A & M Records, Inc. v. Napster, Inc.

Citation114 F.Supp.2d 896
Decision Date10 August 2000
Docket NumberNo. C 99-5183 MHP.,No. C 00-0074 MHP.,C 99-5183 MHP.,C 00-0074 MHP.
CourtU.S. District Court — Northern District of California
PartiesA & M RECORDS, INC., a corporation; Geffen Records, Inc., a corporation; Interscope Records, a general partnership; Sony Music Entertainment, Inc., a corporation; MCA Records, Inc., a corporation; Atlantic Recording Corporation, a corporation; Island Records, Inc., a corporation; Motown Records Company L.P., a limited partnership; Capitol Records, a corporation; La Face Records, a joint venture; BMG Music d/b/a The RCA Records Label, a general partnership; Universal Records Inc., a corporation; Elektra Entertainment Group Inc., a corporation; Arista Records, Inc., a corporation; Sire Records Group, Inc., a corporation; Polygram Records, Inc., a corporation; Virgin Records America, Inc., a corporation; and Warner Bros. Records Inc., a corporation, Plaintiffs, v. NAPSTER, INC., a corporation, and Does 1-100, Defendants. Jerry Leiber, individually and d/b/a Jerry Leiber Music; Mike Stoller, individually and d/b/a Mike Stoller Music; and Frank Music Corp., on behalf of themselves and all others similarly situated, Plaintiffs, v. Napster, Inc., Defendant.

Russell J. Frackman, Jeffrey D. Goldman, George M. Borkowski, Drew E. Breuder, Mitchell Silberberg & Knupp, Los Angeles, CA, William M. Hart, Eric J. German, Frank P. Schibilia, Carla M. Miller, Hank L. Goldsmith, Leon P. Gold, Lawrence L. Weinstein, Proskauer Rose LLP, New York, NY, Hadrian R. Katz, Arnold & Porter, Washington, DC, Steven B. Fabrizio, Washington, DC, for Plaintiffs.

Lisa M. Arent, Melinda M. Morton, Michael A. Brille, Samuel A. Kaplan, William Jackson, Seth A. Goldberg, Fenwick & West LLP, Palo Alto, CA, Laurence F. Pulgram, Kathryn J. Fritz, Fenwick & West LLP, San Francisco, CA, David Boies, Boies Schiller & Flexner LLP, Armonk, NY, for Defendants.

Albert P. Bedecarre, Quinn Emanuel Urquhart Oliver & Hedges, LLP, Palo Alto, CA, for amicus.

OPINION

PATEL, Chief Judge.

The matter before the court concerns the boundary between sharing and theft, personal use and the unauthorized world-wide distribution of copyrighted music and sound recordings.1 On December 6, 1999, A & M Records and seventeen other record companies ("record company plaintiffs") filed a complaint for contributory and vicarious copyright infringement, violations of the California Civil Code section 980(a)(2), and unfair competition against Napster, Inc.,2 an Internet start-up that enables users to download MP3 music files without payment. On January 7, 2000, plaintiffs Jerry Leiber, Mike Stoller, and Frank Music Corporation filed a complaint for vicarious and contributory copyright infringement on behalf of a putative class of similarly-situated music publishers ("music publisher plaintiffs") against Napster, Inc. and former CEO Eileen Richardson. The music publisher plaintiffs filed a first amended complaint on April 6, 2000, and on May 24, 2000, the court entered a stipulation of dismissal of all claims against Richardson.3 Now before this court is the record company and music publisher plaintiffs' joint motion to preliminarily enjoin Napster, Inc. from engaging in or assisting others in copying, downloading, uploading, transmitting, or distributing copyrighted music without the express permission of the rights owner.

In opposition to this motion, defendant seeks to expand the "fair use" doctrine articulated in Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984), to encompass the massive downloading of MP3 files by Napster users. Alternatively, defendant contends that, even if this third-party activity constitutes direct copyright infringement, plaintiffs have not shown probable success on the merits of their contributory and vicarious infringement claims. Defendant also asks the court to find that copyright holders are not injured by a service created and promoted to facilitate the free downloading of music files, the vast majority of which are copyrighted.

Having considered the parties' arguments, the court grants plaintiffs' motion for a preliminary injunction against Napster, Inc. The court makes the following Findings of Fact and Conclusions of Law to support the preliminary injunction under Federal Rules of Civil Procedure 65(d).

I. FINDINGS OF FACT
A. MP3 Technology

1. Digital compression technology makes it possible to store audio recordings in a digital format that uses less memory and may be uploaded and downloaded over the Internet. See David M. Lisi Dec. (Tygar Rep.) at 11. MP3 is a popular, standard format used to store such compressed audio files. See Edward Kessler Dec. ¶ 3;4 Lisi Dec. (Tygar Rep.) at 11. Compressing data into MP3 format results in some loss of sound quality. See List Dec. (Tygar Rep.) at 12. However, because MP3 files are smaller, they require less time to transfer and are therefore better suited to transmission over the Internet. See id. at 11.

2. Consumers typically acquire MP3 files in two ways. First, users may download audio recordings that have already been converted into MP3 format by using an Internet service such as Napster. See Lisi Dec. (Tygar Rep.) at 11. Second, "ripping" software makes it possible to copy an audio compact disc ("CD") directly onto a computer hard-drive; ripping software compresses the millions of bytes of information on a typical CD into a smaller MP3 file that requires a fraction of the storage space. See id.; Kessler Dec. ¶ 32; 1 Laurence F. Pulgram Dec., Exh. A (Conroy Dep.) at 13:19-24.

B. Defendant's Business

1. Napster, Inc. is a start-up company based in San Mateo, California. It distributes its proprietary file-sharing software free of charge via its Internet website. People who have downloaded this software can log-on to the Napster system and share MP3 music files with other users who are also logged-on to the system. See Kessler Dec. ¶ 6. It is uncontradicted that Napster users currently upload or download MP3 files without payment to each other, defendant, or copyright owners.

According to a Napster, Inc. executive summary, the Napster service gives its users the unprecedented ability to "locate music by their favorite artists in MP3 format." 1 Frackman Dec., Exh. A (Richardson Dep.), Exh. 127 at ER000131.5 Defendant boasts that it "takes the frustration out of locating servers with MP3 files" by providing a peer-to-peer file-sharing system that allows Napster account holders to conduct relatively sophisticated searches for music files on the hard drives of millions of other anonymous users. See A & M Records, Inc. v. Napster, Inc., 2000 WL 573136, at *1 (N.D.Cal. May 12, 2000) (citing Def.'s Mot. for Summ. Adjud.) at 4.

2. Although Napster was the brainchild of a college student who wanted to facilitate music-swapping by his roommate, see 1 Frackman Dec., Exh. B (Fanning Dep.) at 31:10-35:1, it is far from a simple tool of distribution among friends and family. According to defendant's internal documents, there will be 75 million Napster users by the end of 2000. See 1 Frackman Dec., Exh. A (Richardson Dep.) at 318:19-319:1, Exh. 166 at 002725. At one point, defendant estimated that even without marketing, its "viral service" was growing by more than 200 percent per month. Id., Exh. 127 at ER00130. Approximately 10,000 music files are shared per second using Napster, and every second more than 100 users attempt to connect to the system. See Kessler Dec. ¶ 29.

3. Napster, Inc. currently collects no revenues and charges its clientele no fees; it is a free service. See, e.g., 1 Frackman Dec., Exh. A (Richardson Dep.) at 179:15. However, it has never been a non-profit organization. See id. at 116:10. It plans to delay the maximization of revenues while it attracts a large user base. See id., Exh. 127 at ER00130; 1 Frackman Dec., Exh. C (Parker Dep.) at 160:1-162:14, Exh. 254 at SF00099. The value of the system grows as the quantity and quality of available music increases. See id. at 112:18-113:2, Exh. 127 at ER00130; David J. Teece Rep. at 4. Defendant's internal documents reveal a strategy of attaining a "critical mass" of music in an "ever-expanding library" as new members bring their MP3 collections online. See 1 Frackman Dec. (Richardson Dep.), Exh. 127 at ER00130; Exh. C (Parker Dep.) at 160:1-162:14, Exh. 254 at SF00099.

Defendant eventually plans to "monetize" its user base. See id. at 115:24-116:13; Teece Rep. at 4, 7-11. Potential revenue sources include targeted email; advertising; commissions from links to commercial websites; and direct marketing of CDs, Napster products, and CD burners and rippers. See 1 Frackman Dec., Exh. C (Parker Dep.) at 160:1-162:14, Exh. 254 at SF00099-100; Teece Rep. at 2-3. Defendant also may begin to charge fees for a premium or commercial version of its software. See Teece Rep. at 8; cf. 1 Frackman Dec., Exh. A (Richardson Dep.) at 179:6-25. The existence of a large user base that increases daily and can be "monetized" makes Napster, Inc. a potentially attractive acquisition for larger, more established firms. See Teece Rep. at 7.

4. Napster Inc.'s value — which is measured, at least in part, by the size of its user base — lies between 60 and 80 million dollars. See Teece Rep. at 11-12; Def.'s Opp. at 35. Defendant obtained substantial capital infusions after the onset of this litigation. For example, in May 2000, the venture firm Hummer Winblad purchased a twenty-percent ownership interest in the company for 13 million dollars; other investors simultaneously invested 1.5 million dollars. See Hank Barry Dec. ¶ 7.

5. The evidence shows that virtually all Napster users download or upload copyrighted files and that the vast majority of the music available on Napster is copyrighted. Eighty-seven percent of the files sampled by plaintiffs' expert, Dr. Ingram Olkin, "belong to or are...

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