United States Court of Appeals,
Ninth Circuit.
A&M RECORDS, INC., a corporation; Geffen Records, Inc., a corporation;
Interscope Records; Sony Music Entertainment, Inc.; MCA Records, Inc.;
Atlantic Recording Corp.; Island Records, Inc.; Motown Record Co.; Capitol
Records, Inc., Plaintiffs-Appellees,
v.
NAPSTER, INC., Defendant-Appellant.
Jerry Leiber, individually and doing business as, Jerry Leiber Music; Mike
Stoller and Frank Music Corp., on behalf of themselves and all others similarly
situated, Plaintiffs-Appellees,
v.
Napster, Inc., Defendant-Appellant.
Nos. 00-16401, 00-16403.
Argued and Submitted Oct. 2, 2000
Filed Feb. 12, 2001
As Amended April 3, 2001.
Record companies and music publishers brought
copyright infringement action against
Napster, an Internet service that facilitated the transmission and retention of
digital audio files by its users. The United States District Court for the
Northern District of California, Marilyn
Hall Patel, Chief District Judge, ruled on
admissibility of experts' reports, 2000
WL 1170106, and granted preliminary injunction in
favor of plaintiffs, 114
F.Supp.2d 896. Service appealed. The Court of
Appeals, Beezer, Circuit Judge, held that: (1) plaintiffs established
prima facie case of direct copyright infringement; (2) users' activities did
not amount to fair use of the copyrighted works; (3) plaintiffs demonstrated
likelihood of success on merits of contributory infringement claim; (4)
plaintiffs demonstrated likelihood of success on merits of vicarious
infringement claim; (5) Audio Home Recording Act was inapplicable; (6)
plaintiffs raised sufficiently serious questions, and established that balance
of hardships tipped in its favor, as to service's claim that it was entitled to
"safe harbor" under the Digital Millennium Copyright Act; (7) service
did not establish defenses of waiver, implied license, or copyright misuse; (8)
preliminary injunction was overbroad; (9) $5 million bond amount was
sufficient; and (10) service was not entitled to imposition of compulsory
royalties rather than preliminary injunction.
Affirmed in part, reversed in part, and
remanded.
West Headnotes
[1] Federal Courts 
815
Court of
Appeals reviews a grant or denial of a preliminary injunction for abuse of
discretion, and application of erroneous legal principles represents an abuse
of discretion by the district court.
[2] Federal Courts 776
If the
district court is claimed to have relied on an erroneous legal premise in
reaching its decision to grant or deny a preliminary injunction, Court of Appeals
will review the underlying issue of law de novo.
[3] Federal Courts 767
In
reviewing grant of preliminary injunction, Court of Appeals is required to
determine whether the court employed the appropriate legal standards governing the issuance of a preliminary injunction and
whether the district court correctly apprehended the law with respect to the
underlying issues in the case; as long as the district court got the law right,
it will not be reversed simply because the appellate court would have arrived
at a different result if it had applied the law to the facts of the case.
[4] Injunction 138.1
Preliminary
injunctive relief is available to a party who demonstrates either (1) a combination of probable success on the
merits and the possibility of irreparable harm, or (2) that serious questions
are raised and the balance of hardships tips in its favor; these two
formulations represent two points on a sliding scale in which the required
degree of irreparable harm increases as the probability of success decreases.
[5] Copyrights and Intellectual Property 77
Secondary
liability for copyright infringement does not exist in the absence of direct
infringement by a third party.
[6] Copyrights and Intellectual Property 83(3.1)
Plaintiffs
must satisfy two requirements to present a prima facie case of direct copyright
infringement: (1) they must show
ownership of the allegedly infringed material, and (2) they must demonstrate
that the alleged infringers violate at least one exclusive right granted to
copyright holders. 17
U.S.C.A. § § 106, 501(a).
[7] Copyrights and Intellectual Property 67.2
(Formerly 99k66)
Record
companies and music publishers that may have owned or administered more than
70% of files available on Internet service that facilitated transmission and
retention of digital audio files by its users established prima facie case of
direct copyright infringement by users of service, based on users' activities
of downloading and uploading copyrighted music, in violation of copyright
holders' exclusive rights of reproduction and distribution. 17
U.S.C.A. § 106(1, 3).
[8] Copyrights and Intellectual Property 67.2
(Formerly 99k66)
Uploading
and downloading of digital audio files containing copyrighted music, through
Internet service that facilitated transmission and retention of such files by
its users, was not fair use of copyrighted works, as such use was not
transformative, use was commercial in that it could save users the expense of
purchasing authorized copies, works were creative in nature and were copied in
their entirety, and such use could impair market for the works by reducing
sales and raising barrier to copyright owners' entry into market for digital
downloading of music. 17
U.S.C.A. § 107.
[9] Copyrights and Intellectual Property 53.2
Fair use
factor which looks at the purpose and character of the use of a copyrighted
work focuses on whether the new work merely replaces the object of the original
creation or instead adds a further purpose or different character; the factor
asks whether and to what extent the new work is transformative. 17
U.S.C.A. § 107(1).
[10] Copyrights and Intellectual Property 53.2
Fair use
factor which looks at the purpose and character of the use of a copyrighted
work requires the district court to determine whether the allegedly infringing
use is commercial or noncommercial; a commercial use weighs against a finding
of fair use but is not conclusive on the issue.
17
U.S.C.A. § 107(1).
[11] Copyrights and Intellectual Property 53.2
Direct
economic benefit is not required to demonstrate a commercial use, for purpose
of fair use factor which looks at the purpose and character of the use of a
copyrighted work; rather, repeated and exploitative copying of copyrighted
works, even if the copies are not offered for sale, may constitute a commercial
use. 17
U.S.C.A. § 107(1).
[12] Copyrights and Intellectual Property 12(1)
Works that
are creative in nature are closer to the core of intended copyright protection
than are more fact-based works.
[13] Copyrights and Intellectual Property 53.2
While
wholesale copying of a copyrighted work does not preclude fair use per se,
copying an entire work militates against a finding of fair use. 17
U.S.C.A. § 107.
[14] Copyrights and Intellectual Property 53.2
Under
certain circumstances, the use of a copyrighted work may be a fair use even
when the protected work is copied in its entirety. 17
U.S.C.A. § 107.
[15] Copyrights and Intellectual Property 53.2
Fair use, when properly applied, is
limited to copying by others which does not materially impair the marketability
of the work which is copied, and the importance of the fair use factor that
looks at the effect of use on the market will vary, not only with the amount of
harm, but also with the relative strength of the showing on the other relevant
factors. 17
U.S.C.A. § 107(4).
[16] Copyrights and Intellectual Property 83(1)
[16]
Copyrights and Intellectual Property 83(3.1)
A
challenge to a noncommercial use of a copyrighted work, which is alleged to be
a fair use, requires proof either that the particular use is harmful, or that
if it should become widespread, it would adversely affect the potential market
for the copyrighted work; if the intended use is for commercial gain, the
likelihood of market harm may be presumed, but if it is for a noncommercial
purpose, the likelihood must be demonstrated.
17
U.S.C.A. § 107(4).
[17] Copyrights and Intellectual Property 36
[17]
Copyrights and Intellectual Property 53(1)
Lack of
harm to an established market by infringer's activities cannot deprive the
copyright holder of the right to develop alternative markets for its works.
[18] Copyrights and Intellectual Property 85
Record
companies and music publishers were likely to prevail on their claim that
specific activity of sampling music in order to decide whether to purchase a
copyrighted recording, by users of Internet service that facilitated
transmission and retention of digital audio files, was not fair use of
copyrighted musical works, for purpose of companies' and publishers' motion for
preliminary injunction, as such use was commercial in nature and had adverse
impact on markets for audio compact discs (CDs) and digital downloads; evidence
that sampling could increase sales of audio CDs would not deprive copyright owners
of their rights to license the works and to develop alternative markets such as
the digital download market. 17
U.S.C.A. § 107.
[19] Copyrights and Intellectual Property 67.2
(Formerly 99k66)
Activities
of users of Internet service that facilitated transmission and retention of
digital audio files, which consisted of downloading such files in order to
listen to music that user already owned on audio compact disc (CD), did not
amount to mere "space-shifting" for purpose of fair use analysis, as
alleged space-shifting involved distribution of copyrighted material to the
general public, not just exposure of work to the original user. 17
U.S.C.A.
[20] Copyrights and Intellectual Property 77
Traditionally,
one who, with knowledge of the infringing activity, induces, causes, or
materially contributes to the infringing conduct of another, may be held liable
as a contributory copyright infringer; liability exists if the defendant
engages in personal conduct that encourages or assists the infringement.
[21] Copyrights and Intellectual Property 85
Record
companies and music publishers were likely to succeed on merits of contributory
infringement claim against Internet service that facilitated transmission and
retention of digital audio files by its users, for purpose of companies' and
publishers' motion for preliminary injunction, in view of evidence that service
had actual knowledge that specific infringing material was available using its
system, that it could block access to system by suppliers of infringing
material, that it failed to remove infringing material, and that service
materially contributed to infringing activity by providing site and facilities
for direct infringement.
[22] Copyrights and Intellectual Property 77
Contributory
liability for copyright infringement requires that the secondary infringer know
or have reason to know of direct infringement.
[23] Copyrights and Intellectual Property 77
In
determining whether Internet service that facilitated transmission and
retention of digital audio files by its users had knowledge of alleged direct
infringement of copyrighted musical works by users, for purpose of contributory
infringement claim, district court should have considered system's capabilities
for noninfringing uses, in addition to current infringing uses.
[24] Copyrights and Intellectual Property 77
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, but, 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.
[25] Copyrights and Intellectual Property 85
Record companies and music publishers were
likely to succeed on merits of claim of vicarious copyright infringement
against Internet service that facilitated transmission and retention of digital
audio files by its users, for purpose of companies' and publishers' motion for
preliminary injunction, in view of evidence that service had direct financial
interest in the infringing activity and that service had limited right and
ability to police its system but failed to exercise that right to prevent the
exchange of copyrighted material.
[26] Copyrights and Intellectual Property 77
Vicarious
copyright liability is an outgrowth of respondeat superior, but vicarious
liability extends beyond an employer/employee relationship to cases in which a
defendant has the right and ability to supervise the infringing activity and
also has a direct financial interest in such activities.
[27] Copyrights and Intellectual Property 77
Financial
benefit that may support claim of vicarious copyright infringement exists where
the availability of infringing material acts as a draw for customers.
[28] Copyrights and Intellectual Property 77
To escape
imposition of vicarious liability for copyright infringement, a reserved right
to police infringing activity must be exercised to its fullest extent; turning
a blind eye to detectable acts of infringement for the sake of
profit
gives rise to liability.
[29] Copyrights and Intellectual Property 67.2
(Formerly 99k66)
Audio Home
Recording Act section precluding copyright infringement actions based on
manufacture, importation, or distribution of digital audio recording device or
digital audio recording medium, or based on noncommercial use by a consumer of
such a device or medium for making digital musical recordings, did not extend
to downloading of digital audio files to computer hard drives; computers and
their hard drives were not "digital audio recording devices" because
their primary purpose was not to make digital audio copied recordings, and computers did not make digital music
recordings as defined by the Act. 17
U.S.C.A. § 1008.
[30] Copyrights and Intellectual Property 85
Record
companies and music publishers alleging contributory and vicarious copyright
infringement by Internet service that facilitated transmission and retention of
digital audio files by its users raised sufficiently serious questions, and
established that balance of hardships tipped in its favor, as to service's
claim that Digital Millennium Copyright Act's "safe harbor" provision
protected service from liability, for purpose of companies' and publishers'
motion for preliminary injunction. 17
U.S.C.A. § 512.
[31] Copyrights and Intellectual Property 40
Waiver or
abandonment of copyright occurs only if there is an intent by the copyright
proprietor to surrender rights in his work.
[32] Copyrights and Intellectual Property 40
[32]
Copyrights and Intellectual Property 75
Record
companies' and music publishers' alleged acts of providing consumers with
technology designed to copy and distribute digital audio files over the
Internet did not amount to waiver of companies' and publishers' legal authority
to exercise exclusive control over creation and distribution of such files, and
thus did not preclude their copyright infringement claims against Internet
service that facilitated transmission and retention of digital audio files by
its users.
[33] Federal Courts 820
[33] Federal
Courts 823
The denial
of an evidentiary hearing is reviewed for abuse of discretion, as is the
court's decision to deny further discovery.
[34] Copyrights and Intellectual Property 48
Record
companies and music publishers alleging contributory and vicarious copyright
infringement by Internet service that facilitated transmission and retention of
digital audio files by its users did not grant implied license to service
merely by encouraging file exchange over the Internet.
[35] Copyrights and Intellectual Property 75
The
defense of "copyright misuse" forbids a copyright holder from
securing an exclusive right or limited monopoly not granted by the Copyright
Office.
[36] Copyrights and Intellectual Property 75
Record
companies and music publishers alleging contributory and vicarious copyright
infringement by Internet service that facilitated transmission and retention of
digital audio files by its users did not engage in copyright
misuse by seeking to control online
distribution of copyrighted works; there was no evidence that companies and
publishers sought to control areas outside of their grant of monopoly but only
that they sought to control reproduction and distribution of their copyrighted
works, which were among their exclusive rights as copyright holders. 17
U.S.C.A. § 106.
[37] Copyrights and Intellectual Property 85
Scope of
preliminary injunction entered against Internet service that facilitated
transmission and retention of digital audio files by its users, in copyright
infringement action brought by record companies and music publishers, which
placed on service the entire burden of ensuring that no copying, downloading,
uploading, transmitting, or distributing of plaintiffs' works occurred on the
system, was overbroad; contributory liability was to be imposed only to the
extent that plaintiffs provided notice to service of copyrighted works and
files containing such works, since only with such notice would service have
duty to disable access to offending content.
[38] Constitutional Law 1603
[38]
Copyrights and Intellectual Property 85
First
Amendment concerns in copyright are allayed by the presence of the fair use
doctrine, and uses of copyrighted material that are not fair uses are
rightfully enjoined. U.S.C.A.
Const.Amend. 1;
17
U.S.C.A. § 107.
[39] Copyrights and Intellectual Property 85
Bond of $5
million imposed by district court upon granting preliminary injunction in favor
of record companies and music publishers, in their action alleging copyright
infringement by Internet service that facilitated transmission and retention of
digital audio files by its users, was not abuse of discretion, although service
alleged that its value was between $1.5 and $2 billion; district court
considered competing evidence of service's value and the deleterious effect
that any injunction would have upon its system. Fed.Rules
Civ.Proc.Rule 65(c), 28 U.S.C.A.
[40] Federal
Courts 815
Court of
Appeals reviews objections to the amount of a bond granted in connection with a
preliminary injunction for abuse of discretion.
Fed.Rules
Civ.Proc.Rule 65(c), 28 U.S.C.A.
[41] Copyrights and Intellectual Property 85
[41]
Copyrights and Intellectual Property 87(1)
Internet
service that facilitated transmission and retention of digital audio files by
its users was not entitled to imposition of compulsory royalty, rather than
preliminary injunction, in copyright infringement action brought by record
companies and music publishers, as case did not involve any special
circumstances, and injunction would not cause great public injury. 17
U.S.C.A. § 115.
*1009
David Boies, Jonathan
Schiller and Robert
Silver, Boies, Schiller
& Flexner, Armonk, New York, Laurence
F. Pulgram, David
L. Hayes, Daniel
Johnson, Jr. and Darryl
M. Woo, Fenwick & West, Palo Alto,
California, for defendant-appellant.
Russell
J. Frackman (argued), George
M. Borkowski, Jeffrey
D. Goldman, Roy
L. Shults, Peter
B. Gelblum, Mitchell Silberberg & Knupp LLP,
Los Angeles, CA, Leon
P. Gold, Hank
Goldsmith, Lawrence
I. Weinstein, Frank
P. Scibilia, Proskauer Rose LLP, New York, New
York, Steven
B. Fabrizio, Recording Industry Ass'n of America,
Inc., Washington, DC, for A & M Records, Inc. Plaintiffs-Appellees.
Carey
R. Ramos (argued), Aidan
Synnott, Michael
C. Keats, Lewis
E. Farberman, Paul Weiss Rifkind Wharton &
Garrison, New York, New York, Jeffrey
G. Knowles, Keith
Evans-Orville, Julia
D. Greer, Coblentz, Patch, Duffy & Bass LLP,
San Francisco, California, for Leiber plaintiffs-appellees.
Hannah
Bentley, San Anselmo, California, for amicus
Casanova Records.
Andrew
P. Bridges, Wilson, Sonsini, Goodrich &
Rosati, Palo Alto, California, for amicus Digital Media Association.
Bruce
G. Joseph, Thomas
W. Kirby, and Scott
E. Bain, Wiley, Rein & Fielding, Washington,
D.C., for amici Ad Hoc Copyright Coalition;
Commercial Internet Exchange;
Computer & Communications Industry Association; Information
Technology Association of America;
Netcoalition.com; United States Internet Industry Association, and
United States Telecommunications Association.
Scott R. McIntosh, Civil Division, Department
of Justice, Washington, D.C., for amicus United States.
Ann
Brick, San Francisco, California, for amici
American Civil Liberties Union and the American Civil Liberties Union of
Northern California.
Judith
B. Jennison, Perkins Coie, San Francisco,
California, for amicus Scour, Inc.
Ralph
Oman, Dechert, Price & Rhoads, Washington,
D.C., as amicus.
Christopher
Tayback, Quinn, Emanuel, Urquhart, Oliver &
Hedges, Los Angeles, California, for amicus National Academy of Recording Arts
& Sciences.
*1010
E. Edward Bruce, Covington & Burling,
Washington, D.C., for amicus Business Software Alliance.
Kevin
T. Baine, Williams & Connolly, Washington,
D.C., for amici Motion Picture Association of America, Inc., Software &
Information Industry Association, American Film Marketing Association,
Association of American Publishers, American Society of Media Photographers,
Professional Photographers Association, Graphic Artists Guild, Interactive
Digital Software Association, American Society of Composers, Authors and Publishers,
Broadcast Music, Inc., Producers Guild of America, Directors Guild of America,
Inc., Writers Guild of America, West, Inc., American Federation of Musicians of
the United States and Canada, Reed Elsevier,
Inc., American Federation of Television and Radio Artists, Office of the
Commissioner of Baseball, Songwriters Guild of America, and AmSong, Inc.; Joel M. Litvin, New York, New York, for
amicus National Basketball Association.
Salvatore
A. Romano, Seyfarth, Shaw, Washington, D.C., for
amici National Association of Recording Merchandisers, Inc. and Video Software
Dealers Association.
Erwin
Chemerinsky, University of Southern California
School of Law, Los Angeles, California, for amicus Law Professors Erwin
Chemerinsky, Kenneth L. Karst, Steven Shiffrin, Rodney A. Smolla and Marcy
Strauss.
Barry I. Slotnick, Richards & O'Neil, New
York, New York, for amicus Association for Independent Music.
Morton
David Goldberg, Cowan, Liebowitz & Latman,
New York, New York, for amici Alliance Entertainment Corp., Audible Inc., Blue
Spike, Inc., The Clandestine Group, Inc., Digimarc Corporation, Digital Media
on Demand, Inc., FullAudio Corporation, InterTrust Technologies Corporation,
Oak Technology, Inc., Reciprocal, Inc., RioPort, Inc., RPK SecureMedia Inc.,
Verance Corporation, and VNU USA, Inc.
Richie
T. Thomas, Squire, Sanders & Dempsey,
Washington, D.C., for amici Consumer Electronics Association, Digital Future
Coalition, and Computer & Communications Industry Association.
Karen B. Tripp, Houston, Texas, for amici
Association of American Physicians & Surgeons, Inc. and Eagle Forum
Education and Legal Defense Fund.
Professor Jessica Litman, Wayne State
University Law School, Detroit, Michigan;
Professor Keith Aoki, University of Oregon School of Law; Professor Ann
Bartow, University of South Carolina School of
Law; Professor Dan Burk, University of Minnesota; Professor Julie
Cohen, Georgetown University School of Law; Professors Christine Haight Farley and Peter
Jaszi, Washington College of Law, American University; Professor Lydia Pallas
Loren, Lewis and Clark College Northwestern School of Law; Professor Pamela Samuelson, Boalt Hall School
of Law, University of California Berkeley;
Professor Shubha
Ghosh, University at Buffalo, SUNY; Professors Paul J. Heald, Allen Post
Professor of Law, L.
Ray Patterson, Pope Brock Professor of Law, and Laura
N. Gasaway, University of Georgia School of
Law; Professor Michael
Madison, University of Pittsburgh School of
Law; Professor Ruth Okediji, University
of Oklahoma Law School; Alfred
C. Yen, Associate Dean for Academic Affairs and
Professor of Law, Boston College Law School;
Professor Diame Zimmerman, New York University School of Law, and
Professor Dennis Karjala, Arizona State University College of Law, for amicus
Copyright Law Professors.
Appeal from the United States District Court
for the Northern District of California; Marilyn
Hall Patel, Chief District Judge, Presiding. D.C. Nos. CV-99-05183-MHP, CV-00-00074-MHP.
Before:
SCHROEDER, Chief Judge, BEEZER and PAEZ, Circuit Judges.
BEEZER, Circuit Judge:
Plaintiffs are engaged in the commercial
recording, distribution and sale of copyrighted *1011 musical
compositions and sound recordings. The
complaint alleges that Napster, Inc. ("Napster") is a contributory
and vicarious copyright infringer. On
July 26, 2000, the district court granted plaintiffs' motion for a preliminary
injunction. The injunction was slightly
modified by written opinion on August 10, 2000.
A
& M Records, Inc. v. Napster, Inc.,
114 F.Supp.2d 896 (N.D.Cal.2000). The district court preliminarily enjoined
Napster "from engaging in, or facilitating others in copying, downloading,
uploading, transmitting, or distributing plaintiffs' copyrighted musical
compositions and sound recordings, protected by either federal or state law,
without express permission of the rights owner." Id.
at 927. Federal
Rule of Civil Procedure 65(c) requires successful
plaintiffs to post a bond for damages incurred by the enjoined party in the
event that the injunction was wrongfully issued. The district court set bond in this case at $5 million.
We entered a temporary stay of the preliminary
injunction pending resolution of this appeal.
We have jurisdiction pursuant to 28
U.S.C. § 1292(a)(1). We affirm in part, reverse in part and remand.
I
We have examined the papers submitted in
support of and in response to the injunction application and it appears that
Napster has designed and operates a system which permits the transmission and
retention of sound recordings employing digital technology.
In 1987, the Moving Picture Experts Group set
a standard file format for the storage of audio recordings in a digital format
called MPEG-3, abbreviated as "MP3." Digital MP3 files are created
through a process colloquially called "ripping." Ripping software allows a computer owner to
copy an audio compact disk ("audio CD") directly onto a computer's
hard drive by compressing the audio information on the CD into the MP3
format. The MP3's compressed format
allows for rapid transmission of digital audio files from one computer to another
by electronic mail or any other file transfer protocol.
Napster facilitates the transmission of MP3
files between and among its users.
Through a process commonly called "peer-to-peer" file sharing,
Napster allows its users to: (1) make
MP3 music files stored on individual computer hard drives available for copying
by other Napster users; (2) search for
MP3 music files stored on other users'
computers; and (3) transfer exact copies
of the contents of other users' MP3 files from one computer to another via the
Internet. These functions are made
possible by Napster's MusicShare software, available free of charge from
Napster's Internet site, and Napster's network servers and server-side
software. Napster provides technical
support for the indexing and searching of MP3 files, as well as for its other
functions, including a "chat room," where users can meet to discuss
music, and a directory where participating artists can provide information
about their music.
A. Accessing the System
In order to copy MP3 files through the Napster
system, a user must first access Napster's Internet site and download [FN1] the MusicShare software to his individual computer. See http://www.Napster.com. Once the
software is installed, the user can access the Napster system. A first-time user is required to register
with the Napster system by creating a "user name" and password.
FN1. "To
download means to receive information, typically a file, from another computer
to yours via your modem.... The
opposite term is upload, which means to send a file to another
computer." United
States v. Mohrbacher,
182 F.3d 1041, 1048 (9th Cir.1999) (quoting Robin
Williams, Jargon, An Informal Dictionary of Computer Terms 170-71
(1993)).
If a registered user wants to list available
files stored in his computer's hard drive on Napster for others to access, he *1012
must first create a "user library" directory on his computer's hard
drive. The user then saves his MP3
files in the library directory, using self-designated file names. He next must log into the Napster system
using his user name and password. His
MusicShare software then searches his user library and verifies that the available
files are properly formatted. If in the
correct MP3 format, the names of the MP3 files will be uploaded from the user's
computer to the Napster servers. The
content of the MP3 files remains stored in the user's computer.
Once uploaded to the Napster servers, the
user's MP3 file names are stored in a server-side "library" under the
user's name and become part of a "collective directory" of files
available for transfer during the time the user is logged onto the Napster system. The collective directory is fluid; it tracks users who are connected in real
time, displaying only file names that are immediately accessible.
C. Searching For Available Files
Napster allows a user to locate other users'
MP3 files in two ways: through Napster's
search function and through its "hotlist" function.
Software located on the Napster servers
maintains a "search index" of Napster's
collective directory. To search the
files available from Napster users currently connected to the network servers,
the individual user accesses a form in the MusicShare software stored in his
computer and enters either the name of a song or an artist as the object of the
search. The form is then transmitted to
a Napster server and automatically compared to the MP3 file names listed in the
server's search index. Napster's server
compiles a list of all MP3 file names pulled from the search index which
include the same search terms entered on the search form and transmits the list
to the searching user. The Napster
server does not search the contents of any MP3 file; rather, the search is
limited to "a text search of the file names indexed in a particular
cluster. Those file names may contain
typographical errors or otherwise inaccurate descriptions of the content of the
files since they are designated by other users." Napster,
114 F.Supp.2d at 906.
To use the "hotlist" function, the
Napster user creates a list of other users' names from whom he has obtained MP3
files in the past. When logged onto
Napster's servers, the system alerts the user if any user on his list (a
"hotlisted user") is also logged onto the system. If so, the user can access an index of all
MP3 file names in a particular hotlisted user's library and request a file in
the library by selecting the file name.
The contents of the hotlisted user's MP3 file are not stored on the
Napster system.
D. Transferring Copies of an MP3 file
To
transfer a copy of the contents of a requested MP3 file, the Napster server
software obtains the Internet address of the requesting user and the Internet
address of the "host user" (the user with the available files). See generally Brookfield
Communications, Inc. v. West Coast Entm't Corp.,
174 F.3d 1036, 1044 (9th Cir.1999) (describing,
in detail, the structure of the Internet).
The Napster servers then communicate the host user's Internet address to
the requesting user. The requesting
user's computer uses this information to establish a connection with the host
user and downloads a copy of the contents of the MP3 file from one computer to
the other over the Internet, "peer-to-peer." A downloaded MP3 file can be played directly
from the user's hard drive using Napster's MusicShare program or other
software. The file may also be transferred back onto an audio CD if the user
has access to equipment designed for that purpose. In both cases, the quality of the original
sound recording is slightly diminished by transfer to the MP3 format.
This architecture is described in some detail
to promote an understanding of transmission mechanics as opposed to the content
of the transmissions. The content *1013
is the subject of our copyright infringement analysis.
II
[1][2] We review a grant or denial of a preliminary injunction
for abuse of discretion. Gorbach
v. Reno,
219 F.3d 1087, 1091 (9th Cir.2000) (en
banc). Application of erroneous legal
principles represents an abuse of discretion
by the district court. Rucker
v. Davis,
237 F.3d 1113, 1118-19 (9th Cir.2001) (en
banc). If the district court is claimed
to have relied on an erroneous legal premise in reaching its decision to grant
or deny a preliminary injunction, we will review the underlying issue of law de
novo. Id.
at 1118 (citing Does
1-5 v. Chandler,
83 F.3d 1150, 1152 (9th Cir.1996)).
[3] On review, we are required to determine, "whether the
court employed the appropriate legal standards governing the issuance of a
preliminary injunction and whether the district court correctly apprehended the
law with respect to the underlying issues in the case." Id. "As long as the district
court got the law right, 'it will not be reversed simply because the appellate
court would have arrived at a different result if it had applied the law to the
facts of the case.' " Gregorio
T. v. Wilson,
59 F.3d 1002, 1004 (9th Cir.1995) (quoting Sports
Form, Inc. v. United Press, Int'l,
686 F.2d 750, 752 (9th Cir.1982)).
[4] Preliminary injunctive relief is available to a party who
demonstrates either: (1) a combination
of probable success on the merits and the possibility of irreparable harm; or (2) that serious questions are raised and
the balance of hardships tips in its favor.
Prudential
Real Estate Affiliates, Inc. v. PPR Realty, Inc.,
204 F.3d 867, 874 (9th Cir.2000). "These two formulations represent two
points on a sliding scale in which the required degree
of irreparable harm increases as the probability of success
decreases." Id.
III
[5] Plaintiffs claim Napster users are engaged in the
wholesale reproduction and distribution of copyrighted works, all constituting
direct infringement. [FN2] The district court agreed. We note that the district court's conclusion
that plaintiffs have presented a prima facie case of direct infringement by
Napster users is not presently appealed by Napster. We only need briefly address the threshold
requirements.
FN2. Secondary
liability for copyright infringement does not exist in the absence of direct
infringement by a third party. Religious
Tech. Ctr. v. Netcom On-Line Communication Servs., Inc.,
907 F.Supp. 1361, 1371 (N.D.Cal.1995)
("[T]here can be no contributory infringement by a defendant without
direct infringement by another.").
It follows that Napster does not facilitate infringement of the
copyright laws in the absence of direct infringement by its users.
A. Infringement
[6][7] Plaintiffs must satisfy two requirements to present a
prima facie case of direct infringement:
(1) they must show ownership of the allegedly infringed material and (2) they must
demonstrate that the alleged infringers violate at least one exclusive right
granted to copyright holders under 17
U.S.C. § 106. See 17
U.S.C. § 501(a) (infringement occurs when alleged infringer engages in
activity listed in § 106); see also Baxter
v. MCA, Inc.,
812 F.2d 421, 423 (9th Cir.1987); see, e.g., S.O.S.,
Inc. v. Payday, Inc.,
886 F.2d 1081, 1085 n. 3 (9th Cir.1989)
("The word 'copying' is shorthand for the infringing of any of the
copyright owner's five exclusive rights...."). Plaintiffs have sufficiently demonstrated
ownership. The record supports the
district court's determination that "as much as eighty-seven percent of
the files available on Napster may be copyrighted and more than seventy percent
may be owned or administered by plaintiffs." Napster,
114 F.Supp.2d at 911.
The district court further determined that
plaintiffs' exclusive rights under § 106 were
violated: "here the evidence
establishes *1014 that a majority of Napster users use the service to
download and upload copyrighted music....
And by doing that, it constitutes--the uses constitute direct
infringement of plaintiffs' musical compositions, recordings." A
& M Records, Inc. v. Napster, Inc.,
Nos. 99-5183, 00-0074, 2000 WL 1009483, at *1 (N.D.Cal. July 26, 2000) (transcript of proceedings). The district court also noted that "it
is pretty much acknowledged ... by Napster that this is
infringement." Id. We agree that
plaintiffs have shown that Napster users infringe
at least two of the copyright holders' exclusive rights: the rights of reproduction, § 106(1); and distribution, § 106(3). Napster users who upload file names to the
search index for others to copy violate plaintiffs' distribution rights. Napster users who download files containing
copyrighted music violate plaintiffs' reproduction rights.
Napster asserts an affirmative defense to the
charge that its users directly infringe plaintiffs' copyrighted musical
compositions and sound recordings.
B. Fair Use
[8] Napster contends that its users do not directly infringe
plaintiffs' copyrights because the users are engaged in fair use of the
material. See 17
U.S.C. § 107
("[T]he fair use of a copyrighted work ... is not an infringement of copyright."). Napster identifies three specific alleged
fair uses: 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 district court considered factors listed
in 17
U.S.C. § 107,
which guide a court's fair use determination.
These factors are: (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. See 17
U.S.C. § 107. The district court first conducted a general
analysis of Napster system uses under § 107, and then
applied its reasoning to the alleged fair uses identified by Napster. The district court concluded that Napster
users are not fair users. [FN3] *1015
We agree. We first address the court's
overall fair use analysis.
FN3. Napster asserts
that because plaintiffs seek injunctive relief, they have the burden of showing
a likelihood that they would prevail against any affirmative defenses raised by
Napster, including its fair use defense under 17
U.S.C. § 107. See Atari
Games Corp. v. Nintendo,
975 F.2d 832, 837 (Fed.Cir.1992) (following Ninth
Circuit law, and stating that plaintiff must show likelihood of success on
prima facie copyright infringement case and likelihood that it would overcome
copyright misuse defense); see also Dr.
Seuss Enters. v. Penguin Books USA,
924 F.Supp. 1559, 1562 (S.D.Cal.1996) ("The
plaintiff's burden of showing a likelihood of success on the merits includes
the burden of showing a likelihood that it would prevail against any
affirmative defenses raised by the defendant."), aff'd, 109
F.3d 1394 (9th Cir.1997); Religious
Tech. Ctr. v. Netcom On-Line Communication Servs.,
923 F.Supp. 1231, 1242 n. 12 (1995) (same); 2 William W. Schwarzer et al., California
Practice Guide, Federal Civil Procedure
Before Trial ¶ 13:47 (2000)
(advising that when a preliminary injunction is sought "plaintiff must
demonstrate a likelihood of prevailing on any affirmative defense as well as on
plaintiff's case in chief"). But
see Fair Use of Copyrighted Works, H.R.
Rep. 102-836 n.3 (criticizing a Northern District
of New York case in which "the district court erroneously held that where
the copyright owner seeks a preliminary injunction, the copyright owner bears
the burden of disproving the [fair use] defense"); see also 1 William F. Patry, Copyright
Law & Practice, 725, 725 n.27 (1994) (citing cases placing burden on
defendant at preliminary injunction stage).
The district court stated that "defendant bears the
burden of proving ... affirmative defenses." Napster,
114 F.Supp.2d at 912. Plaintiffs assert that the district court
did not err in placing the burden on Napster.
We conclude that even if plaintiffs bear the burden of establishing that
they would likely prevail against Napster's affirmative defenses at the
preliminary injunction stage, the record supports the district court's
conclusion that Napster users do not engage in fair use of the copyrighted
materials.
1. Purpose and Character of the Use
[9] This factor focuses on whether the new work merely
replaces the object of the original creation
or instead adds a further purpose or different character. In other words, this factor asks
"whether and to what extent the new work is 'transformative.' " See Campbell
v. Acuff-Rose Music, Inc.,
510 U.S. 569, 579, 114 S.Ct. 1164, 127 L.Ed.2d 500 (1994).
The district court first concluded that
downloading MP3 files does not transform the copyrighted work. Napster,
114 F.Supp.2d at 912. This conclusion is supportable. Courts have been reluctant to find fair use
when an original work is merely retransmitted in a different medium. See, e.g., Infinity
Broadcast Corp. v. Kirkwood,
150 F.3d 104, 108 (2d Cir.1998) (concluding that
retransmission of radio broadcast over telephone lines is not
transformative); UMG
Recordings, Inc. v. MP3.com, Inc.,
92 F.Supp.2d 349, 351 (S.D.N.Y.) (finding that
reproduction of audio CD into MP3 format does not "transform" the
work), certification denied, 2000
WL 710056 (S.D.N.Y. June 1, 2000)
("Defendant's copyright infringement was clear, and the mere fact that it
was clothed in the exotic webbing of the Internet does not disguise its
illegality.").
[10] This "purpose and character" element also
requires the district court to determine whether the allegedly infringing use
is commercial or noncommercial. See Campbell,
510 U.S. at 584-85, 114 S.Ct. 1164. A commercial use weighs against a finding of
fair use but is not conclusive on the issue.
Id. The district court determined that Napster users engage in commercial use of the copyrighted materials
largely because (1) "a host user sending a file cannot be said to engage
in a personal use when distributing that file to an anonymous requester"
and (2) "Napster users get for free something they would ordinarily have
to buy." Napster,
114 F.Supp.2d at 912. The district court's findings are not
clearly erroneous.
[11] Direct economic benefit is not required to demonstrate a
commercial use. Rather, repeated and
exploitative copying of copyrighted works, even if the copies are not offered
for sale, may constitute a commercial use.
See Worldwide
Church of God v. Philadelphia Church of God,
227 F.3d 1110, 1118 (9th Cir.2000) (stating that
church that copied religious text for its members "unquestionably
profit[ed]" from the unauthorized "distribution and use of [the text]
without having to account to the copyright holder"); American
Geophysical Union v. Texaco, Inc.,
60 F.3d 913, 922 (2d Cir.1994) (finding that
researchers at for-profit laboratory gained indirect economic advantage by
photocopying copyrighted scholarly articles).
In the record before us, commercial use is demonstrated by a showing
that repeated and exploitative unauthorized copies of copyrighted works were
made to save the expense of purchasing authorized copies. See Worldwide
Church,
227 F.3d at 1117-18; Sega
Enters. Ltd. v. MAPHIA,
857 F.Supp. 679, 687 (N.D.Cal.1994) (finding
commercial use when individuals downloaded copies of video games "to avoid
having to buy video game cartridges");
see also American
Geophysical,
60 F.3d
at 922.
Plaintiffs made such a showing before the district court. [FN4]
FN4. Napster counters
that even if certain users engage in commercial use by downloading instead of
purchasing the music, space-shifting and sampling are nevertheless non
commercial in nature. We address this
contention in our discussion of these specific uses, infra.
We also note that the definition of a
financially motivated transaction for the purposes of criminal copyright
actions includes trading infringing copies of a work for other items,
"including the receipt of other copyrighted works." See No
Electronic Theft Act ("NET Act"), Pub.L.
No. 105-147, 18 U.S.C. § 101 (defining "Financial Gain").
*1016 2. The Nature of the Use
[12] Works that are creative in nature are "closer to the
core of intended copyright protection" than are more fact-based
works. See Campbell,
510 U.S. at 586, 114 S.Ct. 1164. The district court determined that
plaintiffs' "copyrighted musical compositions and sound recordings are
creative in nature ... which cuts against a finding of fair use under the
second factor." Napster,
114 F.Supp.2d at 913. We find no error in the district court's
conclusion.
[13][14] "While 'wholesale copying does not preclude fair use
per se,' copying an entire work 'militates against a finding of fair use.'
" Worldwide
Church,
227 F.3d at 1118 (quoting Hustler
Magazine, Inc. v. Moral Majority, Inc.,
796 F.2d 1148, 1155 (9th Cir.1986)). The district court determined that Napster
users engage in "wholesale copying" of copyrighted work because file
transfer necessarily "involves copying the entirety of the copyrighted
work." Napster,
114 F.Supp.2d at 913. We agree.
We note, however, that under certain circumstances, a court will
conclude that a use is fair even when the protected work is copied in its
entirety. See, e.g., Sony
Corp. v. Universal City Studios, Inc.,
464 U.S. 417, 449-50, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984) (acknowledging that fair use of time-shifting necessarily
involved making a full copy of a protected work).
4. Effect of Use on Market
[15][16] "Fair use, when properly applied, is limited to
copying by others which does not materially impair the marketability of the
work which is copied." Harper
& Row Publishers, Inc. v. Nation Enters.,
471 U.S. 539, 566-67, 105 S.Ct. 2218, 85 L.Ed.2d 588 (1985). "[T]he
importance of this [fourth] factor will vary, not only with the amount of harm,
but also with the relative strength of the showing on the other
factors." Campbell,
510 U.S. at 591 n. 21, 114 S.Ct. 1164. The proof
required to demonstrate present or future
market harm varies with the purpose and character of the use:
A challenge to a noncommercial use of a copyrighted work
requires proof either that the particular use is harmful, or that if it should
become widespread, it would adversely affect the potential market for the
copyrighted work.... If the intended
use is for commercial gain, that likelihood [of market harm] may be
presumed. But if it is for a
noncommercial purpose, the likelihood must be demonstrated.
Sony,
464 U.S. at 451, 104 S.Ct. 774 (emphases added).
Addressing this factor, the district court
concluded that Napster harms the market in "at least" two ways: it reduces audio CD sales among college
students and it "raises barriers to plaintiffs' entry into the market for
the digital downloading of music." Napster,
114 F.Supp.2d at 913. The district court relied on evidence
plaintiffs submitted to show that Napster use harms the market for their
copyrighted musical compositions and sound recordings. In a separate memorandum and order regarding
the parties' objections to the expert reports, the district court examined each
report, finding some more appropriate and probative than others. A
& M Records, Inc. v. Napster, Inc.,
Nos. 99-5183 & 00-0074, 2000 WL 1170106 (N.D.Cal. August 10, 2000). Notably,
plaintiffs' expert, Dr. E. Deborah Jay, conducted a survey (the "Jay
Report") using a random sample of college and university students to track
their reasons for using Napster and the impact Napster had on their music purchases. Id. at *2. The court recognized that
the Jay Report focused on just one segment of the Napster user population and
found "evidence of lost sales attributable to college use to be probative
of irreparable harm for purposes of the preliminary injunction motion." Id. at *3.
Plaintiffs also offered a study conducted by
Michael Fine, Chief Executive Officer of Soundscan, (the "Fine
Report") to determine the effect of online sharing of MP3 *1017
files in order to show irreparable harm.
Fine found that online file sharing had resulted in a loss of
"album" sales within college markets. After reviewing defendant's objections to
the Fine Report and expressing some concerns regarding the methodology and
findings, the district court refused to exclude the Fine Report insofar as
plaintiffs offered it to show irreparable harm.
Id. at *6.
Plaintiffs' expert Dr. David J. Teece studied
several issues ("Teece Report"), including whether plaintiffs had
suffered or were likely to suffer harm in their existing and planned businesses
due to Napster use. Id. Napster
objected that the report had not undergone peer review. The district court noted that such reports
generally are not subject to such scrutiny and overruled defendant's
objections. Id.
As for defendant's experts, plaintiffs
objected to the report of Dr. Peter S. Fader, in which the expert concluded
that Napster is beneficial to the music industry because MP3 music
file-sharing stimulates more audio CD sales than it displaces.
Id. at *7. The district court found problems in Dr. Fader's
minimal role in overseeing the administration of the survey and the lack of
objective data in his report. The court
decided the generality of the report rendered it "of dubious reliability
and value." The court did not
exclude the report, however, but chose "not to rely on Fader's findings in
determining the issues of fair use and irreparable harm." Id. at *8.
The district court cited both the Jay and Fine
Reports in support of its finding that Napster use harms the market for
plaintiffs' copyrighted musical compositions and sound recordings by reducing
CD sales among college students. The district court cited the Teece Report to
show the harm Napster use caused in raising barriers to plaintiffs' entry into
the market for digital downloading of music.
Napster,
114 F.Supp.2d at 910. The district court's careful consideration
of defendant's objections to these reports and decision to rely on the reports
for specific issues demonstrates a proper exercise of discretion in addition to
a correct application of the fair use doctrine. Defendant has failed to show
any basis for disturbing the district court's findings.
[17] We, therefore, conclude that the district court made sound
findings related to Napster's deleterious effect on the present and future
digital download market. Moreover, lack
of harm to an established market cannot deprive the copyright holder of the
right to develop alternative markets for the
works. See L.A.
Times v. Free Republic,
54 U.S.P.Q.2d 1453, 1469- 71 (C.D.Cal.2000)
(stating that online market for plaintiff newspapers' articles was harmed
because plaintiffs demonstrated that "[defendants] are attempting to
exploit the market for viewing their articles online"); see also UMG
Recordings,
92 F.Supp.2d at 352 ("Any allegedly positive
impact of defendant's activities on plaintiffs' prior market in no way frees
defendant to usurp a further market that directly derives from reproduction of
the plaintiffs' copyrighted works.").
Here, similar to L.A. Times and UMG Recordings, the record
supports the district court's finding that the "record company plaintiffs
have already expended considerable funds and effort to commence Internet sales
and licensing for digital downloads."
114
F.Supp.2d at 915. Having digital downloads available for free
on the Napster system necessarily harms the copyright holders' attempts to
charge for the same downloads.
Judge Patel did not abuse her discretion in
reaching the above fair use conclusions, nor were the findings of fact with
respect to fair use considerations clearly erroneous. We next address Napster's identified uses of
sampling and space-shifting.
5. Identified Uses
Napster maintains that its identified uses of
sampling and space-shifting were wrongly excluded as fair uses by the district
court.
[18] Napster contends that its users download MP3 files to
"sample" the music in order to decide whether to purchase the
recording. Napster argues that the
district court: (1) erred in concluding
that sampling is a commercial use because it conflated a noncommercial use with
a personal use; (2) erred in determining
that sampling adversely affects the market for plaintiffs' copyrighted music, a
requirement if the use is noncommercial;
and (3) erroneously concluded that sampling is not a fair use because it
determined that samplers may also engage in other infringing activity.
The district court determined that sampling
remains a commercial use even if some users eventually purchase the music. We find no error in the district court's
determination. Plaintiffs have
established that they are likely to succeed in proving that even authorized
temporary downloading of individual songs for sampling purposes is commercial
in nature. See Napster,
114 F.Supp.2d at 913. The record supports a finding that free
promotional downloads are highly regulated by the record company plaintiffs and
that the companies collect royalties for song samples available on retail
Internet sites. Id. Evidence
relied on by the district court demonstrates that the free downloads provided
by the record companies consist of thirty-to-sixty second samples or are full
songs programmed to "time out," that is, exist only for a short time
on the downloader's computer. Id.
at 913-14. In comparison, Napster users download a full, free
and permanent copy of the recording. Id.
at 914-15. The determination by the
district court as to the commercial purpose and character of sampling is not
clearly erroneous.
The district court further found that both the
market for audio CDs and market for online distribution are adversely affected
by Napster's service. As stated in our
discussion of the district court's general fair use analysis: the court did not
abuse its discretion when it found that, overall, Napster has an adverse impact
on the audio CD and digital download markets.
Contrary to Napster's assertion that the district court failed to
specifically address the market impact of sampling, the district court
determined that "[e]ven if the type of sampling supposedly done on Napster
were a non-commercial use, plaintiffs have demonstrated a substantial
likelihood that it would adversely affect the potential market for their
copyrighted works if it became widespread." Napster,
114 F.Supp.2d at 914. The record supports the district court's
preliminary determinations that: (1) the
more music that sampling users download, the less likely they are to eventually
purchase the recordings on audio CD; and
(2) even if the audio CD market is not harmed, Napster has adverse effects on
the developing digital download market.
Napster further argues that the district court
erred in rejecting its evidence that the users' downloading of
"samples" increases or tends to increase audio CD sales. The district court, however, correctly noted
that "any potential enhancement of
plaintiffs' sales ... would not tip the fair use analysis conclusively in favor
of defendant." Id.
at 914.
We agree that increased sales of copyrighted material attributable to
unauthorized use should not deprive the copyright holder of the right to
license the material. See Campbell,
510 U.S. at 591 n. 21, 114 S.Ct. 1164 ("Even
favorable evidence, without more, is no guarantee of fairness. Judge Leval gives the example of the film
producer's appropriation of a composer's previously unknown song that turns the
song into a commercial success; the boon
to the song does not make the film's simple copying fair."); see also L.A.
Times,
54 U.S.P.Q.2d at 1471-72. Nor does positive impact in one market, here
the audio CD market, deprive the copyright holder of the right to develop
identified alternative markets, here the digital download market. See id.
at 1469-71.
*1019 We find no error in the district
court's factual findings or abuse of discretion in the court's conclusion that
plaintiffs will likely prevail in establishing that sampling does not
constitute a fair use.
b. Space-Shifting
[19] Napster also maintains that space-shifting is a fair
use. Space-shifting occurs when a
Napster user downloads MP3 music files in order to listen to music he already
owns on audio CD. See id. at 915-16.
Napster asserts that we have already held that space-shifting of musical
compositions and sound recordings
is a fair use. See
Recording Indus. Ass'n of Am. v. Diamond
Multimedia Sys., Inc.,
180 F.3d 1072, 1079 (9th Cir.1999) ("Rio [a
portable MP3 player] merely makes copies in order to render portable, or
'space-shift,' those files that already reside on a user's hard drive.... Such copying is a paradigmatic noncommercial
personal use."). See also
generally Sony,
464 U.S. at 423, 104 S.Ct. 774 (holding that
"time-shifting," where a video tape recorder owner records a
television show for later viewing, is a fair use).
We conclude that the district court did not
err when it refused to apply the
"shifting" analyses of Sony and Diamond. Both Diamond and Sony are
inapposite because the methods of shifting in these cases did not also
simultaneously involve distribution of the copyrighted material to the general
public; the time or space-shifting of
copyrighted material exposed the material only to the original user. In Diamond, for example, the
copyrighted music was transferred from the user's computer hard drive to the
user's portable MP3 player. So too Sony,
where "the majority of VCR purchasers ... did not distribute taped
television broadcasts, but merely enjoyed them at home." Napster,
114 F.Supp.2d at 913. Conversely, it is obvious that once a user
lists a copy of music he already owns on the Napster system in order to access
the music from another location, the song becomes "available to millions
of other individuals," not just the original CD owner. See UMG
Recordings,
92 F.Supp.2d at 351-52 (finding space-shifting of
MP3 files not a fair use even when previous
ownership is demonstrated before a download is allowed); cf.
Religious
Tech. Ctr. v. Lerma,
No. 95-1107A, 1996 WL 633131, at *6 (E.D.Va. Oct.4, 1996) (suggesting that storing copyrighted material on computer
disk for later review is not a fair use).
c. Other Uses
Permissive reproduction by either independent
or established artists is the final fair use claim made by Napster. The district court noted that plaintiffs did
not seek to enjoin this and any other noninfringing use of the Napster system,
including: chat rooms, message boards
and Napster's New Artist Program. Napster,
114 F.Supp.2d at 917. Plaintiffs do not challenge these uses on
appeal.
We find no error in the district court's
determination that plaintiffs will likely succeed in establishing that Napster
users do not have a fair use defense.
Accordingly, we next address whether Napster is secondarily liable for
the direct infringement under two doctrines of copyright law: contributory copyright infringement and
vicarious copyright infringement.
IV
[20] We first address plaintiffs' claim that Napster is liable
for contributory copyright infringement.
Traditionally, "one who, with knowledge of the infringing activity,
induces, causes or materially contributes to the infringing conduct of another,
may be held liable as a 'contributory' infringer." Gershwin
Publ'g Corp. v. Columbia Artists Mgmt., Inc.,
443 F.2d 1159, 1162 (2d Cir.1971); see also Fonovisa,
Inc. v. Cherry Auction, Inc.,
76 F.3d 259, 264 (9th Cir.1996). Put differently, liability exists if the
defendant engages in "personal conduct that encourages or assists the
infringement." Matthew
Bender & Co. v. West Publ'g Co.,
158 F.3d 693, 706 (2d Cir.1998).
*1020 The district court determined
that plaintiffs in all likelihood would establish Napster's liability as a contributory
infringer. The district court did not
err; Napster, by its conduct, knowingly
encourages and assists the infringement of plaintiffs' copyrights.
A. Knowledge
[21][22] Contributory liability requires that the secondary
infringer "know or have reason to
know" of direct infringement. Cable/Home
Communication Corp. v. Network Prods., Inc.,
902 F.2d 829, 845 & 846 n. 29 (11th Cir.1990); Religious
Tech. Ctr. v. Netcom On-Line Communication Servs., Inc.,
907 F.Supp. 1361, 1373-74 (N.D.Cal.1995) (framing
issue as "whether Netcom knew or should have known of" the infringing
activities). The district court found
that Napster had both actual and constructive knowledge that its users
exchanged copyrighted music. The
district court also concluded that the law does not require knowledge of
"specific acts of infringement" and rejected Napster's contention
that because the company cannot distinguish infringing
from noninfringing files, it does not "know" of the direct
infringement. 114
F.Supp.2d at 917.
It is apparent from the record that Napster
has knowledge, both actual and constructive, [FN5] of direct infringement.
Napster claims that it is nevertheless protected from contributory
liability by the teaching of Sony
Corp. v. Universal City Studios, Inc.,
464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984). We disagree. We observe that Napster's actual, specific
knowledge of direct infringement renders Sony 's holding of limited
assistance to Napster. 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.
FN5. The district
court found actual knowledge because:
(1) a document authored by Napster co-founder Sean Parker mentioned
"the need to remain ignorant of users' real names and IP addresses 'since
they are exchanging pirated music' ";
and (2) the Recording Industry Association of America ("RIAA")
informed Napster of more than 12,000 infringing files, some of which are still
available. 114
F.Supp.2d at 918. The district court found constructive
knowledge because: (a) Napster
executives have recording industry experience;
(b) they have enforced intellectual property rights in other
instances; (c) Napster executives have
downloaded copyrighted songs from the
system; and (d) they have promoted the
site with "screen shots listing infringing files." Id.
at 919.
The Sony Court refused to hold the
manufacturer and retailers of video tape recorders liable for contributory
infringement despite evidence that such machines could be and were used to
infringe plaintiffs' copyrighted television shows. Sony stated that if liability "is
to be imposed on petitioners in this case, it must rest on the fact that they
have sold equipment with constructive knowledge of the fact that their
customers may use that equipment to make unauthorized copies of copyrighted
material." Id.
at 439, 104 S.Ct. 774 (emphasis added). The Sony Court declined to impute the
requisite level of knowledge where the defendants made and sold equipment
capable of both infringing and "substantial noninfringing uses." Id. at 442 (adopting a modified
"staple article of commerce" doctrine from patent law). See also Universal
City Studios, Inc. v. Sony Corp.,
480 F.Supp. 429, 459 (C.D.Cal.1979) ("This
court agrees with defendants that their knowledge was insufficient to make them
contributory infringers."), rev'd, 659
F.2d 963 (9th Cir.1981), rev'd, 464
U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984);
Alfred C. Yen, Internet
Service Provider Liability for Subscriber Copyright Infringement, Enterprise
Liability, and the First Amendment,
88 Geo. L.J. 1833, 1874 & 1893 n.210 (2000)
(suggesting that, after Sony, most Internet service providers lack "the requisite level of
knowledge" for the imposition of contributory liability).
[23] We are bound to follow Sony, and will not impute
the requisite level of knowledge to Napster merely because *1021
peer-to-peer file sharing technology may be used to infringe plaintiffs'
copyrights. See 464
U.S. at 436, 104 S.Ct. 774 (rejecting argument
that merely supplying the " 'means' to accomplish an infringing
activity" leads to imposition of liability). We depart from the reasoning of the district
court that Napster failed to demonstrate that its system is capable of
commercially significant noninfringing uses.
See Napster,
114 F.Supp.2d at 916, 917-18. The district court improperly confined the
use analysis to current uses, ignoring the system's capabilities. See generally Sony,
464 U.S. at 442-43, 104 S.Ct. 774 (framing
inquiry as whether the video tape recorder is "capable of
commercially significant noninfringing uses") (emphasis added). Consequently, the district court placed
undue weight on the proportion of current infringing use as compared to current
and future noninfringing use. See
generally Vault
Corp. v. Quaid Software Ltd.,
847 F.2d 255, 264-67 (5th Cir.1988) (single
noninfringing use implicated Sony ).
Nonetheless, whether we might arrive at a different result is not the
issue here. See Sports
Form, Inc. v. United Press Int'l, Inc.,
686 F.2d 750, 752 (9th Cir.1982). The instant appeal occurs at an early point
in the proceedings and "the fully
developed factual record may be materially different from that initially before
the district court...." Id.
at 753.
Regardless of the number of Napster's infringing versus noninfringing
uses, the evidentiary record here supported the district court's finding that
plaintiffs would likely prevail in establishing that Napster knew or had reason
to know of its users' infringement of plaintiffs' copyrights.
This analysis is similar to that of Religious
Technology Center v. Netcom On-Line Communication Services, Inc., which
suggests that in an online context, evidence of actual knowledge of specific
acts of infringement is required to hold a computer system operator liable for
contributory copyright infringement. 907
F.Supp. at 1371.
Netcom considered the potential contributory copyright liability
of a computer bulletin board operator whose system supported the posting of
infringing material. Id.
at 1374.
The court, in denying Netcom's motion for summary judgment of
noninfringement and plaintiff's motion for judgment on the pleadings, found
that a disputed issue of fact existed as to whether the operator had sufficient
knowledge of infringing activity. Id.
at 1374-75.
The court determined that for the operator to
have sufficient knowledge, the copyright holder must "provide the
necessary documentation to show there is likely infringement." 907
F.Supp. at 1374;
cf. Cubby,
Inc. v. CompuServe, Inc.,
776 F.Supp. 135, 141 (S.D.N.Y.1991) (recognizing
that online service provider does not and
cannot examine every hyperlink for potentially defamatory material). If such documentation was provided, the
court reasoned that Netcom would be liable for contributory infringement
because its failure to remove the material "and thereby stop an infringing
copy from being distributed worldwide constitutes substantial participation"
in distribution of copyrighted material.
Id.
[24] 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. See Netcom,
907 F.Supp. at 1374. 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. See Sony,
464 U.S. at 436, 442-43, 104 S.Ct. 774. To enjoin simply because a computer network
allows for infringing use would, in our opinion, violate Sony and
potentially restrict activity unrelated to infringing use.
We nevertheless conclude that sufficient
knowledge exists to impose contributory liability when linked to demonstrated
infringing use of the Napster system. See
Napster,
114 F.Supp.2d at 919 ("Religious *1022
Technology Center would not mandate a determination that Napster, Inc.
lacks the knowledge requisite to contributory infringement."). The record supports
the district court's finding 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. See Napster,
114 F.Supp.2d at 918, 920-21. [FN6]
FN6. As stated by the
district court:
Plaintiff[s] ... demonstrate that defendant had actual
notice of direct infringement because the RIAA informed it of more than 12,000
infringing files. See Creighton 12/3/99
Dec., Exh. D. Although Napster, Inc. purportedly terminated the users offering
these files, the songs are still available using the Napster service, as are
the copyrighted works which the record company plaintiffs identified in
Schedules A and B of their complaint.
See Creighton Supp. Dec. ¶ ¶ 3-4.
B. Material Contribution
Under the facts as found by the district
court, Napster materially contributes to the infringing activity. Relying on Fonovisa, the district
court concluded that "[w]ithout the support services defendant provides,
Napster users could not find and download the music they want with the ease of which defendant boasts." Napster,
114 F.Supp.2d at 919-20 ("Napster is an
integrated service designed to enable users to locate and download MP3 music
files."). We agree that Napster
provides "the site and facilities" for direct infringement. See Fonovisa,
76 F.3d at 264;
cf. Netcom,
907 F.Supp. at 1372 ("Netcom will be liable
for contributory infringement since its failure to cancel [a user's] infringing
message and thereby stop an infringing copy from being distributed worldwide
constitutes substantial participation.").
The district court correctly applied the reasoning in Fonovisa,
and properly found that Napster materially contributes to direct infringement.
We affirm the district court's conclusion that
plaintiffs have demonstrated a likelihood of success on the merits of the
contributory copyright infringement claim.
We will address the scope of the injunction in part VIII of this
opinion.
V
[25][26] We turn to the question whether Napster engages in
vicarious copyright infringement.
Vicarious copyright liability is an "outgrowth" of respondeat
superior. Fonovisa,
76 F.3d at 262.
In the context of copyright law, vicarious liability extends beyond an
employer/employee relationship to cases in which a defendant "has the
right and ability to supervise the infringing activity and also has a direct
financial interest in such activities."
Id. (quoting Gershwin,
443 F.2d at 1162); see also Polygram
Int'l Publ'g, Inc. v. Nevada/TIG, Inc.,
855 F.Supp. 1314, 1325-26 (D.Mass.1994)
(describing vicarious liability as a form of risk allocation).
Before moving into this discussion, we note
that Sony 's "staple article of commerce" analysis has no
application to Napster's potential liability for vicarious copyright
infringement. See Sony,
464 U.S. at 434-435, 104 S.Ct. 774; see generally 3 Melville B. Nimmer
& David Nimmer, Nimmer On Copyright § § 12.04[A][2] & [A][2][b] (2000) (confining
Sony to contributory infringement analysis: "Contributory infringement itself is of
two types--personal conduct that forms part of or furthers the infringement and
contribution of machinery or goods that provide the means to
infringe"). The issues of Sony's
liability under the "doctrines of 'direct infringement' and 'vicarious
liability' " were not before the Supreme Court, although the Court
recognized that the "lines between direct infringement, contributory
infringement, and vicarious liability are not clearly drawn." Id.
at 435 n. 17, 104 S.Ct. 774. Consequently, when
the Sony Court used the term "vicarious *1023 liability,"
it did so broadly and outside of a technical analysis of the doctrine of
vicarious copyright infringement. Id.
at 435 ("[V]icarious liability is imposed in virtually all areas of the
law, and the concept of contributory infringement is merely a species of the
broader problem of identifying the circumstances in which it is just to hold
one individual accountable for the actions of another."); see also Black's Law Dictionary 927
(7th ed. 1999) (defining "vicarious
liability" in a manner similar to the definition used in Sony).
A. Financial Benefit
[27] The district court determined that plaintiffs had
demonstrated they would likely succeed in establishing that Napster has a
direct financial interest in the infringing activity. Napster,
114 F.Supp.2d at 921-22. We agree.
Financial benefit exists where the availability of infringing material
"acts as a 'draw' for customers."
Fonovisa,
76 F.3d at 263-64 (stating that financial benefit
may be shown "where infringing performances enhance the attractiveness of
a venue"). Ample evidence supports
the district court's finding that Napster's future revenue is directly
dependent upon "increases in userbase." More users register with the Napster system
as the "quality and quantity of available music increases." 114
F.Supp.2d at 902. We conclude that the district court did not
err in determining that Napster financially benefits from the availability of
protected works on its system.
B. Supervision
The district court determined that Napster has
the right and ability to supervise its users' conduct. Napster,
114 F.Supp.2d at 920-21 (finding that Napster's
representations to the court regarding "its improved methods of blocking
users about whom rights holders complain ... is tantamount to an admission that
defendant can, and sometimes does, police its service"). We agree
in part.
The ability to block infringers' access to a
particular environment for any reason whatsoever is evidence of the right and
ability to supervise. See Fonovisa,
76 F.3d at 262 ("Cherry Auction had the
right to terminate vendors for any reason whatsoever and through that right had
the ability to control the activities of vendors on the premises."); cf.
Netcom,
907 F.Supp. at 1375-76 (indicating that plaintiff
raised a genuine issue of fact regarding ability to supervise by presenting
evidence that an electronic bulletin board service can suspend subscriber's
accounts). Here, plaintiffs have
demonstrated that Napster retains the right to control access to its system.
Napster has an express reservation of rights policy, stating on its website
that it expressly reserves the "right to refuse service and terminate
accounts in [its] discretion, including, but not limited to, if Napster
believes that user conduct violates applicable law ... or for any reason in
Napster's sole discretion, with or without cause."
[28] To escape imposition of vicarious liability, the reserved
right to police must be exercised to its fullest extent. Turning a blind eye to detectable acts of
infringement for the sake of profit gives rise to liability. See, e.g., Fonovisa,
76 F.3d at 261 ("There is no dispute for the
purposes of this appeal that Cherry Auction and its operators were aware that
vendors in their swap meets were selling counterfeit recordings."); see also
Gershwin,
443 F.2d at 1161-62 (citing Shapiro,
Bernstein & Co. v. H.L. Green Co.,
316 F.2d 304 (2d Cir.1963), for the proposition
that "failure to police the conduct of the primary infringer" leads
to imposition of vicarious liability for copyright infringement).
The district court correctly determined that
Napster had the right and ability to police its system and failed to exercise
that right to prevent the exchange of copyrighted material. The district court, however, failed to
recognize that the boundaries of the premises that Napster "controls and
patrols" are limited. See,
e.g., Fonovisa,
76 F.3d at 262-63 (in addition to having the
right to exclude vendors, defendant "controlled and patrolled" the
premises); see also Polygram,
855 F.Supp. at 1328-29 (in addition to having the
contractual right to remove exhibitors, trade show operator reserved the right
to police during the show and had its "employees walk the *1024
aisles to ensure 'rules compliance' ").
Put differently, Napster's
reserved "right and ability" to police is cabined by the system's
current architecture. As shown by the
record, the Napster system does not "read" the content of indexed
files, other than to check that they are in the proper MP3 format.
Napster, however, has the ability to locate
infringing material listed on its search indices, and the right to terminate
users' access to the system. The file name indices, therefore, are within the
"premises" that Napster has the ability to police. We recognize that the files are user-named
and may not match copyrighted material
exactly (for example, the artist or song could be spelled wrong). For Napster to function effectively,
however, file names must reasonably or roughly correspond to the material
contained in the files, otherwise no user could ever locate any desired
music. As a practical matter, Napster,
its users and the record company plaintiffs have equal access to infringing
material by employing Napster's "search function."
Our review of the record requires us to accept
the district court's conclusion that plaintiffs have demonstrated a likelihood
of success on the merits of the vicarious copyright infringement claim. Napster's failure to police the system's
"premises," combined with a showing that Napster financially benefits
from the continuing availability of infringing files on its system, leads to
the imposition of vicarious liability.
We address the scope of the injunction in part VIII of this opinion.
VI
We next address whether Napster has asserted
defenses which would preclude the entry of a preliminary injunction.
Napster alleges that two statutes insulate it
from liability. First, Napster asserts
that its users engage in actions protected by § 1008 of the
Audio Home Recording Act of 1992, 17
U.S.C. § 1008. Second, Napster argues that
its liability for contributory and vicarious infringement is limited by the
Digital Millennium Copyright Act, 17
U.S.C. § 512. We address the application of each statute in turn.
A. Audio Home Recording Act
[29] The statute states in part:
No action may be brought under this title alleging
infringement of copyright
based on the manufacture, importation, or distribution of a digital audio
recording device, a digital audio recording medium, an analog recording device,
or an analog recording medium, or based on the noncommercial use by a
consumer of such a device or medium for making digital musical recordings
or analog musical recordings.
17
U.S.C. § 1008 (emphases added). Napster
contends that MP3 file exchange is the type of "noncommercial use"
protected from infringement actions by the statute. Napster asserts it cannot be secondarily
liable for users' nonactionable exchange of copyrighted musical recordings.
The district court rejected Napster's
argument, stating that the Audio Home Recording Act is "irrelevant"
to the action because: (1) plaintiffs
did not bring claims under the Audio Home Recording Act; and (2) the Audio Home Recording Act does not
cover the downloading of MP3 files. Napster,
114 F.Supp.2d at 916 n. 19.
We agree with the district court that the
Audio Home Recording Act does not cover the downloading of MP3 files to
computer hard drives. First,
"[u]nder the plain meaning of the Act's definition of digital audio
recording devices, computers (and their hard
drives) are not digital audio recording devices because their 'primary purpose'
is not to make digital audio copied recordings." Recording
Indus. Ass'n of Am. v. Diamond Multimedia Sys., Inc.,
180 F.3d 1072, 1078 (9th Cir.1999). Second, notwithstanding Napster's claim that
computers are "digital audio recording devices," computers do not
make "digital music recordings" as defined by the Audio Home
Recording Act. Id.
at 1077 (citing S.
Rep. 102-294) ("There are simply no *1025
grounds in either the plain language of the definition or in the legislative history
for interpreting the term 'digital musical recording' to include songs fixed on
computer hard drives.").
B. Digital Millennium Copyright Act
[30] Napster also interposes a statutory limitation on
liability by asserting the protections of the "safe harbor" from
copyright infringement suits for "Internet service providers"
contained in the Digital Millennium Copyright Act, 17
U.S.C. § 512. See Napster,
114 F.Supp.2d at 919 n. 24. The district court
did not give this statutory limitation any weight favoring a denial of
temporary injunctive relief. The court
concluded that Napster "has failed to persuade this court that subsection
512(d) shelters contributory infringers."
Id.
We need not accept a blanket conclusion that § 512 of the
Digital Millennium Copyright Act will never protect secondary infringers. See S. Rep.
105-190, at 40 (1998) ("The limitations in
subsections (a) through (d) protect qualifying service providers from liability
for all monetary relief for direct, vicarious, and contributory
infringement."), reprinted in Melville B. Nimmer & David
Nimmer, Nimmer on Copyright:
Congressional Committee Reports on the Digital Millennium Copyright Act
and Concurrent Amendments (2000); see
also Charles S. Wright, Actual
Versus Legal Control: Reading Vicarious
Liability for Copyright Infringement Into the Digital Millennium Copyright Act
of 1998,
75 Wash. L.Rev. 1005, 1028-31 (July 2000)
("[T]he committee reports leave no doubt that Congress intended to provide
some relief from vicarious liability").
We do not agree that Napster's potential
liability for contributory and vicarious infringement renders the Digital
Millennium Copyright Act inapplicable per se.
We instead recognize that this issue will be more fully developed at
trial. At this stage of the litigation,
plaintiffs raise serious questions regarding Napster's ability to obtain
shelter under § 512, and
plaintiffs also demonstrate that the balance of hardships tips in their favor. See
Prudential
Real Estate,
204 F.3d at 874;
see also Micro
Star v. Formgen, Inc.
154 F.3d 1107, 1109 (9th Cir.1998) ("A party
seeking a preliminary injunction must show ... 'that serious questions going to
the merits were raised and the balance of hardships tips sharply in its favor.'
").
Plaintiffs have raised and continue to raise
significant questions under this statute,
including: (1) whether Napster is an
Internet service provider as defined by 17
U.S.C. § 512(d); (2) whether
copyright owners must give a service provider "official" notice of
infringing activity in order for it to have knowledge or awareness of
infringing activity on its system; and (3) whether Napster complies with § 512(i), which
requires a service provider to timely establish a detailed copyright compliance
policy. See A
& M Records, Inc. v. Napster, Inc.,
No. 99-05183, 2000 WL 573136 (N.D.Cal. May 12, 2000) (denying summary judgment to Napster under a different subsection of
the Digital Millennium Copyright Act, § 512(a)).
The district court considered ample evidence
to support its determination that the balance of hardships tips in plaintiffs'
favor:
Any destruction of Napster, Inc. by a preliminary injunction
is speculative compared to the statistical evidence of massive, unauthorized
downloading and uploading of plaintiffs' copyrighted works-as many as 10,000
files per second by defendant's own admission.
See Kessler Dec. ¶
29. The court has every reason
to believe that, without a preliminary injunction, these numbers will mushroom
as Napster users, and newcomers attracted by the publicity, scramble to obtain
as much free music as possible before trial.
VII
Napster contends that even if the district
court's preliminary determinations that it
is liable for facilitating copyright infringement are correct, the district
court *1026 improperly rejected valid affirmative defenses of waiver,
implied license and copyright misuse.
We address the defenses in turn.
A. Waiver
[31] "Waiver is the intentional relinquishment of a known
right with knowledge of its existence and the intent to relinquish
it." United
States v. King Features Entm't, Inc.,
843 F.2d 394, 399 (9th Cir.1988). In copyright, waiver or abandonment of
copyright "occurs only if there is an intent by the copyright proprietor
to surrender rights in his work."
4 Melville B. Nimmer & David Nimmer, Nimmer On Copyright
¶ 13.06 (2000); see also Micro
Star v. Formgen, Inc.,
154 F.3d 1107, 1114 (9th Cir.1998) (discussing
abandonment).
[32][33] Napster argues that the district court erred in not
finding that plaintiffs knowingly provided consumers with technology designed
to copy and distribute MP3 files over the Internet and, thus, waived any legal
authority to exercise exclusive control over creation and distribution of MP3
files. The district court, however, was
not convinced "that the record companies created the monster that is now
devouring their intellectual property rights." Napster,
114 F.Supp.2d at 924. We find no error in the district court's
finding that "in hastening the proliferation of MP3 files, plaintiffs did [nothing] more than seek partners for their
commercial downloading ventures and develop music players for files they
planned to sell over the Internet." Id. [FN7]
FN7. Napster
additionally asserts that the district court improperly refused to allow
additional discovery into affirmative defenses and also erroneously failed to
hold an evidentiary hearing. The denial
of an evidentiary hearing is reviewed for abuse of discretion, Kenneally
v. Lungren,
967 F.2d 329, 335 (9th Cir.1992), as is the
court's decision to deny further discovery.
See Sablan
v. Dep't of Finance,
856 F.2d 1317, 1321 (9th Cir.1988) (stating that
decision to deny discovery will not be disturbed except upon a clear showing
"that the denial of discovery results in actual and substantial
prejudice"). We conclude that the
court did not abuse its discretion in denying further discovery and refusing to
conduct an evidentiary hearing.
B. Implied License
[34] Napster also argues that plaintiffs granted the company an
implied license by encouraging MP3 file exchange over the Internet. Courts have found implied licenses only in
"narrow" circumstances where one party "created a work at [the
other's] request and handed it over, intending that [the other] copy and distribute it." SmithKline
Beecham Consumer Healthcare, L.P. v. Watson Pharms., Inc.,
211 F.3d 21, 25 (2d Cir.2000) (quoting Effects
Assocs., Inc. v. Cohen,
908 F.2d 555, 558 (9th Cir.1990)), cert.
denied, 531
U.S. 872, 121 S.Ct. 173, 148 L.Ed.2d 118 (2000). The district court observed that no evidence
exists to support this defense:
"indeed, the RIAA gave defendant express notice that it objected to
the availability of its members' copyrighted music on Napster." Napster,
114 F.Supp.2d at 924-25. The record supports this conclusion.
C. Misuse
[35][36] The defense of copyright misuse forbids a copyright holder
from "secur[ing] an exclusive right or limited monopoly not granted by the
Copyright Office." Lasercomb
Am., Inc. v. Reynolds,
911 F.2d 970, 977-79 (4th Cir.1990), quoted in
Practice
Mgmt. Info. Corp. v. American Med. Ass'n,
121 F.3d 516, 520 (9th Cir.), amended by 133
F.3d 1140 (9th Cir.1997). Napster alleges that
online distribution is not within the copyright monopoly. According to Napster,
plaintiffs have colluded to "use their copyrights to extend their control
to online distributions."
We find no error in the district court's
preliminary rejection of this affirmative defense. The misuse defense prevents copyright holders
from leveraging their limited monopoly to allow them control of areas outside
the monopoly. See
Lasercomb,
911 F.2d at 976-77; see also *1027Religious Tech. Ctr. v. Lerma,
No. 95-1107A, 1996 WL 633131, at * 11 (E.D.Va. Oct.4, 1996) (listing circumstances which indicate improper leverage). [FN8] There is no
evidence here that plaintiffs seek to control areas outside of their grant of
monopoly. Rather, plaintiffs seek to
control reproduction and distribution of their copyrighted works, exclusive
rights of copyright holders. 17
U.S.C. § 106; see also, e.g., UMG
Recordings,
92 F.Supp.2d at 351 ("A [copyright holder's]
'exclusive' rights, derived from the Constitution and the Copyright Act,
include the right, within broad limits, to curb the development of such a
derivative market by refusing to license a copyrighted work or by doing so only
on terms the copyright owner finds acceptable."). That the copyrighted works are transmitted
in another medium-MP3 format rather than audio CD-has no bearing on our
analysis. See id.
at 351 (finding that reproduction of audio CD
into MP3 format does not "transform" the work).
FN8. The district
court correctly stated that "most of the cases" that recognize the
affirmative defense of copyright misuse involve unduly restrictive licensing
schemes. See Napster,
114 F.Supp.2d at 923; see also Lasercomb,
911 F.2d at 973 (stating that "a misuse of
copyright defense is inherent in the law of copyright"). We have also suggested, however, that a
unilateral refusal to license a copyright may constitute wrongful exclusionary conduct giving rise to a
claim of misuse, but assume that the "desire to exclude others ... is a
presumptively valid business justification for any immediate harm to
consumers." See
Image Tech. Servs. v. Eastman Kodak Co.,
125 F.3d 1195, 1218 (9th Cir.1997). But see Intergraph
Corp. v. Intel Corp.,
195 F.3d 1346, 1362 (Fed.Cir.1999) (
"[M]arket power does not 'impose on the intellectual property owner an
obligation to license the use of that property to others.' ") (quoting
United States Dep't of Justice & Fed. Trade Comm'n, Antitrust Guidelines
for the Licensing of Intellectual Property 4 (1995)).
VIII
The district court correctly recognized that a
preliminary injunction against Napster's participation in copyright
infringement is not only warranted but required. We believe, however, that the scope of the
injunction needs modification in light of our opinion. Specifically, we reiterate that contributory
liability may potentially be imposed only to the extent that Napster: (1) receives reasonable knowledge of specific
infringing files with copyrighted musical compositions and sound
recordings; (2) knows or should know
that such files are available on the Napster system; and (3) fails to act to prevent viral
distribution of the works. See Netcom,
907 F.Supp. at 1374-75. The mere existence of the Napster system,
absent actual notice and Napster's
demonstrated failure to remove the offending material, is insufficient to
impose contributory liability. See Sony,
464 U.S. at 442- 43, 104 S.Ct. 774.
Conversely, Napster may be vicariously liable
when it fails to affirmatively use its ability to patrol its system and
preclude access to potentially infringing files listed in its search index. Napster has both the ability to use its
search function to identify infringing musical recordings and the right to bar
participation of users who engage in the transmission of infringing files.
[37] The preliminary injunction which we stayed is 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.
As stated, we place the burden on plaintiffs to provide notice to
Napster of copyrighted works and files containing such works available on the
Napster system before Napster has the duty to disable access to the offending
content. Napster, however, also bears
the burden of policing the system within the limits of the system. Here, we recognize that this is not an exact
science in that the files are user named.
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.
[38] Based on our decision to remand, Napster's additional
arguments on appeal *1028 going to
the scope of the injunction need not be addressed. We, however, briefly address
Napster's First Amendment argument so that it is not reasserted on remand. Napster contends that the present injunction
violates the First Amendment because it is broader than necessary. The company asserts two distinct free speech
rights: (1) its right to publish a
"directory" (here, the search index) and (2) its users' right to
exchange information. We note that
First Amendment concerns in copyright are allayed by the presence of the fair
use doctrine. See 17
U.S.C. § 107; see generally Nihon
Keizai Shimbun v. Comline Business Data, Inc.,
166 F.3d 65, 74 (2d Cir.1999); Netcom,
923 F.Supp. at 1258 (stating that the Copyright
Act balances First Amendment concerns with the rights of copyright holders).
There was a preliminary determination here that Napster users are not fair
users. Uses of copyrighted material
that are not fair uses are rightfully enjoined. See Dr.
Seuss Enters. v. Penguin Books USA, Inc.,
109 F.3d 1394, 1403 (9th Cir.1997) (rejecting
defendants' claim that injunction would constitute a prior restraint in
violation of the First Amendment).
IX
We address Napster's remaining arguments: (1) that the court erred in setting a $5
million bond, and (2) that the district court should have imposed a
constructive royalty payment structure in lieu of an injunction.
A. Bond
[39][40] Napster argues
that the $5 million bond is insufficient because the company's value is between
$1.5 and $2 billion. We review
objections to the amount of a bond for abuse of discretion. Walczak
v. EPL Prolong, Inc.,
198 F.3d 725 (9th Cir.1999).
We are reluctant to dramatically raise bond
amounts on appeal. See GoTo.com,
Inc. v. The Walt Disney Co.,
202 F.3d 1199, 1211 (9th Cir.2000); see also
Fed.R.Civ.P.
65(c).
The district court considered competing evidence of Napster's value and
the deleterious effect that any injunction would have upon the Napster
system. We cannot say that Judge Patel
abused her discretion when she fixed the penal sum required for the bond.
B. Royalties
[41] Napster contends that the district court should have
imposed a monetary penalty by way of a compulsory royalty in place of an
injunction. We are asked to do what the
district court refused.
Napster tells us that "where great public
injury would be worked by an injunction, the courts might ... award damages or
a continuing royalty instead of an injunction in such special
circumstances." Abend
v. MCA, Inc.,
863 F.2d 1465, 1479 (9th Cir.1988) (quoting 3
Melville B. Nimmer & David Nimmer, Nimmer On Copyright § 14.06[B] (1988)), aff'd, 495
U.S. 207, 110 S.Ct. 1750, 109 L.Ed.2d 184 (1990). We are at a total loss to find any
"special circumstances" simply because this case requires us to apply
well-established doctrines of copyright law
to a new technology. Neither do we
agree with Napster that an injunction would cause "great public
injury." Further, we narrowly
construe any suggestion that compulsory royalties are appropriate in this
context because Congress has arguably limited the application of compulsory
royalties to specific circumstances, none of which are present here. See 17
U.S.C. § 115.
The Copyright Act provides for various
sanctions for infringers. See, e.g., 17
U.S.C. § § 502 (injunctions); 504
(damages); and 506 (criminal
penalties); see also 18
U.S.C. § 2319A (criminal penalties for the unauthorized fixation of and
trafficking in sound recordings and music videos of live musical
performances). These statutory
sanctions represent a more than adequate legislative solution to the problem
created by copyright infringement.
Imposing a compulsory royalty payment schedule
would give Napster an "easy out" of this case. If such royalties were imposed, *1029
Napster would avoid penalties for any future violation of an injunction,
statutory copyright damages and any possible criminal penalties for continuing
infringement. The royalty structure
would also grant Napster the luxury of either choosing to continue and pay
royalties or shut down. On the other
hand, the wronged parties would be forced to do business with a company that
profits from the wrongful use of intellectual properties. Plaintiffs would lose the power to control their intellectual property: they could not make a business decision not
to license their property to Napster, and, in the event they planned to do
business with Napster, compulsory royalties would take away the copyright
holders' ability to negotiate the terms of any contractual arrangement.
X
We affirm in part, reverse in part and remand.
We direct that the preliminary injunction
fashioned by the district court prior to this appeal shall remain stayed until
it is modified by the district court to conform to the requirements of this
opinion. We order a partial remand of
this case on the date of the filing of this opinion for the limited purpose of
permitting the district court to proceed with the settlement and entry of the
modified preliminary injunction.
Even though the preliminary injunction
requires modification, appellees have substantially and primarily prevailed on
appeal. Appellees shall recover their
statutory costs on appeal. See Fed.
R.App. P. 39(a)(4) ("[i]f a judgment is
affirmed in part, reversed in part, modified, or vacated, costs are taxed only
as the court orders.").
AFFIRMED IN PART, REVERSED IN PART AND
REMANDED.
•NAPSTER, INC.,
a corporation, Defendant-Appellant, v. A & M RECORDS, INC., a corporation,
Geffen Records, Inc., a corporation, Interscope Records, a general partnership,
Sony Music Entertainment Inc., a corporation, MCA
Records,
Inc., a corporation, Atlantic Recording Corporation, a corporation, Island
Records, Inc., a corporation, Motown Record Company L.P., a limited
partnership, Capitol Records, Inc., a corporation, LA Face Records, a joint
venture, Bmg, 2000 WL 33983548 (Appellate Brief)
(C.A.9 August 29, 2000), Appellant Napster, Inc.'s Opening Brief
•NAPSTER, INC.,
a corporation, Defendant-Appellant, v. A & M RECORDS, INC., a corporation,
Geffen Records, Inc., a corporation, Interscope Records, a general partnership,
Sony Music Entertainment Inc., a corporation, MCA Records, Inc., a corporation,
Atlantic Recording Corporation, a corporation, Island Records, Inc., a
corporation, Motown Record Company L.P., a limited partnership, Capitol
Records, Inc., a corporation, LA Face Records, a joint venture, BMG, 2000 WL
34004361 (Appellate Brief) (C.A.9 September 12,
2000), Reply Brief of Appellant Napster, Inc.
•A & M
RECORDS, INC., a corporation, Geffen Records, Inc., a corporation, Interscope
Records, a general partnership, and Sony Music Entertainment Inc., a
corporation, MCA Records, Inc., a corporation, Atlantic, Recording Corporation,
a corporation, Island Records, Inc., a corporation, Motown Record Company L.P.,
a limited partnership, Capital Records, Inc., a corporation, Laface Records, a
joint, venture, BMG Music d/b/a The RCA Records Label, a general,, 2000 WL
33979744 (Appellate Brief) (C.A.9 September 19,
2000), Brief of Association for Independent Music as Amicus Curiae in Support
of Appellees Urging Affirmance
239 F.3d 1004, 2001 Copr.L.Dec. P 28,200, 57
U.S.P.Q.2d 1729, 01 Cal. Daily Op. Serv. 1255, 2001 Daily Journal D.A.R. 1611
END OF
DOCUMENT