Now they are fighting among themselves !

Everything that goes around, comes around !

From the LA Times, of this date...


September 26, 2002 E-mail story Print


Music Labels Seek Piracy Payback
Entertainment: The firms consider whether to sue Bertelsmann for allegedly helping Napster users.

By JOSEPH MENN, TIMES STAFF WRITER


SAN FRANCISCO -- A three-year hunt by the major record labels to make someone pay for the rampant digital piracy on Napster might ultimately lead them to one of their own.

Several labels and music publishers are debating whether to sue German media powerhouse Bertelsmann, owner of the BMG label, for allegedly helping Napster Inc. users infringe song copyrights.

If successful, a lawsuit could fetch as much as $1 billion--the amount that Napster would be on the hook for if each alleged copyright violation resulted in a maximum fine of $150,000. That would dwarf the $90 million Bertelsmann has loaned Napster since October 2000.

The potentially costly twist stems from evidence recently unearthed in Napster's Delaware bankruptcy case showing that Bertelsmann exerted more control over Napster's service than previously known.

"The recording studios that we represent are looking at the question of whether or not there can be claims for copyright infringement that could be brought directly or indirectly against Bertelsmann," attorney David Stratton said during a bankruptcy hearing this month. Stratton's clients include A&M and Geffen Records.

Other lawyers involved in the discussions say the chance of a suit are better than ever, given the strength of the evidence and Bertelsmann's deep pockets.

"There is a good deal of sentiment among a number of music publishers that this is a claim that should be pursued up the chain against Bertelsmann," one person familiar with the talks said. "The odds are significantly better than 50-50." A decision could come within a month, the person said.

Lawyers and executives said Vivendi Universal's Universal Music Group and EMI are among the labels most likely to sue. Because of the corporate politics involved--including joint ventures by the labels to put authorized music online--the companies' boards might have to make the final call.

A Bertelsmann spokeswoman and executives at rival labels declined to comment. The Recording Industry Assn. of America is staying out of the fight because it represents BMG and the other labels.

Among the music publishers, the National Music Publishers' Assn. is a leading candidate to be a plaintiff. Asked about the possibility of a suit, NMPA attorney Carey Ramos said: "This matter raises serious issues. We are studying the situation and considering what action is appropriate."

Now dormant and down to a single employee in Redwood City, Calif., Napster was founded in 1999 and pioneered the use of peer-to-peer technology, which used the Internet to connect tens of millions of users searching for songs to copy in the unrestricted MP3 format. In one survey of more than 1,000 Napster users, an expert hired by the labels found that every subscriber to the free service was offering to share copyrighted songs.

Napster shut down its service under court pressure in July 2001 and filed for bankruptcy reorganization three months ago.

The labels' resentment against Bertelsmann for keeping Napster alive surfaced as soon as the owner of BMG and Random House announced its initial investment nearly two years ago.

Loan Kept Napster Up

At the time, Bertelsmann said that the then-undisclosed loan amount would go toward developing a new, legal version of the file-swapping phenomenon that respected music copyrights.

But the new evidence shows that much of the initial $60 million went for operating expenses that kept the pirate system running.

Bertelsmann executive William Sorenson testified in a deposition last month that although Bertelsmann intended the money to go toward the legal service, he assumed it also was used for rent and salaries.

And Napster Chief Financial Officer Carolyn Jensen testified that equipment costs, legal fees and small settlement payments also came out of the Bertelsmann bankroll.

With the cash infusion, Napster was able to stay in business for eight more months at the peak of its popularity.

Napster filed for bankruptcy protection before a final judgment came in the lawsuits against it by record labels and music publishers. But a judge ruled in granting a preliminary injunction against Napster that it was likely to be found liable for contributory and vicarious copyright infringement, and the injunction was upheld by San Francisco's 9th U.S. Circuit Court of Appeals.

A more complicated suit against Bertelsmann might follow along the same lines, lawyers said.

To establish contributory infringement, the plaintiffs would need to show that Bertelsmann knew about the Napster users' wrongful behavior and contributed to it in some way.

Because Bertelsmann's BMG label had sued Napster before the investment, it will be difficult for Bertelsmann to disavow knowledge about the problems with its service, the opposing attorneys said.

In one internal memo, then-Bertelsmann Chief Executive Thomas Middelhoff acknowledged that file-trading by Napster users "has thus far infringed upon the copyrights of artists and record companies." Through a spokeswoman, Middelhoff declined to comment.

And a task force of executives from Bertelsmann's electronic commerce group and BMG recommended to Middelhoff just before the loan that the old Napster stay in operation "in order to provide the traffic and technology needed to build" a revamped system later.

"Bertelsmann knew the money was being used to continue to run the infringing service until the legal service could be developed," concluded music publishers' attorney Andrew Rosenberg.

Experts said Bertelsmann could argue that Middelhoff isn't a lawyer, mitigating the damage from his memo. And they said BMG's lawsuit might not establish definitively that Bertelsmann knew Napster's users were lawbreakers.

"Notwithstanding the documents, that's not a slam dunk either way," said Wayne State University law professor Jessica Litman, who helped draft a friend-of-the-court brief on Napster's behalf two years ago. At the time of the initial Bertelsmann funding, she pointed out, the appeals court had not approved the injunction, so many were arguing that it was legitimate.

To establish vicarious liability, the plaintiffs would have to show that Bertelsmann controlled the activity of Napster users and benefited from it financially. The judge in the 1999 lawsuit determined that Napster had "supervisory control" because it steered users to what they were looking for and could bar specific users or songs.

Data Suggest Control

The new evidence suggests that Bertelsmann had a large degree of at least general control in the situation, though the Napster board was dominated by investors from San Francisco's Hummer Winblad Venture Partners.

Napster finance chief Jensen testified that she was unable to get a bank loan, even to buy new equipment, before Bertelsmann rode to the rescue with a loan at 3 percentage points below the prime rate.

"If Bertelsmann had come in and said, 'You can have the money, but shut it down today,' they would have had no choice," an attorney working on the matter said.

One Napster executive who left the firm this year said of the other labels, "They could definitely make a case. There was a lot of control."

Proving financial gain might be more difficult. Yet the initial Napster rulings set a low threshold. U.S. District Judge Marilyn Patel determined that Napster benefited financially because its worth as a private company increased with the additional traffic brought in by purloined material.

Likewise, the labels could argue that Bertelsmann's loan--which was convertible into a majority equity stake--was worth more as traffic soared into the tens of millions of users.

Loan Questioned

The new evidence came to light as music publishers and the record labels sought to block Bertelsmann from including its loans in the overall value of its bid to buy Napster's assets this month. They argued that the loan was disguised equity because it was convertible into stock and was designed to avoid the greater potential liability of a part-owner.

Bankruptcy Judge Peter Walsh hasn't ruled on that point. Instead, he blocked Bertelsmann's plan because Napster's last CEO, Konrad Hilbers, appeared to be too close to his former colleagues at Bertelsmann during the sale negotiations. Walsh noted he could have blocked the sale for other reasons.

The next skirmish most likely will come in the same Delaware court, where Bertelsmann is expected to seek much of the proceeds from the sale of Napster's assets to the highest bidder. Because Bertelsmann's loans were secured by those assets, the company is still first in line as a creditor.

But other creditors, including the frustrated record label plaintiffs from the 1999 suits against Napster, plan to object, citing the evidence of collusion that might later be displayed in a new federal lawsuit.

If they do file a separate suit, copyright law permits infringement victims to collect either actual damages or statutory damages, which can rise as high as $150,000 per work infringed if the violations are found to be willful. The music publishers alone warned Napster that 90,000 works were being infringed, for a potential total of more than $1 billion.

Judges have wide discretion to set lower awards, and the new, more conservative leadership at Bertelsmann might also be willing to strike a bargain and settle.

*

Times staff writer Jeff Leeds contributed to this report.

http://www.latimes.com/business/la-fi-napster26sep26001431,0,388519.story?coll=la-headlines-business

 

When a group has no defined target, it implodes.