BY:Neil J. Rosini
The decision of the Ninth Circuit Court of Appeals in the Napster case was anticipated as a potential turning point in the law of copyright. Disappointingly to Napster users, the lengthy decision1 left most of the lower court’s findings and holdings undisturbed and did not change copyright law in any fundamental way. (But it may yet prove a turning point if, as Senator Orrin Hatch has predicted, the Copyright Act is amended in reaction to it.2)
The first injunction issued by the district court enjoined Napster “from engaging in, or facilitating others in copying, downloading, uploading, transmitting, or distributing plaintiffs’ copyrighted musical compositions and soumnd recordings, protected by either federal or state law, without express permission of the rights owner.”3 Napster immediately appealed to the Ninth Circuit Court of Appeals which stayed the injunction pending its review.
On Monday, February 12, 2001 the Court affirmed the lower court’s decision in part, reversed in part, and remanded. The Ninth Circuit agreed with the district court that Napster’s users infringed copyrights and that Napster was secondarily liable for those infringements as both a contributory and vicarious infringer of the plaintiffs’ copyrights. It also agreed that an injunction should be reinstated, prohibiting Napster from further infringing of the plaintiffs’ copyrighted works. But the Court instructed the district court to shift to the plaintiffs a portion of the burden in identifying music on the Napster system that infringes plaintiffs’ rights. This resulted in a modified injunction issued by the district court in March, 2001 (described further below).
The Court of Appeals reached these conclusions after: reviewing the way Napster functions and the manner in which its users infringe copyrights; considering and rejecting Napster’s contention that its users were protected by the fair use defense; discussing how Napster’s involvement amounted to contributory as well as vicarious infringement; and ruling that Napster’s reliance on a variety of other defenses was unavailing.
How Napster Works
The appellate court’s decision first describes the “architecture” of the Napster system. Napster facilitates the transmission of digital copies of sound recordings in the MP3 format between and among its users through a process commonly called “peer-to-peer” file sharing. Napster users make MP3 music files available for copying by other Napster users, search for MP3 music files stored on other users’ computers, and transfer exact copies of the content from one computer to another via the Internet. Users first access Napster’s Internet site and download the necessary software that enables use of the system. A first time user is required to register with the Napster system by creating a user name and password.
A registered user who wishes to list available files stored in his computer’s hard drive for others to access (a “host user”) then creates a “user library” directory which, once communicated to the Napster system, becomes part of a fluid “collective directory” of files available for transfer while the user is logged on to the Napster system. A Napster user who wishes to download music (a “requesting user”) locates other users MP3 files through Napster’s search function or through its “hotlist” function.
The search function combs a “search index” of Napster’s collective directory by the name of a song or an artist. Napster’s system does not search the contents of any MP3 file but rather performs a text search of file names given by users that may contain typographical errors or otherwise inaccurate descriptions. Using the “hotlist” function, a Napster user creates a list of other users names from whom he has obtained MP3 files in the past and the Napster system alerts the user if any user on this list is also logged into the system. If so the user can access a list of MP3 file names in that other user’s library and request a file by selecting the file name.
Napster facilitates the transfer of a copy of the contents of a requested MP3 file by communicating the host user’s Internet address to the requesting user. The requesting user’s computer with the help of Napster software then uses this information to establish a connection and download a copy of the requested file directly from the host user. (This method of transfer is called “peer-to-peer” because it does not pass through the Napster system.) Once downloaded, the file can be played directly from the requesting user’s hard drive or transferred to an audio CD if the user has the necessary equipment. The quality of the resulting copy is “slightly diminished by transfer to the MP3 format.”
Infringement by Napster Users
The district court’s conclusion that the plaintiffs presented a basic case of direct infringement by Napster users was not appealed by Napster — only the applicability of the fair use defense to that infringement as well as Napster’s secondary liability were in issue. Still, the appellate decision observed that in order to present a case of direct infringement the plaintiffs must show ownership of the allegedly infringed material in violation of at least one exclusive right granted to copyright holders. Here, the plaintiffs sufficiently demonstrated ownership of more than 70% of the files available on Napster, and that Napster users infringed at least two of the copyright holders’ exclusive rights: the right of distribution (violated by host users who upload file names to the search index), and the right of reproduction (violated by requesting users who download files).
Fair Use Is No Defense For Napster Users
The Court of Appeals was unmoved by Napster’s contention that its users engaged in fair use of the plaintiffs’ sound recordings, which shielded them from liability for direct infringement. The decision reviewed each of the four factors to be balanced in a fair use analysis and held that at least three out of four favor the plaintiffs.
The first factor, “the purpose and character of the use,” favors the plaintiffs for two reasons. First, a mere retransmission of the original work in a different medium “does not transform the copyrighted work.” Instead, it merely replaces the object of the original creation adding no further purpose or different character. Secondly, Napster users engage in commercial use of copyrighted works. This is because a host user sending a file does not engage in a personal use when distributing that file to an anonymous requester and because Napster users get for free something they would ordinarily have to buy. The plaintiffs only had to show that “repeated and exploitative unauthorized copies of copyrighted works were made to save the expense of purchasing authorized copies” to demonstrate commercial use. A showing of direct economic benefit was not required.
A second factor to be balanced in the fair use analysis is the “nature of the use.” Because creative works like musical compositions in sound recordings are “closer to the core of intended copyright protection” than most fact-based works, this factor also disfavors Napster.
The third factor, “the portion used,” does not necessarily favor the plaintiffs. The appellate court said that copying an entire work militates against a finding of fair use, but “under certain circumstances, a court will conclude that a use is fair even when the protected work is copied in its entirety,” citing the U.S. Supreme Court’s Sony Betamax decision.4 In the balance of the other factors, this offered no consolation to Napster.
The last factor, “the effect of the use on the market for the original,” favors the plaintiffs because fair use, when properly applied, is limited to copying by others which does not materially impair the marketability of the work which is copied. Napster was found to harm the market for the plaintiffs’ copyrighted works at least by reducing audio CD sales among college students and by raising barriers to the plaintiffs’ entry into the market for the digital downloading of music. The availability of free downloads necessarily harms a copyright owner’s effort to charge for the same thing.
The appellate court also agreed with the district court that “sampling” and “space-shifting” were not fair uses. Napster had contended that its users “sample” recordings in order to decide whether to purchase them. The district court, however, said that sampling remains a commercial use even if some users eventually purchase the music and even if downloading of individual songs for sampling purposes were to result in temporary copies, thus making the permanent copies afforded by Napster a commercial use without question. Both courts concluded that the more music that “sampling” users download the less likely they are to purchase the recordings on an audio CD or in the developing digital download market.5 The “space-shifting” defense suggested by the Sony Betamax case and the Diamond Multimedia case6 has no application to Napster. In Napster’s case, the “methods of shifting” simultaneously involve distribution of the copyrighted material to the general public. In the Betamax and the Diamond Multimedia Rio cases, “the time or space-shifting of copyrighted material exposed the material only to the original user.”
Contributory Copyright Infringement
Having found that Napster users infringed copyright, and having rejected the fair use defense that might have shielded those users from liability, the court turned to the first of two theories on which Napster could be held secondarily liable for its users’ infringement.
The first of two elements of contributory copyright infringement — inducing, causing or materially contributing to the infringing conduct of another — was satisfied by Napster’s provision of “the site and facilities” for direct infringement. The other element — knowledge or reason to know of the infringing activity — was satisfied by Napster’s actual and constructive knowledge.
Napster had actual knowledge because a document authored by Napster’s co-founder, Sean Parker, admitted that Napster users were “exchanging pirated music” and because the Recording Industry Association of America informed Napster of more than twelve thousand infringing files, some of which are still available. Napster had constructive knowledge because of the background and conduct of its executives: they had industry experience, they enforced intellectual property rights in other instances, they downloaded copyrighted songs from the Napster system, and they promoted the site with screen shots listing infringing files.
The Court found that the “staple article of commerce” defense articulated in the Sony case was of no help to Napster even though both the VCR and the Napster service have at least one thing in common: they are both capable of both infringing and substantial noninfringing uses. Napster is significantly different from Sony, however, because (1) it has actual knowledge that specific infringing material is available using its system; (2) it could block access to the system by suppliers of the infringing material; and (3) it failed to remove the material. Thus unlike Sony, Napster had sufficient knowledge to be held liable for contributory infringement.
The Court of Appeals parted company with the lower court in one important respect. The mere fact that peer-to-peer file sharing technology may be used to infringe the plaintiffs’ copyrights was insufficient to impute the requisite level of knowledge to Napster for a finding of contributory negligence. (This followed the Supreme Court’s reasoning in Sony and departed from the analysis of the district court, which focused on Napster’s current uses and ignored the system’s capabilities for commercially significant noninfringing uses.) The appellate court refused to hold a computer system operator liable for contributory infringement merely because the structure of the system allows for the exchange of copyrighted material, unless the operator has specific information that identifies infringing activity.
Vicarious Copyright Infringement
The appellate court explained that vicarious copyright infringement requires that the defendant have (1) a direct financial benefit from the infringing activity; and (2) the right and ability to supervise that activity. Financial benefit could be established because Napster’s future revenue is directly dependent upon “increases in user base.” Napster also has the right and ability to supervise its users’ conduct through its method of blocking users whom rights holders complain about.
While this “right and ability” satisfies half of the two elements of vicarious copyright infringement, it paradoxically also allows for a potential defense: an effort by Napster to police its system, if exercised to its fullest extent, would allow it to escape liability for vicarious infringement. Unfortunately, this did not describe Napster’s conduct, which turned “a blind eye toward detectable acts of infringement.”
The lower court also recognized that Napster had the right and ability to police its system and did nothing to prevent the exchange of copyrighted material. But the lower court failed to recognize that the boundaries of the “premises” which Napster “controls and patrols” are limited by “the system’s current architecture.” This is because Napster does not “read” the content of indexed files other than to check that they are in the proper MP3 format; it has only the ability to locate infringing material listed on its search indices. Therefore, Napster’s ability to police its system and terminate infringers depends on the accuracy of the file names supplied by its users. For this reason, the district court’s injunction must be modified. Subject only to that limitation, the Court of Appeals agreed that Napster’s “failure to police the system’s ’premises,’ combined with a showing that Napster financially benefits from the continuing availability of infringing files on its system, leads to the imposition of vicarious liability.”
The Court then rejected a series of other defenses asserted by Napster, holding that none of them stands in the way of a preliminary injunction:
The Court deferred the question of whether or not the safe harbors offered by the Digital Millennium Copyright Act8 assisted Napster until the issue is “more fully developed at trial.” Nevertheless the Court noted that the plaintiffs raised serious questions under the statute including whether Napster is an Internet service provider as defined by the Act; whether copyright owners must give a service provider “official” notice of infringing activity in order for it to have knowledge or awareness of infringing activity on its system; and whether Napster complied with the Act’s requirement to timely establish a detailed copyright compliance policy. (In deferring the DMCA analysis, the Court disappointed anyone who hoped to find out whether the general knowledge by an ISP that it facilitates a form of Internet transmission [e.g., unsecured consumer to consumer streams or downloads] of a class of copyrighted works [such as MP3 copies of CDs, or theatrical motion pictures, or best-selling books], for which the pertinent copyright holders have rarely given authorization, would be sufficient to defeat safe harbor protection in the absence of specific knowledge of specific transmissions by specifically identified users of specifically identified works within that class. The answer to that question — which the DMCA on its face does not provide — could affect other search engines and ISP services of many stripes, reaching far beyond the limited factual circumstances of Napster.)
No Bigger Bond And No Compulsory License
The Court also refused to raise the bond amount on appeal despite Napster’s argument that the $5 million bond was insufficient given the company’s alleged value of between $1.5 and $2 billion.
The Court also declined to create a monetary penalty by way of a compulsory royalty in place of an injunction, finding that there were no “special circumstances” to justify such an extraordinary remedy. On the contrary, the Court referred to the existing sanctions for infringers found in the Copyright Act (injunctions, damages and criminal penalties), which “represent a more than adequate legislative solution to the problem created by copyright infringement.” The Court further noted that a compulsory royalty payment schedule would give Napster an “easy out” of this case allowing it avoid penalties for any future violation of an injunction and would result in a loss to the plaintiffs of the power to control their intellectual property.
Instructions to Modify the Injunction
The Court held that the initial preliminary injunction was overbroad because “it place[d] on Napster the entire burden of ensuring that no ’copying, downloading, uploading, transmitting, or distributing’ of plaintiffs’ works occur on the system.” Instead, the burden should be placed on plaintiffs to “provide notice to Napster of copyrighted works and files containing such works available on the Napster system before Napster has the duty to disable access to the offending content. Napster, however, also bears the burden of policing the system within the limits of the system. … [subject to the fact] that Napster’s system does not currently appear to allow Napster access to users’ MP3 files.”
The Court instructed the district court to modify its injunction and take into account that contributory liability properly may be imposed only to the extent that Napster (1) “receives reasonable knowledge of specific infringing files with copyrighted musical compositions and sound recordings”; (2) “knows or should know that such files are available on the Napster system”; and (3) “fails to act to prevent viral distribution of the works.” The Court further explained that the mere existence of the Napster system, absent actual notice and a demonstrated failure to remove the offending material, is insufficient to impose contributory liability.
The Modified Injunction
The Ninth’s Circuit’s instructions allowed for some flexibility in interpretation. On March 5, 2001 the district court issued a modified preliminary injunction that again prohibited Napster from “engaging in, or facilitating others in, copying, downloading, uploading, transmitting, or distributing copyrighted sound recordings” once Napster receives “reasonable knowledge” of specific infringing files containing those recordings.
Such knowledge can be obtained by any of the following methods:
The plaintiffs are entitled to put Napster on notice of recordings even before their release if a review of the relevant artist’s work (including popularity and past appearance on Napster) shows a “substantial likelihood of appearance on the Napster system.”
Within three business days following receipt of such “reasonable knowledge” of specific infringing files, Napster must: (a) block them from its index and thereby prevent access by its users; and (b) search the names of all files of each user at the time of the user’s log-on (before inclusion of the files in the index) and prevent the downloading, uploading, transmitting, or distributing of the “noticed” sound recordings. Napster was also required to submit a “Notice of Compliance” to the court within five business days following the date of the order.
1A&M Records, Inc. et al. v. Napster, Inc., Case No. 00-16401 (9th Cir. 2001).
2 The chairman of the Senate Judiciary Committee, Orrin Hatch, announced his intention to hold hearings to examine the impact of the decision, and stated that “this legal victory for the record labels may prove Pyrrhic and short-sighted from a policy perspective.” (Washington Post Online, February 16, 2001).
3 114 F. Supp. 2d 896 (N.D. Cal. 2000)
4 Sony Corp. v. Universal Studios, Inc. 464 U.S. 417, 449-50 (1984).
5 And even if this sampling had a positive impact on the audio CD market, the Court agrees with the district court that the copyright holders should not be deprived of the right to develop this alternative market.
6 Recording Industry Association of America v. Diamond Multimedia Systems, Inc., 180 F. 3d 1072, 1079 (9th Cir. 1999).
7 17 U.S.C. §1008.
8 17 U.S.C. §512.