October 2, 2000 1:40 PM PDT

Court adjourns without decision in Napster case

SAN FRANCISCO--A panel of appellate judges harshly grilled lawyers for both Napster and the recording industry before adjourning without a decision today in the latest round of a closely watched legal clash that pits the Internet against copyright laws.

The 9th U.S. Circuit Court of Appeals heard arguments here this morning as it prepares to deliver a crucial ruling for Napster and other technology start-ups charged by the recording industry with spawning illicit online music trades. Napster is appealing a July court decision that ordered the company essentially to shut down pending a trial into charges of rampant piracy on its network.

The court has no deadline to deliver its decision; it could rule as early as this week. In the meantime, Napster can continue to operate normally.

The judges could simply send the decision back to the lower court for another round of hearings. But many attorneys believe that the court will take this opportunity to make a definitive ruling on at least a few of the legal questions that cloud the future of online music.

"There is so much riding on it, not just for Napster but for other Net companies, that there is incentive to give us guidance," said Fred von Lohmann, an attorney with Morrison & Foerster in San Francisco.

A three-member panel of judges from the appellate court spent about 40 minutes today probing potential weaknesses in both sides' legal arguments.

Napster's legal team, for example, faced tough questioning from the judges on whether its technology deserves the same protection the Supreme Court granted VCRs in a case involving Sony and the motion picture industry in the 1980s. If the so-called Betamax defense is successful, the court could hold Napster blameless regardless of piracy, provided the company can show the service also has substantial legal uses.

"This is a situation where the number of noninfringing uses is multiplying as we speak," said David Boies, Napster's lead attorney. "The Supreme Court said you can't just take a snapshot and ask how (a technology) is being used today."

Still, the judges raised questions about whether the ruling applies in this case, asking if Napster's relationship with its members is more direct than Sony's relationship with VCR buyers because the company maintains an ongoing relationship with its customers as a service provider.

Lawyers for the Recording Industry Association of America (RIAA), who are representing the plaintiffs including record labels, music publishers and artists, came under fire as well. The judges spotlighted the industry's contention that Napster controls the material traded over its system.

"How are they expected to have knowledge of what goes on in some kid's computer in Hackensack, New Jersey?" asked Judge Robert Beezer, one of the three judges on the panel.

While the judges gave no clue as to what their final ruling will be, Judge Mary Schroeder raised the issue of whether an injunction naming every specific copyrighted song would be acceptable.

Court watchers have noted Schroeder's previous decision in a music piracy case that held a swap meet owner liable for the sale of illegally copied cassettes in his facility. Schroeder, however, drew distinctions between that case and the current one.

"This is completely different than that," Schroeder said. The swap meet owner "controlled what was going on, on those premises...Here, Napster doesn't have any idea what's being transmitted."

Following the hearing, both sides said settlement talks have taken place and would likely continue. But recording industry executives appeared pessimistic that an agreement would be reached.

"It's awfully difficult to spend 40 minutes in the court listening to (Napster attorney) Boies arguing why they don't have to pay," said RIAA chief executive Hilary Rosen. "It's a little difficult to understand which side to listen to."

Looking for common ground
The two sides have been talking over the last months, looking for possibilities for settlement. But the talks haven't borne fruit.

Napster chief executive Hank Barry says the company has offered several different financial and business proposals to the individual labels. The company has been working on business models that involve a subscription service, in which Napster users would pay a small monthly fee for access to much or all of the service. Assuming this fee was just $4.95 a month, Napster could potentially pay record companies close to $500 million in 2001, Barry says.

But the record companies haven't bit. They've cordially listened to the ideas but haven't gone so far as to offer counterproposals, Barry says.

"It's been basically me negotiating against me," he said. "I don't think this is about money. I think this is about control."

The labels themselves have largely been quiet about any negotiations as they continue to criticize Napster as a "business built on piracy."

"What we ultimately wish to come out of this process is an increased cooperation between innovation and industry so legitimate business models can make more music available online," the RIAA's Hilary Rosen, said in a statement Friday.

Test case
Napster's technology, which allows tens of thousands of people at a time to open their hard drives to each other and freely trade copyrighted music files, has turned into a test case both for online music business models and the future of copyright law on the Net.

The RIAA contends that the company's file-trading service is nothing short of massive theft, as millions of songs get downloaded without any payment. U.S. District Judge Marilyn Hall Patel came close to agreeing in late July when she ordered Napster to block all major-label songs from being traded through the service or shut its doors.

"Napster wrote the software; it's up to them to write software that will

On the bench
Three appellate judges were randomly chosen to take Napster's future in their hands. Although they collectively have little experience with significant technology decisions, a few past rulings provide some hints at how they may think.

Mary M. Schroeder: Slated to become the appellate court's chief justice by the end of the year, Schroeder has penned a decision that could play a role in undermining Napster's defense. In that 1996 case, Fonovisa vs. Cherry Auction, Schroeder ruled that a flea market was liable for the sale of illegally copied cassettes on its premises. Attorneys say that logic could apply to Napster. Schroeder, 59, was appointed to the court in 1979 by Jimmy Carter.

Robert R. Beezer: Beezer, 72, wrote a decision earlier this year ruling that America Online didn't break false-advertising laws when it switched to a flat fee pricing mechanism. Ronald Reagan appointed Beezer to the court in 1984.

Richard A. Paez: The newest of the panel judges, Paez, 53, was appointed to appellate court earlier this year by Bill Clinton. Early experience includes work with nonprofit housing and low-income advocacy groups.

remove from users the ability to copy copyrighted material," Patel said then after Napster's attorneys protested that her order would cripple the company. "They created a monster...That's the consequence they face."

It is Napster's arguments that hold the potential to reshape widely held assumptions about copyright law, however.

The company is relying on three sets of laws and precedents to support its service. Attorneys say the most likely candidate for success is the Betamax defense, which draws on the Supreme Court's decision the Sony Betamax could not be outlawed even if it could copy protected movies because the machine had substantial "noninfringing" uses.

Patel initially dismissed that argument, saying it didn't apply to Napster since internal documents showed its service had been explicitly created to trade copyrighted material.

That part of the ruling prompted several technology industry groups, including the Consumer Electronics Association, to file their own briefs in the ongoing appeal. While they don't explicitly support Napster, they do express concern that Patel's ruling could endanger technological progress.

Napster also contends that a copyright law, the Audio Home Recording Act, protects consumers' ability to post and download songs for free online as long as they are not making money from the activity.

Patel also dismissed this line of argument, saying the law and a landmark court case based on it simply didn't apply to Napster.

The U.S. Copyright Office and the Justice Department have criticized this part of the defense, saying it would allow people to trade music "on a scale beggaring anything Congress could have imagined."

What can happen
The appellate judges have several options. They can uphold Patel's decision, in which case Napster would be ordered to block all major-label music from being traded through its service. The company has said that would force it to shut the service down because it can't distinguish between copyrighted and unprotected trades.

The judges could overturn Patel's order, saying that there is no need for a Court: Shut down Napster preliminary injunction to stop Napster while the record industry's case goes to a full trial. In either of these options, the judges could make a ruling on Napster's legal arguments that Patel would have to respect as she weighs the issues in a full trial.

A third option would be to send the injunction back to Patel for more hearings. Napster has said it didn't get enough time to present evidence, and some attorneys think the appellate court will agree.

"I think they will send it back to the (lower) court and say it hasn't done enough homework," said Leonard Rubin, an attorney with Chicago-based Gordon & Glickson. "The court should have held an evidentiary hearing before issuing an injunction of this magnitude."

 

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