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

The Circuit Court agreed with the district court's threshold determination that Napster users were probably engaging in direct infringement of plaintiffs' copyrights.

Turning to the question of fair use, the Circuit court agreed with the district court's "general analysis of Napster system uses" as well as with its analysis of the three "alleged fair uses identified 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."

The court first considered these four factors on an abstract level of the system itself.

1. They agreed with the District Court's finding that downloading an MP3 is not transformative under the purpose and character of use factor, and that even though Napster didn't directly benefit financially from users' downloads (i.e., 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.
2. The court also affirmed the district court's finding that creative works, such as the songs in question, are "closer to the core" of intended copyright protection" than non-creative works, thus favoring the plaintiffs on the second factor.
3. They considered the potential that in some cases, wholesale copying of a work may be protected, noting time-shifting as an example.
4. Finally, the Ninth Circuit agreed with the district court's finding that widespread wholesale transfer of plaintiff's music negatively affected the market for CD sales and that it also jeopardizes the record industry's future in digital markets.[1]

The court then turned to the three uses Napster identified as fair use in the conduct of its users:

1. sampling, where users make temporary copies of a work to sample it before purchase, which the District Court found to be a commercial use even if a user purchases the work at a later time. Sampling was deemed to not be a fair use, because the "samples" were in fact permanent and complete copies of the desired media.
2. space-shifting, where users access a sound recording through the Napster system that they already own in audio CD format; here the District Court found that neither of the shifting analyses used in the Sony or RIAA v. Diamond Multimedia[10] cases applied in this case because the "shifting" in neither case included or enabled distribution. The space-shifting argument did not succeed because, while the shift to a digital format may have been a personal storage use, it was accompanied by making the file available to the rest of the system's users.
3. permissive distribution of recordings by both new and established artists who have authorized their music to be disseminated in the Napster system, which the District Court ruled was not an infringing use and could continue, along with chat rooms and other non-distributory features of Napster.

By contrast, the court found that the owners of Napster could control the infringing behavior of users, and therefore had a duty to do so. The Ninth Circuit affirmed this analysis, finding that the plaintiffs were likely to succeed in proving that Napster did not have a valid fair use defense.

In order to prove contributory infringement, a plaintiff must show that a defendant had knowledge of infringement (here, that Napster knew that its users were distributing copyrighted content without permission across its network) and that defendant supplied material support to that infringement.

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

The Ninth Circuit also held that Napster was not protected under Sony Corp. of America v. Universal City Studios, Inc., "the Betamax case", because of Napster's "actual, specific knowledge of direct infringement." "We 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."

• First, the Ninth Circuit acknowledged that it could not impute sufficient knowledge to Napster "merely because peer-to-peer file sharing technology may be used to infringe plaintiffs' copyrights." Paraphrased Sony into its own words, the Ninth Circuit explained that if a defendant "made and sold equipment capable of both infringing and substantial noninfringing uses," that fact alone—i.e., "evidence that such machines could be and were used to infringe plaintiffs' copyrighted television shows" – would not be sufficient grounds to impute constructive knowledge to defendants.
• The Court also assumed that Napster's software is "capable of commercially significant noninfringing uses." This analysis differed from the District Court's, which allowed "capable of" to be limited to the concrete uses that Napster alleged were actually underway.
• Nevertheless, the Ninth Circuit found that, "Regardless of the number of Napster's infringing versus noninfringing uses", the question could be resolved on the basis of whether "Napster knew or had reason to know of its users' infringement of plaintiffs' copyrights."
• Unlike Judge Patel, the Ninth Circuit accepted that Religious Technology Center v. Netcom might be relevant. Based on that case,

We agree that if a computer system operator learns of specific infringing material available on his system and fails to purge such material from the system, the operator knows of and contributes to direct infringement. ... Conversely, absent any specific information which identifies infringing activity, a computer system operator cannot be liable for contributory infringement merely because the structure of the system allows for the exchange of copyrighted material.

• Applying this rule, the Ninth Circuit nevertheless concluded—in agreement with the district court—

that Napster has actual knowledge that specific infringing material is available using its system, that it could block access to the system by suppliers of the infringing material, and that it failed to remove the material.

Material contribution. The Ninth Circuit briefly approved the district court's analysis of this element.

Thus, the court affirmed the District Court ruling that the plaintiffs were likely to succeed on a claim of contributory infringement.

Addressing the vicarious infringement claim, the court then considered the necessary factors: whether Napster benefited financially from the infringement and whether they were capable of supervising and controlling infringing conduct. The Ninth Circuit sided with the District Court, who held that the infringing activity was a draw to potential users and that, since Napster's future business model was predicated on expanding the number of users, Napster stood to benefit financially from the infringing activity. As for supervision, the Circuit court agreed in part with the District Court's finding that Napster had "the right and ability to supervise its users' conduct."[1] However, the Ninth Circuit felt that Napster's ability to patrol and enforce infringing use 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, only to index by name and ensure they are valid MP3 files. Despite this departure from the District Court's reasoning, they argued that these indices and infringing files were just as searchable by Napster as they were by the plaintiffs in locating infringing files for evidence in the case. 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. §§ 1001-10).[11] and the Digital Millennium Copyright Act's safe harbor clause (17 U.S.C. § 512).[12] The Ninth Circuit agreed with the District Court's finding that downloading MP3 files is not covered by the Audio Home Recording Act. The Ninth Circuit disagreed slightly with the District Court on the safe harbor issue, however, finding that the contributory infringement does not necessarily exclude a party from safe harbor protection. The court held that the safe harbor issue would be explored further at trial.[1]

Napster also argued that the record companies waived their rights to copyright protection because they "hastened" the spread of MP3s on the web and had their own plans to get into the digital market. Rejecting this argument, Judge Patel wrote, "This limited evidence fails to convince the court that the record companies created the monster that is now devouring their intellectual property rights."[4] The Ninth Circuit agreed, and also rejected Napster's claim that, by creating and providing digital files via the Internet, the plaintiffs had granted Napster an "implied license".[1] Finally, Napster argued that the plaintiffs were using copyright to control online distribution, which Napster considered beyond the scope of the limited monopoly provided by the Copyright Office. The court rejected this as well, finding that MP3s were the same works as those that appeared on CDs, just in a different format, thus the plaintiffs had every right to control their distribution of digital music files because they are the plaintiffs' copyrighted works.

Napster contended that the injunction violated the company's First Amendment rights because it was overbroad. While the Ninth Circuit rejected this argument due to the lack of a fair use defense, they did order a stay of the injunction and agreed that the injunction 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 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] The court also declined to adjust the bond amount and called imposition of a compulsory royalty scheme an "'easy out' for Napster" that would destroy the plaintiffs' ability to control their intellectual property.[1]