Napster can play on, but threat looms

Trouble ahead for Napster? John Corcoran, Internet analyst, CIBC World Markets

SAN FRANCISCO--A court ruling Monday allows Napster users to continue swapping music for now but opens the door to millions of dollars in damages that could cripple the service.

A three-member panel of judges from the 9th U.S. Circuit Court of Appeals in San Francisco stopped short of immediately halting the music swapping, as a lower court had done in July. Calling the earlier decision by U.S. District Judge Marilyn Hall Patel "overbroad," they sent it back to the district court with instructions for creating a narrower injunction that would still require Napster to block the trading of copyrighted music.

But the judges also warned that Napster could be liable for huge damages, which could lead to sweeping changes in the way it operates its service.

"We affirm the district court's conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the contributory copyright claim," the judges wrote.

Some form of injunction is "not only warranted but required," the judges continued.

That means Napster must halt the trading of specific files it is told to block by record companies. But that could be millions of songs, and it sets the stage for new, sweeping restrictions on what can be traded through the service.

The ultimate fate of the controversial technology may hinge on whether it is possible--or impossible--to effectively police on the labyrinthine networks created by file-swapping software. Monday's appellate court ruling ordered Napster to police its networks "within the limits of the system." As it has in the past, Napster will likely argue in its next appeal that it is technologically impossible to conduct this policing at the massive level demanded by the recording studios.

Claiming victory

Will Napster sink or swim? Tony Berman, copyright attorney, Idell, Berman & Seitel and John Borland, CNET News.com reporter

Hilary Rosen, chief executive of the Recording Industry Association of America (RIAA), called Monday's ruling "a clear victory. The court of appeals found that the injunction is not only warranted, but required. And it ruled in our favor on every legal issue presented."

Whether Napster could technically keep up with record-industry requests is unclear. When the injunction was initially ordered, the company said it could not comply and would be effectively forced out of business.

"I don't think there is a threat of immediate shut down," said Napster attorney David Boies, adding that such a decision would be made only after the lower court amends the injunction order.

"That obviously depends on the scope of the injunction that the lower court would enter, and I don't want to speculate on that," he said.

"We will be pursuing future appellate review, including possibly an en banc hearing," Boies said. Nevertheless, the appeals court's order would be easier to comply with than would the original lower court decision, he noted.

Napster CEO Hank Barry said the company would continue along its current legal path.

"We believe that Napster users are not copyright infringers, and we will pursue every legal means to keep Napster operating," Barry said. Once the second injunction is issued, "we will do everything we can to work within the limits of the injunction to continue to provide 51 million members access to music."

EMusic Chairman Robert Kohn said his company alone has already presented Napster with specific information on songs that could leave the swapping service liable for millions, or even hundreds of millions, of dollars in damages.

"They are already on notice for tens of thousands of files from us," Kohn said. "We've been giving them hundreds of notices a day for the last few months."

Napster members reacted with confusion and dismay.

"It looks like a bittersweet ruling for Napster," said Wayne Chang, a Massachusetts high school student who once helped moderate Napster's bulletin boards. "The question that I want to know is whether Napster will be allowed to continue its service."

The answer, analysts and legal experts said Monday, is that the service may not survive in its current form.

Bad news for Napster
"On the law, basically, Napster lost," said Fred von Lohmann, a copyright attorney with Morrison & Foerster. "If Napster gets a notice (of infringing songs), they'll have to take them down, and they also have the independent burden to police (the site).

"I think you're going to see the record companies deliver names of artists, song titles and albums and say, 'Remove these from your database.' It will no longer be all the world's music free at your fingertips."

The court said that Napster--as a technology--was protected by some of the same laws that made VCR use legal, despite arguments that those devices can be used to copy movies. However, the facts of this case don't shield Napster the company, the court said. Because the company knew that copyrighted material was being exchanged, and on a huge level, it opened itself to legal liability, the court found.

Nor did arguments succeed that sought to prove Napster use is protected by copyright law. The company had submitted the Audio Home Recording Act for this defense; the court said this did not apply.

The record industry also won its contention that allowing Napster to continue unrestricted would harm its businesses. Any harm to Napster itself was secondary, the court said.

"Any destruction of Napster by a preliminary injunction is speculative compared to the statistical evidence of massive, unauthorized downloading and uploading of plaintiffs' copyrighted works--as many as 10,000 files per second by defendant's own admission," the panel wrote. "The court has every reason to believe that, without a preliminary injunction, these numbers will mushroom as Napster users, and newcomers attracted by the publicity, scramble to obtain as much free music as possible before trial."

An uncertain fix?
Even if the record industry did win a point-by-point legal victory, the future is uncertain.

The case will be sent back to Patel, who must limit her original order to only barring Napster from trading songs that have been brought to its attention by the record companies.

The RIAA has already sent word of at least 12,000 copyrighted songs on the service, and more will be sure to follow.

The judges also said Monday that Napster must police its own system for copyrighted works. But just how far this goes--and how much power Napster has to block songs absolutely--remains in question. Because Napster can't actually access its members' computers, its powers are limited, the court said.

"We recognize that this is not an exact science in that the files are user named," the court wrote. "In crafting the injunction on remand, the district court should recognize that Napster's system does not currently appear to allow Napster access to users' MP3 files."

That means there could be some wiggle room in the injunction. For example, people might be able to trade copyrighted files by renaming or misspelling them, forcing an ongoing game of cat-and-mouse on the part of the record companies.

News.com's Cecily Barnes contributed to this report.