Napster Judge Questions Structures of Record Labels’ New Online Ventures

SAN FRANCISCO — Napster Inc. found a sliver of legal daylight Wednesday, raising issues of collusion and antitrust in federal court as the recording industry’s copyright-infringement lawsuit crept forward.

What began as a hearing to consider the recording industry’s request for summary judgment quickly shifted into a discussion about the possibility of an anticompetitive structure behind MusicNet, the joint venture of Seattle-based RealNetworks Inc. (RNWK) and record labels AOL Time Warner Inc. (AOL), Bertelsmann AG and EMI Group PLC. That online music service is scheduled to launch later this year.

U.S. District Judge Marilyn Hall Patel didn’t rule on the summary-judgment request, but did launch into a vigorous discussion about the workings of MusicNet and how it overlapped with the labels’ suit against Napster. She said MusicNet appeared to have the hallmarks of an anticompetitive business enterprise that “looks bad, sounds bad and smells bad.”

Napster’s attorney argued that an agreement reached earlier this year between MusicNet and Napster contained a provision unfairly giving MusicNet the right to terminate the contract if Napster sought agreements with other labels.
Judge Patel seemed equally perplexed about the provision. She told recording-industry attorney Russell Frackman she saw MusicNet as an attempt by some of his client labels to tap into the growing online music market collectively and “shroud it in some mysterious sort of joint venture.”

Napster attorney Celia Barenholtz argued the industry may have misused its copyright music as a byproduct of the formation of MusicNet and pressplay, the online venture owned by Sony Corp. (SNE) and Vivendi Universal SA (V). Napster wants additional information on the formation of MusicNet and pressplay for possible antitrust violations, as it may form the basis for a new legal defense.
Judge Patel ruled last year that the song-swap company’s free swapping of copyright songs is illegal and issued an injunction forcing the company to closely police its system for pirated music if it wanted to stay in business.
If the recording industry was found to have misused its copyright material, it might not be able to successfully pursue an infringement claim on those works against Napster.

Ms. Barenholtz argued the industry’s misuse comes into play as the major labels pool their power in the formation of MusicNet and pressplay and set price controls to limit the marketplace, leaving Napster with few choices other than to sign agreements with industry leaders.

To support its contention that the recording industry has set up an anticompetitive operation, Napster submitted a declaration from Roger Noll, a Stanford professor and expert in the economics of antitrust and intellectual property. He examined the business structure of the recording industry and found it to have ventured into antitrust territory in forming MusicNet and pressplay.
“To summarize, the joint ventures in digital distribution inherently have an anticompetitive effect on prices,” wrote Mr. Noll. “Moreover, the power of these joint ventures is directly derived from the exercise of copyrights in recordings.”

On the issue of copyright ownership — claimed by the recording industry but challenged by Napster — Judge Patel seemed convinced that the industry’s simple applications to the U.S. Copyright Office would lead to a determination that the labels owned the material. However, she left a final determination on copyright ownership open to further inquiry and said she may appoint a special master to examine all documentation, including artist contracts, before making a final ruling.

Copyright (c) 2001 Dow Jones & Company, Inc. All Rights Reserved