Text of the Napster ruling

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,

NAPSTER, INC.,

Defendant-Appellant.

___________________________________

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,

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

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

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. §

1292(a)(1). We affirm in part, reverse in part and remand.

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 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.

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. § 106. See 17 U.S.C. § 501(a) (infringement occurs

when alleged infringer engages in activity listed in § 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

§ 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, § 106(1); and distribution, § 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. § 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. § 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. § 107. The district court

first conducted a general analysis of Napster system uses under § 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. § 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,

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.