Appeals Court Issues Ruling Against Napster

A federal appeals court in San Francisco on Monday delivered the most devastating blow yet to Napster Inc., directing a lower court to stop the wildly popular online song-swapping service from helping consumers violate copyrights.

The ruling, eagerly anticipated throughout the entertainment industry, solidifies the control that record companies, music publishers and artists exert over the businesses built around their songs. In a slap at fans of free music, it also holds that consumers have no absolute right to copy music from one another over the Internet.

Napster Chief Executive Hank Barry promised to appeal the ruling issued by a three-judge panel at the 9th Circuit Court of Appeals. “We will pursue every legal avenue to keep Napster operating,” he said.

The panel scaled back an earlier finding by a lower court that would have shut down Napster entirely. Instead, it directed U.S. District Judge Marilyn Hall Patel to craft an injunction requiring the company to block specific songs once the copyright holders objected.

Napster will remain in operation at least until Patel in San Francisco imposes the restrictions the panel ordered. Patel is still to decide the details, but Napster could be ordered to do something its lawyers say it cannot: prevent consumers from searching for and downloading copyrighted songs.

The labels, however, were jubilant.

“We are very pleased with today’s decision,” said Warner Music Group spokeswoman Dawn Bridges. “As the legal landscape of the online world becomes increasingly defined, artists, consumers, copyright holders and Internet companies alike can embrace the great potential of this medium with the confidence that the artist’s work will be respected and rewarded.”

The record companies’ triumph in court won’t mean much if the millions of Napster users simply gravitate to one of the many other free sources of music on the Web.

“The longer the labels take to provide a legal alternative,” said Dave Goldberg, chief executive of Launch.com, “the more likely that other illegal distribution methods . . . will win out with consumers.”

Although the labels have been slow to support new online music ventures, some executives argued that the ruling will improve the prospects for subscription services and other paid services online. “It’s very hard to convince a consumer to pay for music when Napster’s out there,” said Jeremy Silver, executive vice president of Uplister Inc.

And consumers might ultimately benefit from the ruling, some officials argued, even if they lose a leading source of free songs.

“It will encourage content owners to put their creative works online knowing that the courts have confirmed what everybody knows: You cannot take for free what belongs to someone else,” said Jack Valenti, a top lobbyist for the movie industry. “The fruits of this ruling will be seen in the film industry within six months as studios start to put movies online.”

Launched in 1999 and funded primarily by San Francisco venture capitalists, Redwood City, Calif.-based Napster enables users to search for and copy songs stored on one another’s computers. Napster provides a directory to the songs, but users exchange them directly with one another through the Net.

The major record labels and leading music publishers sued Napster in December 1999, arguing that it enabled a wholesale violation of their copyrights. In a preliminary order in July, Patel ruled that the labels and publishers were likely to win at trial, and she ordered Napster to stop making copyrighted songs available to its users.

The 9th Circuit intervened two days later, hours before Patel’s injunction was to go into effect. The appeals court put the injunction on hold and agreed to an accelerated review of the case, with the panel holding a hearing in October.

While waiting for the ruling, Napster struck a deal with Bertelsmann, parent company of the BMG label group, to develop a new version that would pay copyright holders for their works. Leading independent label TVT Records also reached a settlement with Napster and joined the efforts to develop a version that would charge users.

On Monday, the appeals panel disagreed with one of Patel’s findings, ruling that there may be a significant legitimate use for Napster. But the court held that Napster violated copyright laws because the company knew unauthorized song files were on its system and could have blocked the suppliers’ access and failed to remove the files from its directories.

Instead of reinstating Patel’s broad injunction, the panel ordered Patel to impose new, more targeted restrictions. The labels and publishers have an obligation to tell Napster which files violate their copyrights, but Napster also has the duty to “patrol its system and preclude access to potentially infringing files listed in its search index,” the panel said in its opinion, written by Circuit Judge Robert R. Beezer.

Napster said it will ask the entire appeals court to reconsider the panel’s decision and petition the U.S. Supreme Court if that move fails. The company also said it will seek to stay the new injunction during those appeals.

Beyond the appeals, Napster is pinning its hopes on two gambits.

The first is its continuing, though so far fruitless, discussions with the other major record labels. “Only time will tell how that process is affected by this decision,” Napster’s Barry said.

The negotiations are aimed at producing a method for collecting money from users and passing it along.

“We have been saying all along that we need an industry-supported solution that makes payments to artists, songwriters and other rights holders while preserving the Napster file-sharing community experience,” Barry said. “We will keep trying.”

The other task for the company is to argue for the narrowest possible injunction.

Napster attorneys David Boies and Jonathan Schiller stressed that the appeals panel ruled that Napster must police its use, when given notice of specific violations, “within the limits of the system.”

And Napster is gearing up for a serious fight over what those limits are. Schiller said the company plans to show Patel that attempts to block specific file names from the Napster directories make the system unstable and interferes with the legitimate uses found by the appeals panel.

Bob Kohn, chairman of EMusic.com Inc., argued that Napster can block copyrighted songs from its service by searching its own databases, which list all the files offered by users for sharing.

Napster has some means to police its usage now. Most easily, it can kick users with copyrighted material off the system and has already done so on occasion.

Napster executives said they were exploring ways to block offending songs, an effort that could be mandated by the lower court judge.

“We’re working on a lot of really pretty amazing things,” said 20-year-old founder Shawn Fanning, who has been working on a new version of Napster. “I still hope to have it in place this year.”

Napster still has a few other tricks left up its sleeve.

One is based on the fact that authorized swapping--either of non-protected songs or of those willingly shared--has increased. It wants hearings on how that use can be protected as infringing activity is weeded out.

And Patel must still hold a trial on whether Napster is at least partially protected by a federal law keeping Internet service providers from total liability for the wrongful behavior of their users. The key issues there, as in the fight over the injunction, involve prior notice to the provider and its ability to police the users.

At Bertelsmann, e-commerce group chief Andreas Schmidt said the music giant “always said the copyright needs to be protected, the artist needs to be paid.” But he acknowledged the ruling is unlikely to help Napster arrange similar partnerships with the four other music conglomerates, which means pressure is mounting on Bertelsmann and Napster alone to develop a working business model.

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FANS REACT

Napster users vowed to swap files elsewhere online. C4