Is this the beginning of the end of Napster?
Beleaguered Napster, the red-hot music-swapping community that has the record industry up in arms, lost its first round in court on Monday. Hoping to rid itself of a threatening copyright infringement lawsuit brought on by the Recording Industry Association of America, Napster had asked a federal judge to throw the case out -- insisting that the company's music-swapping actions were exempt from liability by the Digital Millennium Copyright Act (DMCA). If the court had agreed, Napster would have been off scot-free.
Unfortunately for Napster, the judge did not agree.
Chief Judge Marilyn Hall Patel of the U.S. District Court for the Northern District of California rejected Napster's DMCA defense, delivering the RIAA its second high-profile courtroom win against an online foe in less than two weeks. (The association was victorious against MP3.com in a separate copyright suit on April 28.) "This hearing was Napster's attempt to escape responsibility for aiding and abetting wide-scale piracy and -- not surprisingly -- they lost," said Hilary Rosen, president and CEO of the RIAA. Napster executives declined to comment.
Many legal experts concede that Napster's maneuver for an early and decisive victory was a long shot, so the ruling did not come as a shock. But a grim reality may now be setting in at Napster that the company faces the real possibility of being strangled to death in the courts. Although Napster boasts 10 million users after only eight months on the market, the company does not have hundreds of millions of dollars to bankroll expensive lawsuits, pay hefty damages or offer up nine-figure settlements with the record companies. After all, Napster is a company without revenue, let alone profits.
And will a drawn-out court case scare off potential investors? "The legal threat is a real issue," says venture capitalist and Fortune magazine columnist Stewart Alsop. In March he wrote a glowing piece on Napster's potential, but Alsop has since decided not to invest.
And while some legal observers suggest that Napster stands a better chance if its case winds up in a federal appellate court, the question is whether the company will still be standing nine or 12 months down the line. "That's certainly a risk," says copyright and trademark lawyer Arnie Lutzker of Lutzker & Lutzker in Washington. "The RIAA's firepower is so strong, Napster is going to find itself subject to a barrage of legal maneuverings."
So what's next? First up, RIAA will probably ask for an expedited discovery phase to question Napster executives under oath about the company, followed by an injunction request "to enjoin Napster's ongoing infringement," or shut down Napster during the duration of the lawsuit, according to RIAA's court filings.
Napster is pinning all of its hopes on something called a "safe harbor" -- a legal exemption created by the Digital Millennium Copyright Act in 1998. The DMCA provided four separate safe harbors for Internet service providers, limiting their legal liability for copyright infringements that happen on their watch. Without a safe harbor, Napster is open to what's called contributory and vicarious copyright infringement charges. Because the DMCA is so new, the Napster suit is the highest profile case in determining the question of safe harbor status.
Napster executives have claimed that the company is not responsible for copyright infringement because no music files rest on or pass through Napster's servers. Under the DMCA's ISP exemption, Napster would be off the hook -- proving, essentially, that Napster merely provides the pipes, while the individual customers are the naughty ones exchanging illegal music.
But the DMCA is very specific about who can qualify for the four safe harbors. Napster argued that the software acts as a "a passive conduit" connecting individual users, and should fall inside the first, and most narrowly defined, of the four safe harbors. Patel disagreed. The problem, suggests Neil Rosini, a copyright and new media attorney with Franklin, Weinrib, Rudell & Vassallo in New York, was that Napster wasn't "dumb enough," meaning that the first safe harbor is meant for services and limited to communications, such as the phone company. But since Napster's free software offers music cataloging, chat rooms and updating features, it may have been too smart for the first harbor.
Additionally, Napster's main argument -- that it is exempt from copyright infringement since no files ever pass through company servers -- may have boomeranged. As the RIAA argued in court, if no files pass through Napster, then Napster by definition is not a conduit and cannot qualify under the first safe harbor.
The judge agreed, writing that "because Napster does not transmit, route or provide connections through its system, it has failed to demonstrate that it qualifies for safe harbor."
Although the outlook is bleak, there are still hopeful signs for Napster. A 1984 U.S. Supreme Court decision in favor of Betamax, for example, ruled that Hollywood studio could not ban the arrival of Sony's VCR simply because users might tape some programs illegally. Napster will probably lean on this precedent.
And some Napster fans remain hopeful that if the case moves out of the federal district court Napster will find a more receptive audience before federal appellate judges. "District courts are far more likely to use the black and white letter of the law and ask, 'How does it apply to these facts,'" says Robin Gross, staff attorney for the Electronic Frontier Foundation. "An appellate court is more likely to take a longer view and to incorporate the conflict with copyright and new technology, and to create new law."
After all, Gross notes, last year the RIAA won a similar preliminary injunction against the first portable MP3 player, the Diamond Rio. But Diamond eventually won an outright victory before an appellate court, and the Rio is the hottest MP3 player on the market. Napster is probably praying for a similar fate.