Napster Inc, operator of the Web site that shook up the music world, may be forced to shut down after a court said the music-sharing service could be held liable for enabling copyright-protected recordings to be traded over the Internet.
Monday by a US appeals court is a victory for the record industry and artists such as Metallica and Dr Dre, who feared the Internet program would undermine their livelihoods.
The court found Napster users are infringing copyrighted works, and that the Web site can be legally responsible for failing to prohibit access to music files.
The industry "has landed a blow," Napster Chief Executive Hank Barry said. While the company may be forced to go out of business before trial, he said Napster is negotiating with major record labels to settle their suit and salvage the company.
Record companies regard Napster's software, with 61 million registered users, as the ultimate threat to the future profitability of the industry.
They hailed Monday's decision as a clear victory for artists.
The three-judge panel, ruling unanimously in a 58-page opinion, substantially upheld a federal judge's decision to bar the Web site from distributing its free song-sharing software, pending trial of a suit by all five major music distributors.
"It's time for Napster to stand down and build their business the old-fashioned way: by seeking permission first," Hilary Rosen, president of the Recording Industry Association of America, said.
The RIAA sued in December 1999 on behalf of all five major record distributors, claiming Napster violates copyright law by letting users download software that eases song trading.
In granting a temporary injunction on July 26, US District Judge Marilyn Patel in San Francisco concluded Napster contributes to an unprecedented level of music piracy.
Her injunction protects all copyrighted recordings owned by Bertelsmann AG, AOL Time Warner Inc, Sony Corp, EMI Group Plc, and Vivendi Universal SA. It has been stayed pending review by the appeals court, which heard oral arguments from both sides in October.
The case now goes back to Patel with instructions to modify her injunction so Napster is barred only from distributing music files it knows infringe on copyright-protected material. The injunction won't take effect until the judge issues her modified order.
Redwood City, California-based Napster is a pioneer of the "peer-to-peer" file-sharing movement, which lets computer users exchange content directly.
Written by college dropout Shawn Fanning, its software allows computer users to share MP3-compressed music files stored on each other's hard drives.
Patel correctly determined that "Napster had the right and ability to police its system and failed to exercise that right to prevent the exchange of copyrighted material," Beezer wrote.
Under Monday's decision, record labels have the burden of notifying Napster of which copyright-protected works are on its system before Napster must remove them.
Napster can be held liable for copyright infringement only in situations where it has reasonable knowledge of specific infringing files, knew or should have known those files were on its system, and fails to prevent their distribution, Beezer wrote.
Industry watchers said that regardless of the ruling, Internet users would continue to use peer-to-peer networking to swap intellectual property online.
"I don't believe what happens to Napster the company matters much at all," Larry Miller, president of the digital management company Reciprocal Entertainment, said before the ruling.
"Napster the idea has proven to be a very, very powerful force in the industry."
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