So much for David vs. Goliath.
Any lingering notion that the battle between Napster and the Recording Industry Association of America is the legal equivalent of a powerless Internet start-up fighting off a monstrous industry tool was dashed on Monday when Napster filed its rebuttal in a San Francisco U.S. District Court.
Napster, which was rebutting a RIAA request that the music-swapping company be shut down for rampant copyright infringements, has proved, among other things, that the once-tiny concern has become Big Business.
Napster recently secured $13 million in funding from one of Silicon Valley's largest venture capital firms. Meanwhile, its legal brief's cover page boasted three law firms on two coasts, led by attorney David Boies, who may be the most sought after white-shoe lawyer in the nation. (Boies is coming off the successful prosecution of the Justice Department's antitrust case against Microsoft.)
Thirty-four pages later, the Napster lawyers note that if Judge Marilyn Patel shuts down the company, a bond will have to be posted "to cover all potential injury pending trial" -- which means that if Napster wins on appeal, it can recover money lost during the injunction downtime.
The amount of the bond? First consider recent press reports that Napster, despite zero revenue and profits, is worth between $60 million and $80 million. Instead, company lawyers argue, "when comparing Napster to Internet companies with comparable numbers of active users, Napster's market value is between $1.5 and $2 billion." That's right, billion.
The revelation is just one of many intriguing passages in the no-stone-unturned filing, which argues strenuously that Napster's file swapping is perfectly legal.
The skirmish centers around RIAA's June 12 request that Napster be shut down on the grounds that the company is guilty of "contributory and vicarious copyright infringement." In other words, Napster knowingly allows -- and abets -- 10 million users to swap unauthorized MP3 music files. The argument has been going on for some time: Napster tried to get an earlier RIAA lawsuit dismissed by suggesting that its actions were covered by the Digital Millennium Copyright Act (which provides immunity, or "safe harbor," for online portals that merely connect individual users). Judge Patel essentially denied that request. Patel will hold a hearing on July 26 to decide the injunction issue.
Taking its cue from the judge, Napster in its latest brief basically ditches the DMCA defense (although there is a halfhearted attempt to revive it), and instead focuses on the broader question of whether Napster even needs immunity from copyright infringements. Boies and company insist it does not.
To boost its argument, Napster uses a 1984 Supreme Court decision, Sony Corp. vs. Universal Studios Inc. This landmark ruling (later dubbed the Betamax case) involved the intersection between new technology and copyright infringement. Back in the early '80s Hollywood's major studios, led by Universal, argued that VCR users would be guilty of copyright infringement whenever they taped television shows; tapers, they asserted, did not have permission from the content holders, and manufacturers such as Sony were guilty of contributory infringement for encouraging users to tape shows. In a 5-4 decision, the Supreme Court ruled in Sony's favor, suggesting that if consumers used VCRs for "time-shifting" purposes, such as taping a show they might otherwise miss, that would be a noninfringing use.
"There are parts of Betamax that appeal to both sides," says attorney Kenneth L. Steinthal, a partner at Weil, Gotshal & Manges who specializes in intellectual property. Napster embraces the fact that the Supreme Court allowed new technology into the marketplace as long as it featured noninfringing capabilities. (In Napster's case, that would be swapping files from unsigned acts only.) "Betamax works in their favor and I'd use it to the hilt if I were them," says Arnold Lutzker, a copyright attorney at Washington's Lutzker & Lutzker.
Meanwhile, the RIAA will emphasize that once a manufacturer such as Sony sold its VCRs (in this case, the Betamax), the company's involvement with the user ended. Napster, in contrast, is much more connected with the actual at-home copying process: It connects users to specific, and often unauthorized, MP3 files.
Napster also finds great comfort in an unlikely source, the Audio Home Recording Act, which allows consumers to make copies of their recordings under the "fair use" doctrine. The act is traditionally viewed as an umbrella protection for transferring music on a CD to a tape and giving the copy to a friend, and Napster argues that because its users are engaged in "private," "personal" and "noncommercial use" (i.e., they're not paying Napster anything), they too are covered by the AHRA.
Of course, Napster's file sharing is individual to individual only in the strictest sense, since hundreds of thousands of users are swapping files at any given moment. But since Congress did not set a limit on the amount of personal copying allowed under the AHRA, Napster argues, the company is in the clear: "There is nothing in the language of the AHRA, or any precedent under it, suggesting that consumers' noncommercial copying is permissible if only a few consumers do it." If the RIAA wants to change the law, Napster suggests that it take up its cause with Congress, not in the courts.
Reviving the specter of home taping is a canny move meant to revive an embarrassing episode when label execs feared that at-home duplicating would demolish the music industry. Instead, the $4 billion domestic music business grew to a $14 billion industry despite the advent of home taping. Napster advocates suggest that if the music business simply embraces the latest technology, it will again reap the benefits.
Questions remain: Are Napster users involved in "noncommercial" use? Is their swapping "private" and "personal"? Napster's brief notes that "Congress fully understood that consumers would share music with family, friends and others." But as Neil Rosini, copyright attorney for Franklin, Weinrib, Rudell & Vassallo points out, Napster is putting an awful lot of weight on those "others." Noting that by design Napster users swap files anonymously with strangers and on a massive scale, he suggests their use "is not all that private and it's certainly not with closest friends and family."
As for the noncommercial angle, "if you're a business [as] opposed to an individual, different rules apply," points out Lutzker. "The problem is, Napster does tend to look like a business making money on this."
That's what the RIAA argued in its call for a preliminary injunction: "With essentially every user engaged in music piracy, Napster's current value, and future plans for exploiting its user base, are directly -- indeed, solely -- attributable to the infringement of plaintiff's music that it enables and encourages."
In its response, Napster dismisses the notion, suggesting that even without all the unauthorized music from major-label superstars, Napster would still be a draw for users. But would a Napster filled with MP3s from just unsigned acts be worth between $1.5 billion and $2 billion?
Another possible stumble centers around unsigned acts. Boies argues that the real reason behind the RIAA's objection to Napster is that the major labels fear "the flow of competing unsigned artists' music into the electronic marketplace." The problem is that until very recently, Napster itself showed very little interest in unsigned acts. In fact, early promotions on the site crowed about how "Napster virtually guarantees you'll find the music you want, when you want it and you can forget about wading through page after page of unknown artists."
Chad Paulson, the Indiana University sophomore who founded the Napster-supporting Students Against University Censorship back when university administrations were banning Napster on campus, says that earlier this year he asked company co-founder Sean Parker when Napster was going to start promoting local, unsigned acts. According to Paulson, Parker told him, "That's not a priority right now."
In another curious twist, Napster, which pays artists no royalties for songs swapped, argues that major labels are trying to cheat artists out of royalties by opposing the royalty-based model of licensing music.
Elsewhere, in a battle of surveys, Napster insists CD sales have not decreased as a result of file swapping. Instead, "the recording industry has benefited from Napster's presence." The argument may be crucial, since in its drive for an injunction the RIAA needs to show irreparable harm being done by Napster. But as Rosini points out, in copyright cases an assumption of irreparable harm is often already attached.
As Judge Patel's July 26 hearing approaches, court observers suggest there will be an interesting push-pull scenario at work in the courtroom. While they warn against trying to predict how a judge will rule, attorneys say District Court judges generally follow the black-and-white letter of established law, which in this case could favor the RIAA (since today's copyright laws forbid across-the-board copyright infringements). Consequently, those same judges often opt to maintain the legal status quo. But since this case revolves around an injunction to shut down Napster, which has been in the marketplace for nearly a year now, the status quo would mean letting Napster continue to operate.
What about a possible appeal? Again, another push-pull scenario. If Napster loses, "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," says Robin Gross, staff attorney for the Electronic Frontier Foundation. But this case is being heard in California's 9th Circuit, which "typically has a positive view for content holders," says Lutkzer. Just last May the 9th Circuit Court of Appeals upheld a 1994 jury award of $5.4 million to the Isley Brothers, who had sued singer Michael Bolton for violating the copyright to the group's 1964 hit "Love Is a Wonderful Thing."
Observers suggest the Napster case is by no means open-and-shut on either side, and that despite the mounting piles of depositions, surveys and legal briefs -- and because technology has outpaced the law in this area -- the dispute may simply turn on the judge's gut reaction.
"Certainly the court's perception of Napster is going to be important," says attorney Steinthal. "If the perception is Napster facilitates copying and is out to screw the labels, then the case is a foregone conclusion."