In re Napster, Inc. Copyright Litigation

• Decision Date: 14 March 2007
• Docket Number: No. 06-15886.,No. 06-72515.,06-15886.,06-72515.
• Citation: 479 F.3d 1078
• Parties: In re NAPSTER, INC. COPYRIGHT LITIGATION, UMG Recording, Inc.; Interscope Records; Motown Record Company, L.P.; Jerry Leiber; Mike Stoller, Individually and dba as Mike Stoller Music; Frank Music Corporation; Peer International Corporation, on Behalf of Themselves & All Others Similarly Situated; Capitol Records, Inc.; Caroline Records, Inc.; Noo Trybe Records, Inc.; Virgin Records America, Inc.; Narada Productions, Inc.; Higher Octave Music, Inc.; Priority Records LLC; Forefront Communications Group, Inc.; Jubilee Communications, Inc.; Emi Christian Music Group, Inc.; Bridgeport Music, Inc.; Southfield Music, Inc.; Westbound Records, Inc., Plaintiffs-Appellees, v. Bertelsmann AG; Bertelsmann, Inc.; Bemusic, Inc., Defendants-Appellants, and Hummer Winblad Venture Partners; Hummer Winblad Venture Partners IV, LP; Hummer Winblad Technology Fund IV, LP; Hummer Winblad Equity Partners IV, LLC; Hank Barry; John Hummer, Defendants. In re Bertelsmann, Inc.; In re Bemusic, Inc.; In re Bertelsmann AG, Bertelsmann AG; Bertelsmann, Inc.; Bemusic, Inc., Petitioners, v. United States District Court for the Northern District of California, Respondent, Capitol Records, Inc.; Caroline Records, Inc.; Noo Trybe Records, Inc.; Virgin Records America, Inc.; Narada Productions, Inc.; Higher Octave Music, Inc.; Priority Records LLC; Forefront Communications Group, Inc.; Jubilee Communications, Inc.; Emi Christian Music Group, Inc.; UMG Recordings Inc.; Interscope Records; Motown Record Company; Jerry Leiber, Individually and dba Jerry Leiber Music; Mike Stoller, Individually and dba as Mike Stoller Music; Frank Music Corporation; Peer International Corporation, Real Parties in Interest.
• Court: U.S. Court of Appeals — Ninth Circuit

479 F.3d 1078

In re NAPSTER, INC. COPYRIGHT LITIGATION,

UMG Recording, Inc.; Interscope Records; Motown Record Company, L.P.; Jerry Leiber; Mike Stoller, Individually and dba as Mike Stoller Music; Frank Music Corporation; Peer International Corporation, on Behalf of Themselves & All Others Similarly Situated; Capitol Records, Inc.; Caroline Records, Inc.; Noo Trybe Records, Inc.; Virgin Records America, Inc.; Narada Productions, Inc.; Higher Octave Music, Inc.; Priority Records LLC; Forefront Communications Group, Inc.; Jubilee Communications, Inc.; Emi Christian Music Group, Inc.; Bridgeport Music, Inc.; Southfield Music, Inc.; Westbound Records, Inc., Plaintiffs-Appellees, v. Bertelsmann AG; Bertelsmann, Inc.; Bemusic, Inc., Defendants-Appellants, and Hummer Winblad Venture Partners; Hummer Winblad Venture Partners IV, LP; Hummer Winblad Technology Fund IV, LP; Hummer Winblad Equity Partners IV, LLC; Hank Barry; John Hummer, Defendants.

In re Bertelsmann, Inc.;

In re Bemusic, Inc.;

In re Bertelsmann AG,

Bertelsmann AG; Bertelsmann, Inc.; Bemusic, Inc., Petitioners, v. United States District Court for the Northern District of California, Respondent, Capitol Records, Inc.; Caroline Records, Inc.; Noo Trybe Records, Inc.; Virgin Records America, Inc.; Narada Productions, Inc.; Higher Octave Music, Inc.; Priority Records LLC; Forefront Communications Group, Inc.; Jubilee Communications, Inc.; Emi Christian Music Group, Inc.; UMG Recordings Inc.; Interscope Records; Motown Record Company; Jerry Leiber, Individually and dba Jerry Leiber Music; Mike Stoller, Individually and dba as Mike Stoller Music; Frank Music Corporation; Peer International Corporation, Real Parties in Interest.

No. 06-15886.

No. 06-72515.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted September 13, 2006.

Filed March 14, 2007.

R. Bruce Rich, Kenneth L. Steinthal, Elizabeth Stotland Weiswasser, Jonathan Bloom, Mark J. Fiore, Weil Gotshal & Manges, New York, NY; Matthew D. Powers, Weil Gotshal & Manges, Redwood Shores, California; Gayle E. Rosenstein, Gregory S. Coleman (argued) and Marc S. Tabolsky, Weil Gotshal & Manges, Austin, TX, for the appellants.

Daniel P. Collins, Glenn Douglas Pomerantz, Kelly M. Klaus, Fred A. Rowley, Jr., Munger Tolles & Olson, Los Angeles, CA; Carey Ramos, Lynn B. Bayard, Paul Weiss Rifkind Wharton & Garrison, New York, NY; Peter L. Simmons, Mitchell E. Epner, Fried Frank Harris Shriver Jacobson, New York, NY, for the appellees.

Appeal from the United States District Court for the Northern District of California; Marilyn H. Patel, District Judge, Presiding. D.C. Nos. CV-00-01369-MHP, CV-04-01166-MHP, CV-04-01671-MHP, CV-04-01351-MHP, CV-04-02121-MHP, CV-00-01369-MHP, CV-04-01166-MHP, CV-04-01671-MHP, CV-04-01351-MHP, CV-04-02121-MHP.

Before FERNANDEZ, W. FLETCHER, and RAWLINSON, Circuit Judges.

WILLIAM A. FLETCHER, Circuit Judge.

In this appeal, we must decide whether the district court properly ordered the disclosure of privileged attorney-client communications under the crime-fraud exception. We hold that in a civil case the district court must allow both the party seeking discovery of the communications and the party asserting the privilege to present evidence relevant to the privilege and the exception, and must weigh that evidence before ordering outright disclosure. We further hold that in a civil case, when the district court is asked to order outright disclosure, the burden of proof on the party seeking to vitiate the privilege is preponderance of the evidence. We conclude the appellees in this case have failed to make the requisite evidentiary showing to support a finding that the crime-fraud exception applies. We reverse and remand for further proceedings consistent with this opinion.

I. Background

This appeal arises out of litigation over alleged copyright infringement by various parties who funded Napster, the now-defunct online file-sharing service. In December 1999 and January 2000, plaintiffs Jerry Leiber et al. and Capitol Records et al., as well as other music industry players, sued Napster for copyright infringement. Leiber et al. and Capitol Records et al. (collectively "appellees") are now appellees in this court.

Appellees alleged that Napster's service enabled the unauthorized reproduction and distribution of copyrighted digital music files. See A & M Records, Inc. v. Napster, Inc., 114 F.Supp.2d 896 (N.D.Cal.2000), aff'd in part, rev'd in part, 239 F.3d 1004 (9th Cir.2001) (as amended). In July 2000, the district court entered a preliminary injunction requiring Napster to search for, and remove from its service, files that rights holders had identified as infringing. A & M Records, Inc., 239 F.3d at 1011. We stayed the preliminary injunction two days later, but substantially affirmed in February 2001. Id. at 1029. Napster's service was shut down in July 2001 after Napster failed to comply with the terms of a modified preliminary injunction. See A & M Records, Inc. v. Napster, Inc., No. C 99-05183, 2001 WL 227083 (N.D.Cal. Mar.5, 2001), aff'd, 284 F.3d 1091 (9th Cir. 2002). Napster filed for bankruptcy in June 2002, and its ultimate liability for copyright infringement was never adjudicated.

Appellant Bertelsmann AG is a German media conglomerate. Between October 2000 and October 2001, Bertelsmann loaned Napster a total of about $85 million to fund its anticipated transition to a licensed digital music distribution system. However, Napster failed fully to launch the new licensed system before declaring bankruptcy. Bertelsmann did not obtain Napster's assets in the bankruptcy proceedings.

In April 2003, appellees and others separately filed suit against Bertelsmann in federal court in the Southern District of New York, claiming that Bertelsmann was vicariously and contributorily liable for copyright infringement by Napster and/or Napster's users. Appellees charged that by lending Napster millions of dollars Bertelsmann assumed control over Napster's file-sharing service, or prolonged its allegedly infringing operations, in order to avoid dispersion of Napster's estimated 40 million users before the anticipated new licensed digital music distribution system was functional. The Judicial Panel on Multidistrict Litigation subsequently transferred appellees' suits against Bertelsmann to the Northern District of California, where the In re Napster, Inc. Copyright Litigation was pending.

In July 2003, Bertelsmann moved to dismiss appellees' suits for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). UMG Recordings, Inc. v. Bertelsmann AG, 222 F.R.D. 408, 410 (N.D.Cal.2004). Bertelsmann argued as a matter of law that merely lending money to an alleged copyright infringer cannot give rise to liability under either a vicarious or contributory copyright infringement theory. Id. at 412. Bertelsmann further argued that its loan did not give it the ability to control Napster.

The district court denied Bertelsmann's motion to dismiss, holding that appellees had stated a claim by alleging Bertelsmann's control of Napster's operations. It explained that

[Bertelsmann and co-defendants'] motions to dismiss are premised on the theory that plaintiffs have accused them only of what might be considered "aiding and abetting" Napster's copyright violations, viz., providing Napster with additional funding that allowed it to continue operating. According to defendants, plaintiffs thus state claims for what this court has termed "tertiary infringement" —vicarious or contributory assistance to a vicarious or contributory infringer, here Napster—and towards which this court has previously expressed disfavor. . . . Defendants have not properly characterized plaintiffs' complaints. Rather than alleging that defendants merely supplied Napster with necessary funding (serving as a "but for" cause of Napster's subsequent activities) . . . plaintiffs have specifically accused defendants of assuming control over Napster's operations and directing the infringing activities that gave rise to the original Napster litigation. . . . Capitol Records' complaint alleges essentially identical facts [as other plaintiffs']: "At least as early as September 2000, Bertelsmann began preparing to operate the Napster system, and by at least as early as October 2000, the Napster system was firmly under the control of Bertelsmann. Bertelsmann continued to operate the Napster system and to allow its users to copy millions of protected recordings . . . ."

Id. at 412-13 (internal citations omitted). The district court declined to "pass upon the question of whether mere financial support of a contributing and vicarious infringer . . . without more direct involvement" could give rise to liability. Id. at 414.

Pretrial discovery continued after the district court denied Bertelsmann's motion to dismiss. On November 8, 2005, appellees moved to compel Bertelsmann to produce all attorney-client communications related to a $50 million loan, convertible to equity, that Bertelsmann made to Napster on October 30, 2000 while Napster was appealing the initial preliminary injunction. Appellees contended that beginning in September 2000, when drafting of the loan documents began, Bertelsmann had engaged in a continuing scheme to defraud the courts. They argued that the crime-fraud exception to the attorney-client privilege applied to these communications, relying on two theories of fraud under California Civil Code §§ 1709-10 ("Fraudulent Deceit") (2006).

First, appellees contended that Bertelsmann's loan to Napster was not in fact a loan, but was, rather, cash tendered in exchange for an equity stake in the company. According to appellees, Bertelsmann used its lawyers to create sham loan documents that were designed to disguise what was, in fact, a purchase of control of Napster. Appellees alleged that Bertelsmann, anticipating future copyright infringement litigation, intended to use the sham loan...