Sun, Feb 24, 2002 page11

• Napster finally wins a round in Web music case

  ONLINE TUNES A US district judge said it was unfair that, while the site is shut down, major record labels have formed joint ventures to market music online

  • NY TIMES NEWS SERVICE
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  America's major record companies, which successfully sued to shut down the online music-swapping service Napster, suffered a setback on Friday as the judge in the case allowed Napster to seek evidence that the record companies colluded to monopolize the digital music market.

  In her ruling, Judge Marilyn Patel of US District Court wrote that, while the evidence before the court has thus far been limited, she found reason for concern given that the five major record labels have created two joint ventures to distribute music over the Internet themselves.

  "These ventures look bad, smell bad and sound bad," Patel wrote. She added later in her ruling, "If Napster is correct, these plaintiffs are attempting the near monopolization of the digital distribution market."

  The decision was a potential turnabout in a case that has helped define how copyrighted material is distributed over the Internet, who will profit from such distribution, and whether and how much consumers will pay.

  Patel wrote that if Napster shows the record labels were involved in illegal collusion, it could invalidate their lawsuit. But, underscoring the complexity of the legal doctrines involved in the case, she added that even if that were to occur, the record companies could modify any anti-competitive activity and become eligible again to sue Napster.

  Napster said on Friday that it was pleased by the decision.

  The record companies, however, said the evidence will show that they did not collude. "The courts are relying entirely on a record submitted by Napster, which has neither been tested nor refuted by record companies," said Matt Oppenheim, senior vice president for business and legal affairs for the record labels. "The facts, when presented to the court in full, will tell a very different story."

  Napster exploded in popularity in 2000, eventually gaining some 80 million users who freely exchanged copyrighted music. The record labels sued, asserting Napster abetted copyright infringement, and Patel agreed. She issued a preliminary injunction against Napster, and ordered the company to stop the "wholesale" exchange of material it had no permission to distribute.

  As part of its defense, Napster has asserted the record companies, hoping to maintain their dominant market position, have colluded to prevent alternative methods of distribution, and have offered anti-competitive licensing terms to would-be Internet competitors. Napster also has argued that there is a question as to whether the companies own the digital distribution rights to all the songs they claim ownership to.

  In her ruling on Friday, Patel said Napster will be able to seek some documentation from the companies that show whether they own the necessary rights to the music. However, Patel, in a nod to the position of the record companies, said she found it "unlikely" they would have failed to secure rights to works that form the foundation of their business.

  Napster itself has sought to create a for-pay service, which would charge consumers a monthly fee for access to music.

  But these online efforts require licenses to sell music from the major record companies, which control distribution of 85 percent of music sold in the US. And some companies have asserted that their efforts to obtain licenses have been stone-walled by the record companies.

  The concerns over possible antitrust are also being examined in Washington. The Justice Department said in October that it started an antitrust investigation into whether the companies have misused their copyrights to dominate the digital market.

  The stakes are high. The music business is among the few industries with the potential to thrive in the early days of the Internet. Songs can be easily bought and sold on the Internet because the data files that contain them are sufficiently small to be sent easily by e-mail message, or traded on World Wide Web sites. Tapping into the possibilities, Napster achieved success by distributing software that permitted users to exchange music files that they kept on their home computers.

  The song files exchanged on Napster typically were created by "ripping" the music from commercial compact discs. As such, once a song was put onto the system, it could be shared by millions of people who would never need to purchase the music, and, thus, terrifying the record industry, which threatened to lose millions of dollars in lost sales.

  In its defense, Napster argued its service was used not just for the exchange of copyrighted files, and that, given its broader applications, should not be shut down.

  Record companies have said they intend to address consumer demand and sell music over the Internet, but only once they figure out how to do so profitably. They contend that the industry cannot survive if labels simply give music away. Their initial forays were two joint ventures: Pressplay, owned by Sony Records and Vivendi Universal; and MusicNet, backed by EMI, BMG and AOL Time Warner.

  The companies have also said they are negotiating in good faith to license their music to Internet startups.

  As Napster continues to build its defenses for trial, the company has asserted that it could not have created a record-company friendly service, even if it wanted to, because the companies have refused to license their music.

  In her ruling Friday, Patel did not back off her earlier condemnation of Napster. In fact, she said the evidence suggests Napster activities could have resulted in "millions of acts of unauthorized copying," and that if Napster's actions were "willful" the company's hands are "abundantly dirty."

  But, Patel said, given that Napster is now offline, the company appears to no longer be causing public harm. By contrast, she said, the "alleged" conduct of the record companies is ongoing. "The extent of the prospective damage is massive," the judge wrote, noting several sentences later that "the resulting injury affects both Napster and the public interest."
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