Analysis Of Ninth Circuit Ruling In Napster

On February 12, 2001, a three judge panel of the United States Court of Appeals for the Ninth Circuit handed down its long awaited decision in the appeal in A & M Records, et al v. Napster, et al, 2001 W.L. 115033 (9th Cir. 2001), in which the District Court, per Judge Patel, had granted plaintiffs’ preliminary injunction motion. Judge Patel’s ruling had been stayed pending the appeal.

The Ninth Circuit’s unanimous decision, which in large part comprises a serial dismissal of each and every one of Napster’s arguments, constitutes a decisive ruling against Napster. As a federal appellate court, the Ninth Circuit panel’s role was limited to the questions of whether the District Court’s factual findings were clearly erroneous and whether the District Court properly applied the law.

The Court’s opinion begins with a discussion of Napster and its business. Napster, the opinion notes, designs and operates a system which permits the transmission and retention of sound recordings employing digital technology. In 1987, the Motion Picture Experts Group set a standard file format for the use of audio recordings in the digital format called MPEG 3, abbreviated as MP3. Compressed MP3 format allows for rapid transmission of digital audio files from one computer to another by electronic mail or any other file transport protocol.

Napster, according to the opinion, facilitates transmission of MP3 files between and among its users through a process commonly called "peer-to-peer" file sharing. Napster allows its users to make MP3 music files stored in individual computer hard drives available for copying by other Napster users; to search for MP3 music files stored on other user’s computers; and to transfer exact copies of the contents to other users. In order to copy MP3 files to the Napster system, the user first accesses Napster’s Internet site and downloads music share software to his individual computer. Once installed, the user can then access the Napster system.

The plaintiffs' claim that Napster’s users are engaged in the wholesale reproduction and distribution of copyrighted works, all constituting direct infringement. The Circuit Court briefly focused on the infringement issue concluding that the plaintiffs had sufficiently demonstrated ownership and the violation of their exclusive rights under copyright, i.e. "that a majority of Napster users use the service to download and upload copyrighted music and this constitutes a direct infringement of the musical composition recordings."

Napster’s principal affirmative defense to the infringement charge, both before the District Court and on appeal, was that of "fair use" under copyright. In short, Napster contended that its users did not directly infringe plaintiffs’ copyrights because the users are engaged in a "fair use" of the material. This "fair use" was defined by Napster as "sampling," where users make temporary copies before purchasing, and "space shifting," where users access sound recordings through the Napster system that they already own.

The Circuit Court panel thus undertook an in depth analysis of the four-part test for "fair use" and concluded, as the District Court had concluded, that the Napster users were not engaged in fair use. First, the Court concluded that the District Court was not clearly erroneous when it had found that Napster users "get something for free they would normally have to buy," thus satisfying the "commercial use" prong of the fair use test. The Circuit Court also found the District Court was not clearly erroneous in finding that the copied works are "creative in nature" as opposed to "factual in nature," thus defeating the second prong of the fair use defense. In looking to the third test of "fair use," i.e., the "portion used," the Court of Appeals agreed with the District Court’s conclusion that Napster’s users engage in "wholesale copying." Finally, the Court of Appeals reviewed the District Court’s finding regarding the fourth fair use prong, "market effect." Addressing this factor, the District Court had concluded that Napster harms the market in at least two ways: first, it reduces audio CD sales among college students; and second, it raises the barriers to plaintiffs’ entry into the market for the digital downloading of music. The District Court had relied upon extensive expert testimony and reports. The Ninth Circuit panel concluded that the District Court had made "sound findings" related to the "deleterious effect on the present and future market."

The Ninth Circuit panel then addressed Napster’s argument that the District Court had erroneously excluded so-called sampling and space-shifting as "fair uses." Specifically, as to sampling, Napster argued that the District Court erred by "conflating" a non-commercial use with a personal use and thus erred in determining that sampling adversely affects the market for plaintiffs’ music. The Ninth Circuit panel disagreed and affirmed the District Court’s finding that sampling constitutes a commercial use. Moreover, it concluded that the District Court did not err when concluding that Napster’s space shifting was not a fair use. Space shifting, as noted above, occurs when an end user downloads MP3 files in order to listen to music he already owns by CD. Relying upon earlier Ninth Circuit authority, Napster had argued that this was a fair use citing Recording Indus. Ass’n of Am. v. Diamond Multimedia Sys, Inc., 180 F.3d 1072, 1079 (9th Cir. 1999). The Circuit Court panel ruled that that case was inapplicable because it did not involve the simultaneous distribution of copyrighted material to the general public.

The Circuit Court then went on to affirm the lower court finding that Napster was liable as a contributory copyright infringer based upon its knowledge of the direct infringement of its users and because Napster "materially contributes to the infringement." The Circuit Court further affirmed the District Court’s finding of Napster’s vicarious liability.

The Court then went on to address two statutory defenses raised by Napster: the Audio Home Recording Act and the Digital Millennium Copyright Act. The Audio Home Recording Act insulates the manufacture, distribution and sale of digital audio recording devices and the like from claims of copyright infringement. The Circuit Court affirmed the District Court’s rejection of this argument based, in part, on the fact that this statute does not cover the downloading of MP3 files. Napster also invoked the "safe harbor" provisions reserved for ISP’s under the Digital Millennium Copyright Act. Noting that the statute does not provide blanket protection, the Appeals Court concluded that the plaintiffs had raised serious doubts as to whether this statute was applicable to the present case.

Napster argued that the District Court also erred by ignoring that the plaintiffs knowingly provided consumers with technology designed to copy and distribute MP3 files over the Internet and thus "waived" any legal authority to exercise exclusive control over creation and distribution of MP3 files. The District Court had not been convinced that the record companies "created the monster that is now devouring their intellectual property rights." Accordingly, the Circuit Court panel found no error in the District Court’s finding that "in hastening in the proliferation of MP3 files, plaintiffs did nothing more than seek partners for their commercial downloading ventures in developing music players for files they planned to sell over the Internet." The Circuit Court furthermore disregarded the misuse defense which was raised by Napster.

Napster further contended that the District Court should have imposed a monetary penalty by way of a compulsory royalty in place of an injunction. The Circuit Court was requested to do that on appeal. Napster had argued on appeal that "where a great public injury would be worked by an injunction, the courts might . . . award damages and continuing royalty instead of an injunction in such special circumstances" citing Abend v MCA Inc., 863 F.2d 1465 (9th Cir. 1988). The Ninth Circuit panel was "at a loss to find any special circumstances simply because the case requires the application of well established doctrines of copyright law to a new technology."

The panel further concluded that an injunction would not cause great public injury. Rather, "imposing a compulsory royalty schedule would give Napster an easy way out of this case. If such royalties were imposed Napster would avoid penalties for any future violation of an injunction, statutory copyright damages and future criminal penalties for continuing infringement. Such a royalty structure would grant Napster the luxury of either choosing to continue to pay royalties or shut down. On the other hand, the wronged parties would be forced to do business with a company that profits from the wrongful use of their intellectual properties."

Finally, in the only portion of the ruling which in any way supported Napster, the Court found the District Court’s injunction overbroad because it placed on Napster the entire burden of ensuring that "no copying, downloading, uploading, transmitting or distributing" of plaintiffs’ works occurred. The Court placed the burden on plaintiffs to provide Napster with notice of the infringed works, which must then be disabled by Napster. Even though the injunction was modified, Napster was assessed with costs.

This decision constitutes a stinging rebuke of Napster. While Napster has announced that it will seek an en banc review, given the clarity of this decision, the lack of any division within the panel, and the lack of any colorable defense, it is doubtful that such a hearing, even if granted, will support Napster. Having been enjoined and found likely to fail on the merits of the lawsuit, Napster now faces a trial on the merits with the prospect of a multi-billion dollar damage award.

Despite Napster’s posturing over the past months, its top echelon investors, the arguments of its high priced legal talent, the pronouncements of its spin doctors, and its glitzy self-serving press releases, the decision by the Ninth Circuit panel leaves one to wonder how anyone could have ever believed that Napster and its business model was anything other than a wholesale scheme to commit copyright infringement.