New Inquiry Into Claims in Napster Suit Can Begin

With hopes for a settlement fading, a federal judge Friday revived the major record companies’ lawsuit against Napster Inc. by opening a new inquiry into copyright-misuse and improper-ownership claims by the labels.

U.S. District Judge Marilyn Hall Patel in San Francisco gave Mountain View, Calif.-based Napster permission to gather more evidence on two potential defenses to the labels’ lawsuit. The company can explore whether the labels owned the copyrights to 213 songs that Napster users traded, and whether the labels misused their copyrights to impede competition.

In particular, Patel said the labels’ two joint ventures to distribute music online in competition with Napster and other independent companies “may run afoul of antitrust laws.” Reprising a concern she voiced last year, Patel added, “Even on the undeveloped record before the court, these joint ventures look bad, sound bad and smell bad.”

Cary Sherman, general counsel of the Recording Industry Assn. of America, responded, “Napster’s allegations of misuse are without merit.... We look forward to providing the court with evidence to refute Napster’s claims.”

Jonathan Schwartz, Napster’s general counsel, also said he looked forward to the case moving forward on the ownership and misuse issues. But he added that settlement talks would continue.

Patel had put the labels’ 2-year-old lawsuit on hold for 30 days in mid-January after the two sides said they were nearing a settlement. But those talks produced so little progress, the parties did not ask Patel to extend the stay when it expired this week.

Legal experts say Napster is still likely to lose the case, making the company liable for a huge amount of damages. But copyright ownership and anti-competitive practices are touchy subjects for the labels, which are being scrutinized by the Justice Department’s antitrust division and whose copyrights are being challenged in court and in state legislatures by artists.

The latest twist in the lawsuit came in response to the record companies’ motion for summary judgment, which would decide the case in their favor without a trial.

Patel told lawyers for both sides in mid-January that she planned to allow Napster to gather evidence on copyright ownership and misuse before ruling on the motion. Lawyers quickly sought a timeout in the proceedings, with some representatives of the labels saying privately that they didn’t want to go through the expense if a settlement was within reach.

No settlement was forthcoming, however, as Napster wasn’t able to reach deals with the labels for the distribution of their songs. That led Patel to issue her order.

On the ownership issue, Patel said Napster “raised serious questions” about the validity of the labels’ claims to own the songs as “works for hire”--a claim that musicians in the Recording Artists Coalition also dispute. But if the labels can produce contracts for each song that assigned them the copyright or described it as a work for hire, Patel said, “ownership of the work is probably established.”

On copyright misuse, Napster claimed that its deal with MusicNet--a joint venture by RealNetworks Inc. and the owners of three major record companies--was unduly restrictive. It also argued that MusicNet and Pressplay--a joint venture by the other two major record companies--were anti-competitive.

Patel said Napster had “virtually no access to most commercial available music” unless it signed a deal with MusicNet that required it to obtain licenses from MusicNet and not its competitors. As for the antitrust argument, Patel said MusicNet and Pressplay look like entities designed to let the labels “use their copyrights and extensive market power to dominate the market for digital music distribution.” The judge emphasized, however, that she didn’t have enough evidence from either side to decide the copyright-misuse claim.

Antitrust investigators for the Justice Department also are scrutinizing MusicNet, Pressplay and the labels’ licensing practices.