The court upheld the findings of a lower court almost universally, holding that Napster's service is not protected by fair use, is guilty of two kinds of copyright infringement, has failed to police its system in an attempt to stop the spread of copyrighted works and that its service does cause substantial harm to record companies.
"Napster, by its conduct, knowingly encourages and assists the infringement of [record company] copyrights," the court wrote in its decision, which one analyst said was no surprise.
Napster is guilty, the court said, of two types of copyright infringement: contributory and vicarious. Contributory infringement is the act of aiding knowingly in the infringement of copyright. Vicarious infringement is the result of having the power to stop the infringement and failing to do so, as well as benefitting financially from the infringement.
The court found that Napster is aware that infringing material is being traded on its service, that it could, if it chose, block those users supplying the material and that it has failed to do either, thus making the company a contributory infringer.
A failure to adequately monitor the system for such abuses, combined with a financial stake in the trading in copyrighted works makes the company responsible for vicarious infringement, the court said.
"Napster got nailed, plain and simple," said P.J. McNealy, an analyst with Gartner Group. "I'm not surprised that they got what they got."
Despite setting aside the vast majority of Napster's argument, the court stayed the injunction, thereby keeping the service running -- for now -- because it deemed the injunction "overbroad". The original injunction must be modified, the court said, so that Napster be only guilty of contributory infringement if it is given notice of specific copyrighted files, does or should know that they are on the system and then fails to act the stop their spread. With these provisions, the company will also be guilty of vicarious infringement only if it fails to act.
"The mere existence of the Napster system, absent actual notice and Napster's demonstrated failure to remove the offending material, is insufficient to impose ... liability," the court wrote. As such, the appeals court remanded the matter to the lower court to modify the injunction to comply with the new terms laid out. Until such modifications are made, the court said, Napster will remain active.
But probably not for long, McNealy said. He expects the service will "likely" be shut down within a few days. Napster could decide to voluntarily shut down, he said.
The ruling winds up being "a real testament to the language of the DMCA," he said, referring to the Digital Millennium Copyright Act, approved by the US Congress in 1998. "It was not so loosely written" as many contended, McNealy said. "It was defensible in court."
As might be expected, Napster chief executive officer Hank Barry issued a statement expressing disappointment in the ruling because "under this decision Napster could be shut down -- even before a trial on the merits".
The appeals court "ruled on the basis of what it recognised was an incomplete record before it," the statement said. "While we respect the court's decision, we believe ... that Napster users are not copyright infringers and we will pursue every legal avenue to keep Napster operating."
Napster founder Shawn Fanning also weighed in, saying in the statement that he is focused on developing a better service that will pay artists for their music. That system, he said, could be in place this year.
"The new technologies we are developing are amazing; I hope that, by further court review or by agreement with the record companies, we can find a way to share them with the community."
The ruling was the result of a lawsuit brought by the Recording Industry Association of America (RIAA) on behalf of the five major record labels -- BMG Entertainment, Warner Bros. Music Group, EMI Group, Sony Music Entertainment and Universal Music Group -- in December 1999.
The RIAA had asked the court to find the company guilty of copyright infringement and to shut down the service because it was causing its member companies irreparable harm. The trading of MP3 files, it said, amounted to stealing as it allowed users who had not purchased songs to download, play and store them. The RIAA charged that Napster executives knew that infringement was taking place and were contributing to it by providing the service.
The Napster service allows users to search for MP3 music files on the computers of other users online and download the tracks they want directly from those users, bypassing any central servers, a technique called peer-to-peer computing. The lack of central servers in the system was at the heart of Napster's defense. Because no copyrighted material resided on company servers, which only house directories of files, not the files themselves, Napster argued that it was not liable for any infringement being committed.
It could not be held liable, the company further argued, because in trading files its users were simply exercising their right to fair use. Fair use is a consumer right that allows private, non-commercial trading of copyrighted materials among friends and family. Napster argued that MP3-swapping was simply an extension of fair use for the Internet age and thus should be protected. The company further argued that the RIAA's own figures showed that music sales increased in 2000 and that Napster, therefore, was not causing harm, but rather was spurring sales.
Judge Marilyn H. Patel disagreed and issued an injunction against the company in late July, ordering that the service be shut down immediately, pending resolution of the trial. That injunction was stayed the next day, however, by a US Appeals Court. Monday's decision is the result of oral arguments made before the Ninth Circuit in October.
In late October, Napster signed a surprise agreement with Bertelsmann, the parent company of BMG, one of the record companies suing Napster, in which Napster pledged to create a secure, copyright-friendly subscription service in exchange for a reported investment of $US50 million and Bertelsmann dropping its suit. Since then, music companies TVT Records and edel music have also signed agreements with Napster. None of the four remaining major labels, widely seen as being integral to the success of such a service, have yet made any moves toward signing such deals. Napster's subscription service, which will also give Bertelsmann a hefty ownership stake in the company, will become available in June or July, a Bertelsmann executive said recently.
Bertelsmann applauded the ruling in a statement, which said that "today's decision is another step in the process of accommodating the legitimate rights of copyrights holders and the important insteres of Napster users."
The company wants to abide by the rights of artists, copyrights holders and the music industry "while also enabling Napster to provide music lovers with a first-class file-sharing system. That is why Bertelsmann did the deal with Napster in the first place and why we will redouble our efforts to reach a mutually satisfactory solution," the statement said.
Bertelsmann will continue to work on creating a membership-based Napster service, the statement said.
Napster has an estimated 50 million plus users.