Legal experts see one course for Napster: litigation

A federal appeals court on Friday stayed a judge's preliminary injunction against Napster while it considers whether to uphold or throw out the ruling. That decision could come by October.

The appeal schedule gives Napster some time to close the distance with the recording industry. But legal experts said a deal is unlikely given the company's inability to pay for a major settlement and the difficulty of working out an arrangement that would pass muster with millions of people who have flocked to the service in search of free music.

"Hummer Winblad (Napster's venture capital firm) has only capitalized the case up to $15 million. It wouldn't make any sense for them to do that," said copyright attorney Whitney Broussard, who is not involved in the case.

For now, Napster is being mum about what strategies it will use during the next few weeks to protect its future. "There are no deals. There are no new developments. There are ongoing conversations," a company representative said.

Left to ponder Napster's tactics, some legal experts say they see little choice for the music-swapping company but to forge full-steam ahead with litigation.

Any steps Napster takes toward settling with the Recording Industry Association of America (RIAA) could risk alienating its 20 million members, these attorneys said. If Napster agrees to charge its members a fee, or if it develops a filter to host only non-copyrighted music, fans might flock to competing free sites such as Gnutella and Freenet.

"As we saw after the decision, there are a lot of competitors waiting in the wings," said Fred von Lohmann, a copyright attorney with San Francisco-based Morrison & Foerster. "Anything you do in a settlement needs to take (this) into account."

This was proven last week after Judge Marilyn Hall Patel issued the injunction against Napster, when music fans turned to competing sites in droves, forcing their servers offline.

Sources close to the RIAA, meanwhile, say the music industry group may be unwilling to settle, even if Napster is ready. Legal experts agree this makes sense.

"(Settling) would leave the question open as to if what (Napster) is doing is violating the law," said Anthony Carbone of New York law firm Richards & O'Neil. "Because there are so many other companies out there, the (RIAA) would have to chase them all down."

Because issues raised in this lawsuit deal with previously undecided legal issues--the intersection between copyright law and the Internet--legal experts said a decision would go a long way toward setting ground rules. A similar lawsuit is pending by the Motion Picture Association of America against Scour.net, which provides software that allows people to share music and video files.

Some major labels settled a lawsuit against online music site MP3.com over its My.MP3.com service. That case, which is still being pursued by "Big Five" labels Sony Music Group and Universal Music Group, is scheduled to go to trial later this month to determine damages.

Pointing to MP3.com as an example, copyright attorney Broussard suggested it would cost Napster too much to settle. In early June, MP3.com agreed to pay Warner Music Group and Bertelsmann's BMG Entertainment up to $100 million in fees after a federal judge ruled in favor of the recording industry in its copyright infringement suit.

"Facing the choice of spending $100 million dollars in an attempt to settle the case or spending $2 (million) to $3 million in the chance of winning, it's probably not worth it to them to settle," she said.

Another outcome could involve a merger or partnership with another music company, although the uncertainty over the lawsuit makes that possibility unlikely anytime soon. According to published reports, Napster has been in talks with Universal about a possible buyout and has been in discussions with online music site EMusic over potential marketing collaborations.

Napster is scheduled to file a brief with the 9th U.S. Circuit Court of Appeals by Aug. 18; a responding brief by the music industry is due Sept. 8. After the briefs are filed, the court will schedule oral arguments.