Judge Suggests Labels Misled U.S.

Evidence suggests that the major record labels misled the Justice Department when they persuaded it to drop an antitrust probe of the music industry, a federal judge has ruled in a related San Francisco case.

In 2001, prosecutors began investigating whether the labels had conspired to fix the terms for distributing digital music through two jointly owned services, MusicNet and Pressplay. The officials were concerned that the five big labels were colluding to discourage people from downloading popular music in an attempt to protect CD sales.

The probe was dropped in December 2003, when the Justice Department found that MusicNet and Pressplay used separate management and other safeguards to prevent the labels from improperly learning the practices of their competitors.

But the Justice Department’s decision was influenced by two detailed “white papers” -- one submitted by EMI Group and MusicNet, the other by Universal Music Group and Pressplay. In a ruling made public Friday, U.S. District Judge Marilyn Hall Patel found that those papers were “deliberately misleading.”

Patel ruled in a dispute over what documents EMI and Universal should be forced to turn over in a long-running copyright lawsuit about Bertelsmann’s investment in Napster. That suit centers on whether Bertelsmann, which also owned the BMG label, improperly helped users of the song-swapping service infringe copyrights.

Bertelsmann’s co-defendant and fellow Napster investor, Hummer Winblad Venture Partners, has filed a counterclaim arguing that the other labels broke antitrust and copyright laws by refusing to license music to Napster on reasonable terms while using the heavily restricted music available on MusicNet and Pressplay as a smokescreen.

Hummer Winblad is seeking evidence prepared by the labels’ lawyers as they fended off the Justice Department inquiry. Patel ruled that the documents should be produced, despite attorney-client privilege, because there was reason to believe that the lawyers were helping to perpetrate fraud.

Patel singled out the white papers’ claims that the services kept the labels from learning about rival licensing terms. In fact, because EMI and Universal had clauses that guaranteed them the ability to match rivals’ terms, they always knew what others were getting.

But even as Hummer Winblad secured the tactical victory, Patel delivered a loss to its co-defendant, Bertelsmann. That company’s lawyers helped draft an agreement that said the company’s $50-million loan to Napster was to be used only for developing a legitimate service.

But in later accounts, Hummer Winblad partner Hank Barry, who also served as Napster’s chief executive, described an unwritten deal allowing $10 million to be used for the legal defense of the old system.

In the current case, Bertelsmann had submitted the loan document without noting the $10 million in legal funding, which Patel wrote could be fraud. She ordered Bertelsmann to turn over documents on the drafting of the loan papers.