Napster Buys Some Time as Judges Consider Appeal

Napster Inc., the controversial music-sharing service, will continue operating after a federal appeals court heard legal arguments Monday but adjourned without making a ruling.

The three judges did not say when they would hand down their decision on the music industry’s copyright infringement suit. While the judges could send the issue back to the lower court for additional hearings, most legal experts think the U.S. 9th Circuit Court of Appeals will rule on the landmark Napster case in the next few months.

On Monday, Napster’s legal team was bombarded with questions from the judges about whether the company’s technology is as legal as people using a videocassette recorder to watch a borrowed movie. Soon after, attorneys for the Recording Industry Assn. of America were grilled about the industry’s contention that Napster has control over whether their members swap copyrighted digital music files.

“How are they expected to have knowledge of what comes out of some kid’s computer in Hackensack, N.J., and is transmitted to Guam?” asked Judge Robert Beezer, one of the judges on the panel.

One thing is clear, say attorneys on both sides: In an age when entertainment is disseminated digitally and intellectual property is under technological assault, a Napster decision by the appeals court will set a benchmark for the future of doing business on the Internet.

Legal experts indicated that the case is not going well for the Redwood City, Calif.-based firm.

“Unless the record labels are totally clueless, all they have to do is wait,” said Anthony Berman, a San Francisco-based entertainment attorney who specializes in new-media issues. “As much as I’d like to see this thing go to trial, I don’t think it will.”

Napster’s legal troubles peaked on July 26, when U.S. District Judge Marilyn Patel issued a preliminary injunction against Napster, saying that it facilitates illegal online music piracy. The injunction would have shut down Napster, but it was suspended after the company’s appeal.

Monday’s hearing follows weeks of failed back-room negotiations by Napster as the company continues to struggle to end this high-profile case out of court. Hilary Rosen, president of the RIAA, confirmed that Napster has been in talks with “numerous” music labels and publishers for “quite some time.”

But Napster executives say the music industry has rejected outright a series of licensing deals proposed by the online firm, which has suggested that it could start charging a $4.95 monthly fee to the estimated 32 million members who have downloaded music.

Napster has also been scrambling to negotiate out-of-court settlements in copyright infringement lawsuits filed by entertainers Metallica and Dr. Dre. Sources say those talks have also dead-ended.

Napster was created last year by Shawn Fanning, a college dropout. The service allows consumers to share music files from their own computers over the Internet.

Napster has become one of the world’s hottest technology companies, and company officials say its user base has mushroomed 45% since August. Napster’s huge consumer following poses a dire threat to the traditional record industry, which still derives most of its revenue from the sales of compact discs.

David Boies, lead attorney for Napster, told reporters after the hearing that the online music company will continue to fight the suit. “We’re looking for a trial without being shut down,” Boies said.

Meanwhile, Napster executives insist they are eager to strike a deal with the labels. The company has proposed a settlement of the record industry’s claims that would pay more than $500 million in licensing fees to music companies in its first year, Napster Chief Executive Hank Barry said.

Barry acknowledged that if Napster started charging its members a monthly subscription fee, the company would lose “a significant” number of users, as much as 80% to 90%.

“We’re ready to move forward [with a fee-based model],” Barry said. But as of last Friday, “every one of these proposals has been rejected and the record companies have made no counterproposals.”

The record companies, however, have little incentive to cut a deal with Napster, particularly at this late date.

“[The labels] can just crush Napster now, control them and then dictate terms for settling things,” Berman said.

If the appeals court permits the injunction to take effect, Napster says, it will shut down the company because there is no practical way for it to separate legitimate use of the service from infringing uses. Napster’s defense had centered on arguments that there are legitimate, non-infringing uses for its technology. The company pointed to its new-artist program, which allows little-known bands to distribute their tunes to Napster’s users.

Yet the obscure bands must give their consent to Napster to distribute their material, a courtesy that “the company has not given the recording industry,” said Russell Frackman, lead attorney for the RIAA.

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Times staff writer Chuck Philips contributed to this report.