WASHINGTON -- When a federal appeals court decided the Napster case on Monday, it granted the embattled file-trading service a temporary stay of execution.
But Napster not only has to worry about the threat of being shut down -- it also faces a very real possibility of whopping fines for copyright violations.
The Ninth Circuit Court of Appeals said the proceedings in the district court showed the company's executives had "actual and constructive" knowledge that not-exactly-legal MP3 swapping was happening.
Translation: Statutory damages that could quickly add up to big bucks. A federal judge in New York ruled last year, for instance, that MP3.com was liable for $25,000 in damages for each CD copied.
"It's extremely likely that Napster will have a very large financial judgment against them," said R. Polk Wagner, an assistant professor at the University of Pennsylvania's law school.
"Napster could be forced to declare bankruptcy and sell off its assets, which include the service," Wagner says. "That's the ironic thing. At the end of the day, the record companies may end up owning Napster -- not in the way everyone thought they would by buying them off, but by getting this monstrous judgment."
Currently the courts hearing the case are focused solely on the request by music companies -- including Sony, Atlantic, and MCA Records -- for a preliminary injunction against Napster. But unless the case is settled, it eventually will go to trial before U.S. District Judge Marilyn Hall Patel.
During that trial, the recording industry plaintiffs plan to ask for damages -- and Monday's ruling indicates that the appeals court seems inclined to grant the request.
In their complaint that started the lawsuit, the plaintiffs ask "for maximum statutory damages in the amount of not less than $100,000 for each copyrighted work infringed." Plus attorney's fees, "restitution," and punitive damages.
Ouch.
When some 10,000 files per second are exchanged through Napster -- according to the company's own numbers, which the appeals court called "statistical evidence of massive, unauthorized downloading and uploading of plaintiffs' copyrighted works" -- the costs add up remarkably quickly.
Webnoize, a market research firm, reports that in 2001 the pace of transfers accelerated to nearly 3 billion song transfers in January alone.
That's one reason the appeals court gave to explain why it narrowed, but upheld Patel's preliminary injunction: "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."
What happens between now and the time of the trial depends on how Patel rewords her preliminary injunction, which the appeals court instructed her to do. A narrow injunction would impose additional costs on Napster, but allow it to stay alive, while a broad order could come very close to shutting it down.
"There's a great deal of play in there," said Jessica Litman, a professor of law at Wayne State University. "(Patel's) got a great deal of discretion."
One possibility: Napster only has to respond when recording industry firms identify a specific name and location of a file.
"If that happened, the effect would be an inconvenience," Litman said. "But it wouldn't necessarily have a great deal of effect on Napster."
According to the appeals court, Napster "could block access to the system by suppliers of the infringing material."
But Patel's previous rulings show that she doesn't seem to view Napster as a very legitimate enterprise, and she could hand down a broader injunction that requires Napster to do ongoing surveillance of its system. In that case, the Recording Industry Association of America would merely give Napster a list of copyrighted songs and make the company do all the work.
Litman said: "That puts a burden on Napster that's just huge."
The appeals court lets Patel decide either way: "We agree that if a computer system operator learns of specific infringing material available on his system and fails to purge such material from the system, the operator knows of and contributes to direct infringement.
"Conversely, absent any specific information which identifies infringing activity, a computer system operator cannot be liable for contributory infringement merely because the structure of the system allows for the exchange of copyrighted material."
