Universal Sues Bertelsmann Over Napster

Universal Music Group on Monday became the first major record label to sue Bertelsmann over its investment in Napster Inc., adding more force to a suit filed in February by songwriters and music publishers.

The suit in New York federal court accuses the German media powerhouse of vicarious and contributory copyright infringement for funding the Napster system from October 2000 until its shutdown the following July.

Universal, a unit of French conglomerate Vivendi Universal, argues that although Bertelsmann said its investment in Napster would be used to develop a copyright-friendly version of the service, much of its $85 million in loans went for routine operating expenses that allowed millions more songs to be traded illegally.

Bertelsmann, owner of record label BMG, had a clear incentive to keep Napster alive until a legal version of the service 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 suit cites documents that emerged last year in Napster’s Bankruptcy Court proceedings, including a Bertelsmann task force 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.

“Bertelsmann did not merely provide a loan to Napster; nor was it merely a passive investor,” Universal said in a written statement. “It took control of the Napster system to financially benefit itself at the expense of Universal and its artists.”

A Bertelsmann spokeswoman declined to comment.

The suit seeks as much as $150,000 for each of the thousands of copyrighted Universal songs swapped during Napster’s last eight months of life, as well as punitive damages. Total damages could range into the billions of dollars.

Bertelsmann is facing a $17-billion copyright infringement suit by songwriters Jerry Leiber and Mike Stoller and a pair of music publishers. The two suits are expected to be consolidated.

Last month, Universal and EMI sued Hummer Winblad Venture Partners, the San Francisco venture capital firm that backed Napster before Bertelsmann’s loan.

Napster’s brand name and technology are now owned by Santa Clara, Calif.-based Roxio Inc., which has no liability for Napster’s copyright woes.