January 27, 2003 9:00 PM PST

Kazaa strikes back at Hollywood, labels

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Sharman Networks, owner of the popular Kazaa file-swapping software, has launched a legal counterstrike against the major record labels and Hollywood studios, asserting that they have ?obscenely? abused their copyright powers.

In a lawsuit filed late Monday in federal court in Los Angeles, Sharman claims that major entertainment companies have colluded to drive potential online rivals out of business. The conduct should preclude the industry from being able to defend its copyrights in court, at least until the behavior is corrected, Sharman contends.

The lawsuit is a counterstrike by Sharman, which has been sued for allegedly contributing to massive online copyright infringement. Last week , a federal judge ruled that record companies and movie studios could proceed with their lawsuit against Sharman.

The entertainment industry considers Sharman to be as much an outlaw as Napster and Aimster, two file-sharing services that have been shuttered. But Sharman executives say their business is fundamentally different because the company was created to take advantage of legal online distribution.

?What the industry is incapable of doing is realizing that Kazaa is different,? said Sharman attorney Rod Dorman. ?Now (they) have got to face the legal consequences.?

The lawsuit marks a significant development in the most critical online copyright case since the disappearance of Napster. Sharman is being sued along with Grokster and Morpheus parent Streamcast Networks. The popularity of Kazaa, the leading file-trading service in the United States, has brought it to the top of copyright holders? list of online enemies.

Sharman purchased the Kazaa software in early 2002 and planned to make money by distributing authorized, copy-protected content, its attorneys said.

Other companies, however, also have entered the file-swapping business contending that their plans were legal. Early entrant Scour turned on its file-trading service only after seeking the advice of top Hollywood copyright lawyers. But that didn?t prevent it from being sued and driven out of business.

The ?legal consequences? Sharman is seeking are potentially severe. Sharman is asking the judge to declare the copyright holders guilty of antitrust and related violations, and to bar them from enforcing any of their copyrights.

According to the lawsuit, Sharman and a partner called Altnet met repeatedly with movie and music industry executives over the course of 2002, seeking to license copy-protected content for online distribution. Providing legal, authorized versions of popular entertainment content would help mitigate piracy on the file-swapping system, Sharman and Altnet said.

A few industry executives were interested, but were ?repeatedly instructed? not to pursue relationships with Sharman or Altnet by the Recording Industry Association of America and other trade groups, attorneys for Sharman said.

Altnet CEO Kevin Bermeister said Monday he supports Sharman?s claims.

"Altnet confirms the allegations made by Sharman, relating to Altnet, in its counterclaim against the record and motion picture industries,? Bermeister said in a prepared statement. ?While we have seen a shift in consumers? willingness to pay for the licensed content we now supply, that behavior would be further along if we enjoyed the full support and cooperation of the entertainment industries."

Recording industry executives have maintained that Sharman was created to take advantage of online piracy and that there is no need to negotiate with the company.

"Sharman and its cohort Kazaa, which built the world?s largest piracy network, premised on flouting copyright laws and not obtaining licensees, now claim that a lack of licensing has somehow inhibited their development," an RIAA representative said. "This proposition is laughable, but the real harm to creators and copyright owners is no joking matter."

Although unconventional, the copyright misuse and antitrust claims have been the sole bright spot in file-swapping companies? repeated string of losses in court.

Last year, federal judge Marilyn Hall Patel ordered an investigation into the record labels? licensing practices towards online companies and into the structure of Pressplay and Musicnet, services largely owned by record labels.

"The evidence now shows that the plaintiffs have licensed their catalogues of works for digital distribution in what could be an overreaching manner," Patel wrote in a February 2002 decision that was part of the Napster lawsuit. "The evidence also suggests the (record labels?) entry into the digital distribution marketplace may run afoul of antitrust laws."

Napster went out of business before that investigation or court case could be concluded. However, a United States Department of Justice antitrust investigation of the music labels, begun in 2001, has yet to conclude.

Meanwhile, some of the initial criticism of the labels? reluctance to license to digital music companies has passed, as subscription services such as Listen.com?s Rhapsody have won rights to large music catalogs.

Along with the sweeping antitrust claims, Sharman?s legal defense rests on familiar grounds. The Kazaa software is a technology that has considerable non-infringing uses, and cannot therefore be deemed illegal, the company says. That argument harks back to a Supreme Court ruling defending the legality of the videocassette recorder against a copyright lawsuit mounted by the movie industry.

Judges have not given the ?non-infringing use? argument much sway in previous file-swapping cases, but Sharman appears to have more to show than predecessors Napster and Aimster. Together, Sharman and Altnet distribute more than 15 million copy-protected files per month though the Kazaa network, the company says in its legal papers.

Kazaa?s own popularity has now outstripped Napster?s, even at its peak. The software has been downloaded at least 181 million times, according to Download.com, a software aggregation site owned by CNET Networks, publisher of News.com. Many of those downloads have been upgrades or duplicate copies, however.

The federal judge in the Sharman case is still considering separate requests by the copyright holders and Streamcast to decide the case quickly, without going to a full trial.

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Regarding Kazaa and P2P sharing...
I hope that someone who matters reads this. P2P sharing is really no different than if I go out and buy an album and let all my friends take it and record it. It is also no different than if I take theirs and record it. I think that we've all done that from time to time. P2P has been very helpful to me to obtain music that I would have spent hours, days, even months or years to find on vintage vinyl. And yes, I've even downloaded a new song or two here and there. But guess what, then I've gone out and bought the album. Artists and labels need to get over themselves. Copyright infringement? I hardly see it as that. So they aren't getting paid for a few thousand downloads. If the music industry is that broke, maybe they should pay themselves a little less. I'm sure they live in better homes than what I live in, probably have health and dental insurance, and probably drive nicer cars than the one I have. I'm tired of hearing about the money. People have a right to the music and they will find a way, even if the industry takes away every Kazaa, Morpheus and Napster out there. I say the argument needs to stop. Album sales are down because the quality of music has gone downhill, not because of the P2P networks.
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