers on both sides to work on plans for proceeding to trial in case she decides to approve the suits.

In the earlier batch of cases, dating to 1999, Bertelsmann was among the plaintiffs that sued to stop Napster from enabling copyright violations by its tens of millions of users by maintaining a peer-to-peer network on which songs were freely traded. By the time Patel ruled in that case, Bertelsmann had switched sides, launching what it called a “strategic partnership” with Napster and laying plans to reform it into a service that would compensate artists and record labels.

The copyright suits against Bertelsmann and Hummer Winblad could change the legal standard for when investors can be held responsible for the improper acts of firms they back. As things stand, liability for corporate actions almost always ends with the company itself. Venture experts said they didn’t know of any case in which the investors had been held liable.

“If they won, it would be a cause for concern,” said intellectual property lawyer Evan Cox of Covington & Burling in San Francisco. “For companies who have business models close to the edge, it’s one more thing for investors to worry about.”

Santa Clara University law professor Tyler Ochoa said the case was “extraordinarily significant.”

“The whole purpose of corporate formation is so that the investors have limited liability,” Ochoa said. A loss by either Bertelsmann or Hummer Winblad would “lead to a chilling effect on venture capital and investment in new technology and could have a terribly destructive effect on a vital sector of the economy,” he said.

Hummer Winblad contends that if Napster is guilty of aiding the wrongdoing of others, Hummer Winblad could only be guilty of aiding the aiding of wrongdoing -- an action not punishable under U.S. copyright laws.

But Universal, the world’s biggest music company, and EMI claim that Hummer Winblad effectively controlled Napster’s activities because one of its general partners -- co-defendant Hank Barry -- served as Napster’s chief executive for more than a year and because he and another partner were on the board of directors.

As for Bertelsmann, Universal contends that although the German company said it loaned Napster money to develop a copyright-friendly version of the service, much of the money went for routine operating expenses that allowed millions of additional songs to be traded illegally during Napster’s last eight months of operation.

Bertelsmann, owner of record label BMG, had a clear incentive to keep Napster alive until a legal version was up and running, according to the suit: “Its control of Napster would be worthless if it did not keep Napster users hooked on the system.”

The two copyright suits cite documents that emerged in Napster’s bankruptcy proceedings, including a Bertelsmann memo that concluded that the old service should stay active to avoid losing the audience.

Universal also alleges that Bertelsmann effectively controlled Napster, since its loan could be converted into majority ownership of the Redwood City, Calif.-based company.

Napster filed for bankruptcy protection in June 2002; its brand name was bought and revived by Roxio Inc., which offers a legitimate online music service.

Bertelsmann said it didn’t have control and that its record-company accusers are at least partly responsible for the continued spread of piracy because they missed the chance to turn Napster’s song-stealing users into paying customers.

Bertelsmann’s goal in loaning money to Napster “was to create a licensed service that would provide users with the functionality they enjoyed in the old Napster service,” Bertelsmann attorney R. Bruce Rich said in an interview last year.

The firm feared that consumers would go to other free-music services if Napster didn’t lead them away from piracy, Rich said, and “history has proved this to be absolutely correct.”

Bertelsmann’s attorneys have also pointed out in court filings that Napster had not been definitively ruled illegal when their company invested.

“The plaintiffs’ depiction of Bertelsmann as a willing participant in what it knew was illegal conduct is at odds with the legal record as it then stood,” they wrote last fall.

In court Tuesday, Patel seemed delighted to be dealing with Napster again. Nine suits against the company are pending, and Patel said she would ask the plaintiffs whether she could dismiss them when Napster’s liquidation plan becomes final Friday since there would be nothing left for them to recover.

She also asked the lawyers what had become of the brand and technology, saying, “I wanted to know where it all ended up.”