October 31, 2000 12:55 PM PST

Napster deal doesn't end threat of shutdown

The surprise deal unveiled Tuesday between Bertelsmann and Napster has sent shock waves through the music industry--but it's unlikely to derail the lawsuit that threatens to close the music-swapping service in the short term, experts say.

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Has Napster been saved?
Philip Corwin, attorney, Butera and Andrews
A panel of federal appeals judges is mulling whether to shut down Napster as it exists today and is expected to deliver a decision any day. Tuesday's settlement involves only one of the five major labels in the lawsuit and won't serve as a shield should those judges make a decision against the start-up, lawyers say.

"As far as the case is concerned, I don't think there's any effect," said Leonard Rubin, a copyright attorney with law firm Gordon & Glickson. "All the other plaintiffs want an injunction. The fact that there is one less plaintiff means very little."

Far from bolstering Napster's legal position, Tuesday's deal could even undermine one of the start-up's key positions, some experts said.

Napster and Bertelsmann gave few hints about how the new service would work. But Napster has argued in court that it is difficult, and perhaps impossible, to distinguish between authorized and unauthorized music on its service. By forcing it to block trades of major label material, the court would in effect force it to shut down all trades, the company's attorneys have said.

The Bertelsmann deal indicates that Napster either has or must develop a way to distinguish between authorized and unauthorized songs, potentially bolstering the industry's contention that trades of their copyrighted songs should immediately be shut down, some experts said.

Regardless of the immediate legal effects of the deal on the industry's lawsuit against Napster, the new relationship marks a seismic change in the foundations of the online music business.

Napster, which allows individual consumers to freely swap songs stored on their personal computers using the Internet, has widely been viewed as a major impediment to the record industry's attempts to set up online distribution systems. But if Bertelsmann can successfully tap into Napster, this potentially revolutionary force could be muted and channeled by the industry itself.

The success of this drive, however, depends largely on the other record companies. And they're still pursuing the lawsuit, at least for now.

But Napster's uncompromising legal argument that freely trading music online is protected by law may not bode well for an immediate settlement with the remaining labels.

"Our court case and what we're doing today are absolutely consistent," Napster chief executive Hank Barry said. "We haven't changed between yesterday and today."

The Recording Industry Association of America (RIAA) welcomed news of the deal, saying that it indicated new willingness on the part of Napster to work with the creative community. But the RIAA stopped short of offering anything like an olive branch.

"Today's announcement does not bring an end to the court case," RIAA chief executive Hilary Rosen said in a statement. "There are multiple plaintiffs in addition to BMG...And frankly, it is important for everyone--Napster included--that the ground rules of the Internet music business be established once and for all. The courts need to make clear that, contrary to what Napster has been claiming, companies like Napster do need to get permission before they launch businesses built on other people's creative property."

Bertelsmann and Napster executives each said Tuesday that they would work to bring the other labels into the fold.

Court: Shut down Napster But analysts said the other labels have little to gain from an immediate settlement, particularly if they believe that a court ruling against Napster can strengthen their negotiating hand.

"If they stand to gain a lot, particularly by having (Napster) shut down in the next couple of months, I would think they would bide their time," said Jim Penhune, director of media and entertainment strategies for the Yankee Group.

Universal Music Group's refusal to come to terms with MP3.com, even after the other four major labels had settled a copyright infringement lawsuit with that company, "shows you that there is less groupthink among the labels on how to deal with this than you might expect," Penhune added.

Some legal experts say the deal could persuade judges that the company's technology has substantial, unambiguously legal uses as the case goes to full trial. That could help a judge rule in Napster's favor in the same way that judges defended the sale of VCRs, even though they could copy movies.

"This is manna from heaven for Napster's fair-use (argument)," Lawrence Solum, a professor at Loyola Marymount University's law school, wrote in an email interview. "It creates a way Napster can win, even if the RIAA was right about all of Napster's other defenses."

Napster attorney David Boies said he would be unlikely to file new briefs in the case regarding with the Bertelsmann deal, saying that it was legally comparable to the thousands of other smaller bands and labels that have authorized distribution over the file-swapping service.

"This happens to be a big example," Boies said. "But what this means is that Napster is being used for a variety of purposes, some concededly legal, some allegedly illegal, and that means Napster can't be shut down as a contributory infringer."

Other attorneys are less sanguine about the addition of a new "noninfringing" use. The portion of Napster that allows free, unrestricted trading could still be analyzed separately and shut down, closing the service as most consumers know it today, they said.

"I think the influence is mostly in a practical effect," said Josh Bressler of New York law firm Schulte Roth & Zabel. "If Bertelsmann is carrying the torch for a business settlement, and they are fairly powerful, then others may follow the lead."

 

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