The Napster Decision: What's It All About?

The quick take: If the appeals court's decision foreshadows how the trial will pan out, it's certainly bad news for Napster, but it's equally bad news for consumers, Internet service providers, and, ultimately, the public enthusiasm for musical expression that the Internet has done so much to foster.
THE APPELLATE COURT'S FINDINGS

In a nutshell, here's what the appellate court concluded.

Finding #1: Napster Users Are Not Protected By The Fair Use Exemption

In U.S. copyright law, the exclusive rights of copyright holders are tempered by the fair use doctrine, which holds that copyrighted material can, under some circumstances, be reproduced or distributed without permission. This doctrine is intended to protect the free flow of essential information, analysis and commentary, without which a democracy cannot function. However, there are no hard and fast rules to determine exactly what constitutes fair use. When a fair use exemption is claimed in court, judges consider (1) the purpose and character of the use; (2) the nature of the copyrighted work; (3) the "amount and substantiality of the portion used" in relation to the work as a whole; and (4) the effect of the use upon the potential market for the work or the value of the work.

In brief, the appellate court determined the following:

<il>Purpose and character--To establish fair use, the reproduced work must be transformed in some way. For example, the use of a copyrighted work in a parody may qualify under the fair use guidelines, to the extent that the parody transforms the original work. Mere retransmission in a different medium doesn't qualify as "transformation" under the fair use guidelines. Napster argued that converting CD audios to MP3s "transformed" the works to the point that fair use could be claimed, but the appeals court didn't buy this argument.

Purpose and character also involves an assessment of whether the use was commercial or noncommercial. If the use was commercial, it's difficult to claim fair use. What's more, money needn't change hands to establish a commercial use. Repeated and exploitive copying can constitute commercial use if it is done to avoid the costs of purchasing the copyrighted works, and that's especially true if two strangers swap infringing copies to avoid the costs of purchasing the works. The appeals court found that those Napster users who traded copyrighted works are engaged in commercial copying, which means that fair use could be justified only if all of the other considerations favored a finding of fair use.

<il>Nature of the Use--The courts have consistently held that creative works deserve a higher level of protection under copyright law than works that are predominantly factual. The appeals court agreed the copied material was creative in nature.

<il>Portion of Work Used--To establish fair use, it's generally necessary to show that only a small proportion of the work was copied or reproduced, a portion sufficient for analysis or commentary. A work can be copied in its entirety under certain conditions; for example, a consumer can legally copy a broadcast television show in its entirety in order to watch the show at a later time. Napster argued that many of its users were engaged in "space shifting" (downloading MP3s of CDs they already owned), but the appeals court didn't buy it.

<il>Effect on the Market--Fair uses of copyrighted material should not harm the market for a copyrighted work. In reviewing the scanty and contradictory evidence that Napster downloads are hurting recording industry profits, the appeals court concluded the industry was indeed suffering irreparable losses due to the distribution of copyrighted works by Napster users, and the losses seemed likely to increase. What's more, the appeals court noted that, even if Napster isn't hurting the recording industry's profits right now, copyright holders have the right to develop alternative means to distribute copyrighted works. Napster's activities are causing irreparable harm to the recording industry, the judges concluded, by creating conditions under which it is nearly impossible for the recording industry to develop on-line distribution techniques that would incorporate adequate safeguards against user infringement.

The appeals court concluded that, to the extent Napster users swap copyrighted creative works in their entirety, they are not protected by the fair use exemption and are guilty of direct copyright infringement. Having established this point, the court went on to consider whether Napster is liable for contributory and vicarious copyright infringement. As you'll see, here's where the court's conclusions did not go entirely in the direction that the RIAA wanted.

Finding #2: Napster's Liability for Contributory Infringement Must Be Determined by the Trial

The plaintiffs alleged that Napster executives knowingly created a service to facilitate users' direct copyright infringement. That they knowingly did so is clear from Napster's own business plans, which were obtained and revealed at the preliminary hearing. However, court cases and recent legislation have altered the definition of "knowledge" when it comes to infringing works transmitted via an Internet service provider, which Napster claims to be. In the famous Betamax decision (Sony Corp. v. Universal City Studios), the US Supreme Court ruled that the makers of a recording technology cannot be held liable for contributory infringement, even if they know some users will use the equipment for infringing purposes, as long as the equipment also has substantial non-infringing uses.

The lower court refused to apply the Betamax decision to the Napster case, but the appeals court disagreed, finding that Napster indeed has "substantial non-infringing uses". Still, the appeals court noted that Napster could still be liable for contributory copyright infringement. In line with the DMCA and recent court decisions, an ISP can be held liable for contributory copyright infringement if it is notified that infringing material is present on its systems but fails to remove this material. At issue here is the plaintiffs' notification to Napster that its systems contained 12,000 infringing files. Napster terminated the accounts of these users, but, not surprisingly, the same songs were still available from other Napster users, and Napster took no steps to delete those accounts. The appeals court argued Napster ought to have done this, instead of hiding behind the claim that the system's architecture did not permit Napster's staff to perform policing tasks of this magnitude. Although the appeals court noted the weight of the evidence goes against Napster on this point, it concluded the truth of the matter will have to be determined in the trial.

Finding #3: Napster Appears to be Liable for Vicarious Infringement

Here, the appeals court agreed with the findings of the lower court: Napster gains financially by facilitating direct infringement by its users; by providing users with an incentive for using Napster's site, the company is building its "user base", which is, for Internet enterprises, a clear financial benefit. The appeals court further agreed with the lower court that Napster possesses both the right and means to detect the existence on its system of infringing material about which it had been notified; the company could, after all, use the same search services that Napster users employ.

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