Napster to Head Back to Court

Feb. 28, 2001 -- Doomsday could come as early as Friday for Napster.

U.S. District Court Judge Marilyn Hall Patel has ordered both parties in the Napster copyright lawsuit back to court for a March 2 hearing to consider modifications to a legal order against the wildly popular Internet company.

On Feb. 12, the 9th Circuit Court of Appeals dealt the online music swap shop a harsh legal blow, ruling that Napster must stop dealing in most copyrighted music, pending a trial.

A recap of the events in a trial that hasn't even begun yet goes like this: Patel granted the Recording Industry Association of America’s request to shut down Napster last July, until the lawsuit is resolved. But days later, Napster got a last-minute reprieve from a higher court allowing the Internet music company to stay open until it reviewed Judge Patel’s ruling. About seven months later, the appeals court ruled heavily in favor of the recording industry. (Click here for a complete timeline.)

While Napster has argued it has a number of legal, fair uses — an argument that helped Sony win its Betamax videocassette recorder case against Hollywood in the Supreme Court in 1984 — the appeals court shot down that argument, saying the cases' issues are different. It also agreed with the Patel’s finding of clear copyright infringement.

“Napster, by its conduct, knowingly encourages and assists the infringement of plaintiffs’ copyrights,” the appeals court wrote in its opinion.

But while the appeals court agreed with the lower court decision to issue the injunction that would halt at least some of Napster’s operations, it found Judge Patel’s wording too broad and sent it back to the district court for reworking.

“Judge Patel has the discretion now to decide how and when and what she wants to enter” with respect to the injunction, said Russell Frackman, lead attorney representing the record companies. The appeals court has given her guidance, though, including placing “dual burdens … both on us to some respect to identify copyrighted works and on Napster.”

Wiggle Room?

But Napster won’t go down without a fight, and has requested a new appeal of the injunction with all 25 9th Circuit judges.

“You don’t get a rehearing en banc [with all 25 justices] just because you ask for one,” said ABCNEWS legal analyst Jeffrey Toobin. “Unless the appeals court decides to step in, [Napster] has to go back to district court. Their problems remain.”

And the company is running out of options. If Napster doesn’t get an appeal or if it loses this appeal, the only other recourse to reconsider the preliminary injunction is the United States Supreme Court. It’s unclear if Napster will go this route or if the Supreme Court would even hear the case.

The real issue now, says Toobin, given the appeals court decision, is whether Napster has any business left to salvage.

“There seems to be a real challenge for Napster to carve out a real business while complying with the appeals court injunction,” said Toobin.

Takin’ Care of Business

Just how Napster will proceed is unclear.

When asked its plans should the court issue the preliminary injunction on Friday, a Napster spokesperson told ABCNEWS.com in an e-mail: "We really can't talk to this, as it's all speculation at this point."

The injunction only pertains to the illegal copying and swapping of copyrighted materials. But some copyright holders may not object to their music zipping through the Internet from one Napster user’s computer to another. The court order allows that such material could still be available through Napster.

"To the court Napster says we're trying to ban the technology. It's not the technology," Frackman told ABCNEWS.com. "It's the system. It's the model."

But from a technical standpoint, there’s no way for Napster to block certain songs or musicians, says a company representative. Instead, when copyright holders who do not want their music on Napster see their songs listed, they can tell the company, and Napster will block access to the computers where the songs reside. (See sidebar.)

Some see the scenario as a do-or-die situation for Napster. Although the online swap shop announced in October a roughly sketched deal with German media giant Bertelsmann AG, which owns the BMG music label, just how that will pan out in light of the imminent court injunction remains to be seen. Bertelsmann says it will drop its suit if Napster is able to come up with a viable business plan and is working with the company toward that end, but it still faces the copyright lawsuit brought on by four major labels — Sony Music Entertainment, AOL Time Warner's Warner Music Group, Universal Group and EMI Group.

Last week, Napster proposed a settlement to pay $150 million to the major record labels each year for five years, and $50 million toward indie labels. The offer came on the eve of the Grammy Awards, a timing that some industry watchers saw as peculiar. The record labels reacted cooly to the offer.

"We're a year after this lawsuit started," said Frackman, "and Napster is only starting to talk about ways they could have [put in place a business model] from the beginning. … I will tell you from my experience that litigation in this area for copyright holders is a last resort."

The litigation continues on Friday, with Napster's destiny in limbo.

“Status quo is that Napster’s lost, and they have to figure out how to survive,” said Toobin.