FOR GERMANS, A BAD CASE OF NAPSTER.

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Author: Butler, Susan

LEGAL

Bertelsmann AG is in the same hot seat as illegitimate peer-to-peer services. A federal judge has held that the company's activities surrounding its $85 million loan to the original Napster will be scrutinized under the U.S. Supreme Court's "inducement" theory carved out in the Grokster case last year.

This marks one of the first applications of the Grokster ruling and could mean potential liability of millions of dollars for the media conglomerate that owns BMG Music Publishing and a 50% stake of Sony BMG.

The opinion came in the six-year lawsuit led by Universal Music Group and EMI Music against investors in the then-P2P Napster, which filed bankruptcy in 2001 and sold its name. Early in the suit, the court held that investors Bertelsmann and private equity partnership Hummer Winblad could be liable for secondary (i.e., contributory) copyright infringement if copyright holders could prove that the investors essentially had full operational control over the P2P network when it was a "conduit for infringing activity."

Defendants Bertelsmann and Hummer Winblad filed a motion asking the court to rule that they could only be held liable for works meeting three criteria: they were on a list provided to Napster by copyright holders; not removed by Napster; and known by the defendants not to have been removed.

Judge Marilyn Patel in San Francisco denied the motion on May 17, and held that the Grokster standard would apply to the case even though Bertelsmann's involvement with Napster occurred before the Supreme Court decision. Bertelsmann reportedly structured its convertible loan to Napster to comply with an injunction Patel had issued when she was initially hearing the Napster case.

Under the Grokster inducement theory, anyone who distributes a device "with the object of promoting its use to infringe copyright" is liable for the resulting acts of infringement by others. The distributor will be liable for infringing all copyrighted works, not just ones they have been provided in a list to that party.

Before the suit was filed in 2000, the RIAA notified Napster of more than 12,000 infringing recordings. If found liable for just these works, a judge or jury could award statutory damages under copyright law in an amount ranging from $9 million to $360 million for the recordings and the same range in damages for the compositions. If the actions of either investor were willful, the damages could total $3.6 billion.

Bertelsmann hotly contests this math. A company source says the 12,000 recordings have not been shown to be infringing transactions; any infringement occurred before its October 2000 investment; and that it would be unconstitutional to award billions in statutory damages when real-world damages would never reach more than several million.

Under Grokster, a party may prove inducement by showing that a company "took affirmative steps to foster infringement." Patel pointed out that the Supreme Court highlighted efforts made by Grokster and StreamCast to supply services to former Napster users as examples of possible inducement. In the Napster case, the labels will likely have to prove similar activities to hold Bertelsmann and Hummer Winblad liable.

Victory will be hard-won for anyone in this contentious case. Judge Patel questioned UMG and EMI over possible misrepresentations during a now-closed U.S. Department of Justice antitrust investigation into ownership of online music services, ordering the labels to produce confidential documents.

Meanwhile, the Grokster case continues against Morpheus owner StreamCast and Kazaa owner Sharman Networks in Los Angeles. The District Court must apply the Supreme Court's inducement guidelines to the facts in the case.

Grokster settled the case last November. A hearing on a motion to hold StreamCast liable for inducing infringement is scheduled for June 5.

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By Susan Butler