A&M Records, Inc. v. Napster, Inc.

The Circuit Court dedicated much more of its opinion to Napster's attempted application of the fair use defense. The Circuit Court agreed with the District Court's "general analysis of Napster system uses" as well as with its analysis of the three types of fair use alleged by Napster, which were "sampling, where users make temporary copies of a work before purchasing; space shifting, where users access a sound recording through the Napster system that they already own in audio CD format; and permissive distribution of recordings by both new and established artists."[1]

The court first considered these four factors required for the fair use defense:

1. Downloading an MP3 is not transformative, and even though Napster didn't directly benefit financially from users' downloads (it did not charge for the service), "repeated and exploitative copying of copyrighted works, even if the copies are not offered for sale" could be considered a commercial use that requires authorization from copyright holders.
2. Creative works, such as the songs in question, are "closer to the core of intended copyright protection", thus favoring the plaintiffs.
3. In some cases, wholesale copying of a work may be allowable, with time shifting as an example.
4. Widespread wholesale transfer of plaintiffs' music negatively affected the market for CD sales and jeopardized the record industry's future in digital markets.[1]

Thus, the Circuit Court rejected Napster's argument that file sharing by its users qualified for the fair use defense. Napster's claims that it enabled legal sampling, space shifting, and permissive distribution (some artists had consented to the presence of their songs on the Napster service) were also rejected by the court. Furthermore, the court found that Napster could control the infringing behavior of the service's users, and therefore had a duty to do so. Therefore, Napster did not have a valid fair use defense.[1]

The District Court had ruled that the "law does not require knowledge of 'specific acts of infringement'"[1] and rejected Napster's assertion that, because it could not distinguish between infringing and non-infringing files, it did not have knowledge of copyright infringement by its users. The Ninth Circuit upheld this conclusion, holding that Napster had "knowledge, both actual and constructive, of direct infringement."[1]

The Ninth Circuit also held that Napster was not protected under Sony Corp. of America v. Universal City Studios, Inc.,[5] in which the Supreme Court ruled that media copying technologies were acceptable if they were unlikely to cause widespread copyright infringement beyond the original user. Because of Napster's "actual, specific knowledge of direct infringement," and the unlikelihood of non-infringing uses of Napster, "[W]e are compelled to make a clear distinction between the architecture of the Napster system and Napster's conduct in relation to the operational capacity of the system." Thus, the Circuit Court ruled in favor of the plaintiffs' contributory infringement claim against Napster.[1]

Addressing the vicarious infringement claim, the Circuit Court determined that Napster stood to benefit financially from the infringing activity, due to the network effects of potentially selling advertising space for a large population of users, and that Napster's ability to patrol and enforce infringing usage was limited by the design of the system itself. The system was not designed to read the contents of MP3s or check for copyright ownership or permissions. Because of Napster's failure to police within its means combined with the financial interest factor, the Ninth Circuit affirmed the District Court's finding of vicarious infringement.[1]

In its defense against the injunction, Napster also cited the Audio Home Recording Act (17 U.S.C. §§ 1001).[6] and the Digital Millennium Copyright Act's safe harbor clause (17 U.S.C. § 512),[7] claiming that Napster users only made allowable copies of files for their personal use, with no interest in wider distribution of unauthorized copies. The Ninth Circuit agreed with the District Court's finding that downloading MP3 files is not covered by the Audio Home Recording Act because online file sharing could spread unauthorized copies much more quickly than older forms of analog tape trading.[1]

Napster also argued that the record companies waived their rights to copyright protection because they "hastened" the spread of MP3s on the Internet and had their own plans to get into the digital market.[2] The Ninth Circuit rejected Napster's claim that, by creating and providing digital files via the Internet, the plaintiffs had granted Napster an "implied license" to enable the copying of music files.[1] Finally, Napster argued that the plaintiffs were misusing copyright law to control online distribution, which Napster considered beyond the scope of the limited ownership rights provided by copyright. The court rejected this argument as well, finding that MP3s were the same works as those that appeared on CDs, just in a different format, thus the plaintiffs had the ownership right to control the distribution of digital music.[1]

Napster contended that the original District Court injunction shutting down its operations violated the company's First Amendment rights because it was overbroad and restricted other user activities beyond copyright infringement. While the Ninth Circuit rejected this argument due to the lack of a fair use defense, it did order a stay of the original injunction and agreed that it was overbroad because "it places on Napster the entire burden of ensuring that no 'copying, downloading, uploading, transmitting, or distributing' of plaintiffs' works occur on the system."[1]

Recognizing that Napster's system simply indexed files with imperfect file names and did not automatically verify copyright ownership, the Circuit Court found that it was the plaintiffs' burden to notify Napster of any infringing files on the system, which Napster would then remove. But the court also again noted that Napster must police the system within its means: "In crafting the injunction on remand, the district court should recognize that Napster's system does not currently appear to allow Napster access to users' MP3 files."[1]

To determine whether Napster should be permitted to continue functioning, the Circuit Court remanded the case back to the District Court for another trial in which Napster would be required to show that it could keep track of user activities on its network and restrict access to infringing material by its users. Napster wasn't able to comply and thus had to close down its service in July 2001. The following year, Napster filed for bankruptcy and sold its assets to a third party.[8] The owners of the service settled with songwriters and music publishers, agreeing to pay $26 million.[9]