Office of the Circuit Executive
U.S. Court of Appeals for the Ninth Circuit
_________________________________________________________________
Case Name:
A&M RECORDS V NAPSTER
Case Number: Date Filed:
00-16401 02/12/01
_________________________________________________________________
FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE 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.
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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. No. 00-16401
D.C. No. CV-99-05183-MHP
No. 00-16403
D.C. No. CV-00-00074-MHP
OPINION
Summary
Appeal from the United States District Court
for the Northern District of California
Marilyn Hall Patel, Chief District Judge, Presiding
Argued and Submitted October 2, 2000
San Francisco, California
Filed February 12, 2001
Before: SCHROEDER, Chief Judge, BEEZER and PAEZ, Circuit Judges.
BEEZER, Circuit Judge:
Plaintiffs are engaged in the commercial recording, distribution and
sale of copyrighted 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.
ß 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 "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)). the MusicShare
software to his individual computer. See GOTOBUTTON BM_1_
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.
B. Listing Available Files
If a registered user wants to list available files stored in his
computer's hard drive on Napster for others to access, he 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 is the subject of our copyright
infringement analysis.
II
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, __ F.3d __, 2001
WL 55724, at *4 (9th Cir. Jan. 24, 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 *4 (citing
Does 1-5 v. Chandler, 83 F.3d 1150, 1152 (9th Cir. 1996)).
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)).
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
Plaintiffs claim Napster users are engaged in the wholesale
reproduction and distribution of copyrighted works, all constituting
direct infringement. 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. 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.
A. Infringement
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. ß 106. See 17 U.S.C. ß 501(a) (infringement
occurs when alleged infringer engages in activity listed in ß 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 ß 106 were violated: "here the evidence establishes 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, ß
106(1); and distribution, ß 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
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. ß 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. ß 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. ß 107. The district court first conducted a general analysis of
Napster system uses under ß 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. 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. ß
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. We agree. We first
address the court's overall fair use analysis.
1. Purpose and Character of the Use
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 (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. 1994) (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.").
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. 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.
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. Napster
counters that even if certain users engage in commercial use by
downloading instead of purchasing the music, space-shifting and
sampling are nevertheless noncommercial 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. ß 101 (defining "Financial
Gain").
2. The Nature of the Use
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. 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.
3. The Portion Used
"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 (1984) (acknowledging that fair
use of time-shifting necessarily involved making a full copy of a
protected work).
4. Effect of Use on Market
"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 (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. 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 (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 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.
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.
a. Sampling
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 ("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.
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
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 (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. ab 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
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).
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
Contributory liability requires that the secondary infringer "know or
have reason to know" of direct infringement. Cable/Home Communication
Corp. 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, 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. 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 (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.
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 (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 (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).
We are bound to follow Sony, and will not impute the requisite level
of knowledge to Napster merely because peer-to-peer file sharing
technology may be used to infringe plaintiffs' copyrights. See 464
U.S. at 436 (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 (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. 1997) (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.
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.
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
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. 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. PP 3-4.
114 F. Supp. 2d at 918.
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
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; see generally Anne Hiaring, Copyright
Infringement Issues on the Internet, 617 PLI/Pat 455, 528 (Sept. 2,
2000) (indicating that the "staple article of commerce" doctrine
"provides a defense only to contributory infringement, not to
vicarious infringement"). 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.
Consequently, when the Sony Court used the term "vicarious 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
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."
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. Greene 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.2d 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 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 ß 1008
of the Audio Home Recording Act of 1992, 17 U.S.C. ß 1008. Second,
Napster argues that its liability for contributory and vicarious
infringement is limited by the Digital Millennium Copyright Act, 17
U.S.C. ß 512. We address the application of each statute in turn.
A. Audio Home Recording Act
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. ß 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 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
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. ß 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 ß 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 ß 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. ß 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 ß 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, ß 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.
114 F. Supp. 2d at 926.
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 improperly rejected valid
affirmative defenses of waiver, implied license and copyright misuse.
We address the defenses in turn.
A. Waiver
"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).
Napster argues that the district court erred in 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. 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
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, 121 S. Ct. 173 (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
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 970 at 976-77; see also
Religious Tech. Ctr. v. Lerma, No. 95-1107A, 1996 WL 633131, at *11
(E.D. Va. Oct. 4, 1996) (listing circumstances which indicate improper
leverage). 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)). 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. ß 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).
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.
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.
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.
Based on our decision to remand, Napster's additional arguments on
appeal 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. ß 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
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
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 ß 14.06[B] (1988)),
aff'd, 495 U.S. 207 (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.
ß 115.
The Copyright Act provides for various sanctions for infringers. See,
e.g., 17 U.S.C. ßß 502 (injunctions); 504 (damages); and 506 (criminal
penalties); see also 18 U.S.C. ß 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, 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.
COUNSEL LISTING
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, George M. Borkowski, Jeffrey D. Goldman, Roy L.
Shults and Peter B. Gelblum, Mitchell, Silberberg & Knupp, Los
Angeles, California; Carey R. Ramos, Paul, Weiss, Rifkind, Wharton &
Garrison, New York, New York, for 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.
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.
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.