Copyright in Cyberspace The MP3 War Victor H. Bouganim 2000 Dr. Victor H. Bouganim, Faculty of Law, Haifa University

MP3 Copyright War Case Law Direct Infringement? RIAA v. Diamond (9th Cir. 1999) UMG v. MP3.Com (S.D.N.Y. 2000) A&M v. Napster, (9th Cir. 2001) Direct Infringement? Contributory Infringement? Vicarious Infringement? Fair Use? Implied License?

MP3 Technology MPEG-3, or MP3, is a standard file format for the storage of audio recordings in digital format. MP3 files are created through a process called “ripping.” Ripping software allows a user to copy a CD directly onto a hard drive by compressing the audio information on the CD into MP3 format. The MP3’s compressed format allows for rapid transmission of digital audio files from one computer to another by e-mail or other file transfer protocol. The quality of the original sound recording is only slightly diminished by transfer to MP3.

Audio Home Recording Act of 1992 Highlights of the AHRA Restrictions on Digital Audio Recording Devices (Sec. 1002). Prohibits the importation, manufacture, and distribution of any digital audio recording device that does not contain controls to block second-generation digital copying - Serial Copy Management System. Compensation of Copyright Owners (Secs. 1003-1007). Implements a royalty pool by manufacturers and importers of recording equipment for the benefit of qualifying copyright owners. Limited Immunity for Noncommercial Home Taping (Sec. 1008). Provides immunity for non-commercial home taping by consumers.

RIAA v. Diamond 9th Cir. 1999 RIAA alleged that a device made by Diamond to download and listen to MP3 files violated the AHRA The court stated: “a device falls within the Act’s provisions if it can indirectly copy a digital music recording by making a copy from a transmission of that recording” The court found that the device was not a digital audio recording device and, further, that it facilitated personal use --one of AHRA’s primary objectives The court also found that hard drives are not digital audio recording devices either, because that is not their primary purpose

UMG v. MP3.Com S.D.N.Y. 2000 MP3.com converted a large number of UMG CDs into MP3 files and provided access to these files to their website users Requiring users to prove ownership of a CD or else purchase it, MP3.com argued their service was a fair use in that they provided a space shift for its users The court agreed with UMG that the songs had to be illegally copied to MP3.com’s servers before users could access them The court rejected MP3.com’s fair use argument, finding MP3.com’s use commercial

CLASS DISCUSSION Suppose MP3.com merely offered the service of providing space to users in which they could upload their own music. Would MP3.com still be engaging in copyright infringement? What arguments could MP3.com make in its favor? How would record companies respond?

Napster Technology Through a process called “peer-to-peer” sharing, Napster allows its user to: make MP3 files stored on individual hard drives available for copying by other users search for MP3 music files stored on other user’s computers transfer exact copies of the contents of other users’ MP3 files from one computer to another via the Internet

The Napster Case Peer to Peer Technology Upload MP3 User’s Index Search All Users’ Indices Napster Connects Users Napster Search Index User A File Exchange Users User B

Napster Timeline Jan 99 Shawn Fanning writes Napster program Aug 99 Napster released on the Internet 06 Dec 99 A&M Records and 17 other record companies file suit against Napster 07 Jan 00 Group of music publishers file suit against Napster Feb 00 5 million copies of Napster being used (Many schools ban or restrict use) 13 Apr 00 Metallica files suit against Napster; Dr. Dre next 13 Jul 00 Membership reaches 20 million 26 Jul 00 Judge Patel issues preliminary injunction 28 Jul 00 Napster appeals, 9th Cir. stays injunction 02 Oct 00 9th Cir. hears oral arguments 12 Feb 01 9th Cir. orders modified injunction 5 Mar 01 Judge Patel issues a modified injuction. Final ruling still pending...

A&M Records v. Napster N.D. Cal. 2000 Napster provides a central directory service, which allows users to download music from other users’ collections. Napster argued that it was facilitating “space shifting” of music, but the court found this was a de minimis use. In its fair use analysis, the court found that all of the factors weighed heavily in favor of the record companies. The court concluded that the users were directly infringing the copyrighted works, and that Napster was contributing to this infringement--Judge Patel issued preliminary injunction. The Ninth Circuit stayed the injunction.

Napster Parties Napster’s Users? NAPSTER DEFENDANT PLAINTIFFS A&M Records Geffen Records Interscope Records Sony Music Entertainment MCA Records Atlantic Recording Island Records Motown Record Co. Capitol Records DEFENDANT NAPSTER Napster’s Users?

Plaintiffs’ Allegations Napster Users are engaged in the wholesale reproduction and distribution of copyrighted works, all constituting direct infringement Napster is engaged in contributory and vicarious infringement

Napster’s Fair Use Argument Users do not directly infringe plaintiff’s copyrights because they are engaged in fair uses of the material: sampling space-shifting permissive distribution

Court’s Findings Fair Use Analysis Purpose and Character of the Use downloading MP3 files does not transform the copyrighted work; the use is commercial Nature of the Work: the works in question are creative in nature Portion Used: “wholesale copying” Effect of Use on Market: reduces CD sales among college students; barrier to plaintiff’s entry into market for downloading music

Contributory Infringement Gershwin Case, 2nd Cir. 1971 A contributory infringer is “one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another.” Two Elements: the defendant must know or have reason to know of someone else’s direct infringement the defendant must actively participate by inducing, materially contributing to or furthering the other person’s direct infringement

Napster - Contributory Infringement KNOWLEDGE Napster had both actual and constructive knowledge that its users exchanged copyrighted music The district court, though, ignored Napster’s substantial non-infringing uses On the record, however, Plaintiffs will likely prevail MATERIAL CONTRIBUTION Napster provides site and facilities for direct infringement Plaintiffs demonstrated a likelihood of success on the merits of contributory infringement.

Vicarious Infringement Gershwin Case, 2nd Cir. 1971 Vicarious liability exists where “the right and ability to supervise coalesce with an obvious and direct financial interest in the exploitation of copyrighted materials” Based on the tort concept of respondeat superior However, not limited to employer-employee or principal-agent settings Two Elements: Defendant has control or supervision over the direct infringer Defendant has a direct financial interest in the infringement Knowledge and direct participation are not necessary

Napster - Vicarious Infringement FINANCIAL BENEFIT Napster has a direct financial interest where future revenue depends on increases in user-base SUPERVISION Although files are user-named and may not match copyrighted material exactly, Napster, nonetheless, has the right and ability to supervise its users’ conduct Napster had the right and ability to police its system and failed to do so Plaintiffs demonstrated a likelihood of success on the merits of vicarious infringement.

Other Napster Arguments User’s actions insulated from liability under the AHRA Napster is insulated from liability under the DMCA safe harbor for ISPs Court AHRA does not cover downloading MP3 files to hard drives Not inapplicable per se, but an issue to be developed at trial; balance of hardship tips in Plaintiffs’ favor

Napster - Modified Injunction 5 Mar 2001 Plaintiffs shall provide notice to Napster of their copyrighted sound recordings by providing details for each work (names including variations). Once Napster “receives reasonable knowledge” of specific infringing files containing copyrighted sound recordings, Napster shall, within three (3) business days, prevent such files from being included in the Napster index (thereby preventing access to the files corresponding to such names through the Napster system).

NAPSTER Updates Napster is attempting to legalize its business signing deals with independent music labels to distribute their songs, and agreeing to be an affiliate of MusicNet, an online music service planned by Warner Music Group, EMI Recorded Music and BMG Entertainment. 24 Sep 2001 - Settlement Napster settled a key class-action lawsuit with the National Music Publishers Association and agreed on a tentative deal to license the group's library of songs.

NAPSTER Goes To Trial October 10, 2001 Judge Patel opted not to issue an immediate ruling on whether the file-sharing service is in violation of copyright law. A third-party representative might be appointed to further investigate issues of ownership, misuse and the willfulness of Napster's infringement on the copyrights of recordings belonging to the major label groups.

Napster Strikes Back... The Justice Department’s anti-trust investigation began in February 2001 and investages the following questions: Why are MusicNet and Pressplay the only ventures to receive licenses for a significant amount of major-label music? What, if anything, did the labels do to inflate their royalties from online radio services? Napster alleges Anti-trust violations by RIAA RIAA members are colluding and abusing their market power by refusing licenses to Napster and other on-line companies

Napster’s Proposed Business Model Fee-Based Service Basic Service: limited downloads $2.95-$4.95/month Unlimited Service: unlimited downloads $5.95-$9.95/month converting to CD or MP3 device would be additional charge all songs in MP3 format would have to be removed and replaced with songs in a proprietary format 70% of Napster users polled say they would pay for service

CLASS DISCUSSION Is the Napster controversy more concerned with legality, or with business models? Should the traditional model of record companies survive? Or should a model involving the on-line transfer of music be allowed to take its place?

File-Swapping Sites Still Popular According to Nielsen//Net Ratings, the top file-swapping sites in September 2001 from home and office computers combined were: Napster - 4.2 million unique users Kazaa - 2.1 million Audiogalaxy - 2.0 million Winmx - 1.6 million MusicCity - 878,000 Aimster - 805,000 Morpheus - 451,000 Source: The Hollywood Reporter, October 11, 2001

MP3 File Sharing Statistics Source: The Economist, October 2001

New P2P Lawsuits October 2, 2001: Several major music labels and movie studios sued MusicCity ("Morpheus”) and Grokster The Labels claim that a file-sharing program used by Grokster and MusicCity allowed those companies to develop and "control a network largely dedicated to the repeated and exploitative unauthorized distribution and reproduction of plaintiff's protected works." The software was originally developed by FastTrack, an Amsterdam-based Corp., and is licensed to MusicCity and Grokster. Grokster and MusicCity license and distribute nearly identical peer-to-peer software that allows users to look for, trade and copy various computer files containing music, video and software content.