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On July 26, 2000, Chief Judge Marilyn Hall Patel granted a preliminary injunction against Napster. On July 28, 2000, the Ninth Circuit Court of Appeals issued a stay of the preliminary injunction pending appeal. Although the appellate court has ordered that the matter be handled on an expedited basis, it appears that an appellate decision will likely be 3-6 months in coming. In the interim, Napster remains free to continue to operate as it has been.

Although the preliminary injunction has been stayed pending appeal, the court's rationale  may have important implications not just for Napster, but for a wide range of Internet companies.  The following is a brief summary of the court's oral ruling. This summary is intended only for informational purposes and must remain tentative, as the court has not yet issued its written opinion. 

The Facts
The Preliminary Injunction
The Court's Rationale
Direct Copyright Infringement by Napster Users
Contributory Infringement
Vicarious Infringement
Other Napster Defenses
Irreparable Injury
The Injunction
Possible Implications

The Facts

The Napster service allows individuals with Internet access to share their own stored MP3-encoded music files directly with other users who are running the Napster software at the same time. The Napster service is made up of two components--the free Napster client software, which a user downloads from the Napster website and installs onto his or her PC, and numerous Napster servers, which centrally administer the system by keeping track of which users are logged on and what MP3 files they have made available. As of July 2000, there were estimated to be more than 20 million Napster users sharing well over 1 million music tracks at any particular moment.

A number of record companies filed suit against Napster in December 1999, alleging contributory and vicarious copyright infringement. Several music publishers filed a similar suit in January 2000. In March, the district court ruled that the 512(a) safe harbor provisions of the Digital Millennium Copyright Act (DMCA), which shield Internet Service Providers (ISPs) and similar entities from certain copyright actions, did not protect Napster.  Both the record company and music publishing plaintiffs subsequently moved for a preliminary injunction. 

The Preliminary Injunction

The court granted plaintiff's motion for a preliminary injunction, finding that plaintiffs had demonstrated a strong likelihood of success on the merits of their contributory and vicarious copyright infringement claims, as well as irreparable injury in the absence of injunctive relief pending trial.

The Court's Rationale

Direct Copyright Infringement by Napster Users
To begin, the court held that plaintiffs had successfully established that the users of the Napster service were directly infringing plaintiffs' copyrights by copying and distributing copyrighted works without their permission. In dismissing Napster's argument that its users were engaged in "fair use" of the copyrighted works, Judge Patel indicated that the downloading of music tracks by end users in order to determine whether they want to purchase a CD does not qualify as fair use. Also, the court found that making a work generally available to the public did not constituted a "noncommercial personal use" within the meaning of the Supreme Court's decision in Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417 (1984). The court also rejected the argument that Napster users were entitled to the benefit of the "noncommercial home copying" exception created by the Audio Home Recording Act (AHRA), 17 USC § 1008. Relying on RIAA v. Diamond Multimedia Systems, 180 F.3d 1072 (9th Cir. 1999), the court held that the AHRA had no application to Napster users because that provision is limited only to "digital audio recording devices" (DARDs). Because the Diamond Multimedia opinion held that computer hard drives are not DARDs, the court found that Napster users fell outside the reach of the AHRA's "noncommercial home copying" exception.

Contributory Infringement
Having laid a foundation of direct infringement by Napster users, the court went on to find that the plaintiffs had established a strong likelihood of success on their contributory infringement claim. In arriving at this conclusion, the court found that Napster had actual, or, at a minimum, constructive knowledge of the infringing activities of its users. The court was also satisfied that Napster had materially contributed to these infringing activities insofar at the Napster software assists and facilitates the sharing of MP3 music files.

Vicarious Infringement
The court went on to hold that plaintiffs had also shown a strong likelihood of success on the merits of their vicarious liability claim. In coming to this conclusion, the court determined that Napster's practice of terminating users after receiving complaints regarding them demonstrates Napster's "supervisory control" over its users. In addition, the court found that Napster received a financial benefit from the infringing activities of its users because these activities attracted a large user base, which in turn attracted investors in the company. In addition, the court was not persuaded by the fact that Napster's services are provided free of charge--the court noted that Napster was founded as a commercial venture and that its officers intended to make a profit at some point.

Other Napster Defenses
Napster had also hoped to take shelter behind the "staple article of commerce" principle enunciated in the Sony case, also known as the "Betamax defense." The Supreme Court in the Sony case held that manufacturers are not liable for contributory infringement when they sell a product that can be used for infringing purposes by end users, so long as the product is capable of a substantial noninfringing use. The district court rejected Napster's reliance on this argument, finding that any noninfringing uses of the Napster service were not "commercially substantial." Judge Patel went on to observe that Sony does not apply where the vendor has a continuing relationship with the user after the product has been sold. The court rejected Napster's remaining defenses--copyright misuse, First Amendment, and waiver--with only minimal comment.

Irreparable Injury
In finding that the plaintiffs had demonstrated irreparable injury, the court relied on the presumption of irreparable harm that arises in copyright cases once there has been a showing of a likelihood of success on the merits. The court found that Napster had not rebutted this presumption. 

The Injunction
Based on its finding of a strong likelihood of success on the merits and irreparable injury, the court granted plaintiffs' motion for a preliminary injunction. The injunction was to take effect at midnight on Friday, June 28, 2000. However, the injunction was stayed by the Ninth Circuit pending appeal. Had the injunction gone into effect, it would have required that Napster cease facilitating or contributing to the infringement of any of the sound recordings or musical works owned by plaintiffs.  In the wake of the stay pending appeal, Napster can continue to operate.  At the same time, the plaintiffs' damages continue to mount, and now that the Court has ruled on its copyright defenses, the plaintiffs are likely to argue with additional vigor that ongoing infringement is willful, thereby adding to Napster's financial exposure.[1]

Possible Implications

Although the preliminary injunction has been stayed pending appeal, the legal principles announced in the Napster ruling may have implications for many Internet businesses, especially those whose users may be engaging in copyright infringement.  Some possible implications include:

Constructive knowledge of copyright infringement may be enough to strip an online service provider of DMCA safe harbor protections.  In rejecting Napster's 512(d) defense (the DMCA safe harbor that applies to information location tools), the court ruled that the fact that Napster had "actual, or at least constructive, knowledge" was enough to deprive it of the safe harbor. This has the potential to be a disquieting ruling for companies that have been relying on the 512(d) safe harbor, especially for those companies who have generalized knowledge that many of their users may be engaged in substantial copyright infringement.

The "Betamax defense" announced by the Supreme Court in the Sony decision may not apply to businesses that combine a product with ongoing services. Where a manufacturer sells a product that has infringing uses (such as a VCR), the Sony decision has generally been understood to operate as shield against contributory infringement liability so long as the product is capable of a substantial noninfringing uses. Judge Patel intimated that this defense does not apply where the defendant  maintains a continuing relationship with the product after it is sold. This holding may be troubling for companies that hope to use the Internet to maintain a continuing relationship with those who use their products.

The power to terminate a user may lead to vicarious infringement liability. Judge Patel found that Napster's demonstrated ability to terminate infringing users was enough "supervisory control" to satisfy the "control" element of vicarious infringement. Given that most companies that provide services over the Internet retain the right to terminate their users, this holding could increase the potential for vicarious copyright infringement, even where a company has no knowledge of the infringing activities. A policy of terminating users who repeatedly engage in infringing activities, moreover, is a prerequisite for the DMCA safe harbors generally. Accordingly, this aspect of Judge Patel's order may put companies in the unfortunate position of accepting an increased risk for vicarious liability in order to qualify for the DMCA safe harbors.

If the infringing activities of users are part of a service's appeal and ultimately attract investors, this may be enough to satisfy the "financial benefit" element of vicarious infringement. This may be true, moreover, even if the services are provided free of charge and the company is not making a profit. Many Internet services derive at least a portion of their value from user activities that are not wholly legitimate, from a copyright point of view. The court's decision in the Napster case may expose these companies to additional risks.

The foregoing analysis is based upon the district court's oral ruling on July 26, 2000. Morrison & Foerster's Internet and new media groups will be reviewing the district court's written opinion closely when it is issued in order to evaluate what effect the decision is likely to have.

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