Prompted by arguments presented by Napster's legal team, U.S. District Judge Marilyn Hall Patel grilled music industry lawyers about antitrust concerns related to MusicNet and Pressplay, joint ventures between two groups of major record labels to distribute their music online.
"I'm really confused as to why the plaintiffs came upon this way of getting together in a joint venture," Patel said. "Even if it passes antitrust analysis, it looks bad, sounds bad, smells bad."
The question could be a dangerous one for the record companies. Napster argues that if the labels have "misused" their copyrights, they lose the ability to enforce them. If Patel accepts the argument, it could mean no damages for Napster's past two years of file swapping.
Patel stopped well short of ruling on the issue, and it's possible that she could decide antitrust concerns are irrelevant to Napster's case.
The court spotlight is the latest and most public official scrutiny to be turned on the record companies' joint ventures, which are serving as the first broad initiatives to make major label music widely available online.
Several months ago, the Justice Department opened a preliminary antitrust investigation into the labels' online efforts. Lawmakers critical of the record companies have also expressed some concern about Pressplay and MusicNet's structure. None of this concern has grown into official action, however.
MusicNet, which is backed by RealNetworks, AOL Time Warner, Bertelsmann and the EMI Group, has already begun demonstrating its technology and is slated to launch on RealNetworks' site in less than two months. Pressplay, a joint venture of Sony and Vivendi Universal, will launch on Yahoo and Microsoft's MSN later this year.
Who made the deals?
Napster's attorneys hammered MusicNet on Wednesday as a possible out for their client, which faces crippling damages if it is found guilty of willfully violating millions of copyrights--an outcome that looks increasingly likely.
The file-swapping company struck a deal earlier this year to carry MusicNet songs in its own forthcoming subscription service--but the agreement carried an exclusivity provision that barred Napster from immediately signing a similar deal with Pressplay for songs from Sony Music Entertainment and Universal Music Group.
That exclusivity provision amounted to "misuse of copyright," said Napster attorney Celia Goldwag Barenholtz. "What you have here is an attempt (to use copyrights) to control Napster's ability to enter into an agreement with anyone else."
Record industry lawyers protested, saying that the deal was between Napster and MusicNet, not the labels themselves. MusicNet is a joint venture and did not tell the labels the provisions of its agreement, said Russell Frackman, attorney for the Recording Industry Association of America.
The issue does highlight what has sometimes been a contentious relationship inside MusicNet.
Record executives involved in MusicNet have previously complained privately about the Napster deal, which they say was done almost wholly under the direction of RealNetworks Chief Executive Rob Glaser, who is also MusicNet's acting chief executive.
"We had nothing to do with it," said one senior record label executive involved with MusicNet. AOL Time Warner and EMI were not aware of the terms of the deal before it was signed, the executive said.
Whatever the terms of that single deal or the various joint ventures, Patel made it clear she may open the case to look at whether the record companies are using Pressplay and MusicNet to control the competition.
"Don't think that the fact that you're shrouded in some mysterious joint venture gets you out of the pickle," she told industry lawyers. "This could have the effect of stopping everything and having massive discovery." Discovery is a legal term for the process of requesting documents and investigating each side's claims.
Patel also said she is considering appointing a "special master" in the case that could investigate the record industry's claims to owning copyrighted songs under a "work-for-hire" rule. That rule would essentially relegate artists such as Pearl Jam or Mariah Carey to the status of employees of the record companies.
Despite the criticism of record companies' claims, Patel did not back off on her skepticism of Napster's legal arguments. She dismissed several attempts to bring up defense that would give Napster the same protection as Internet service providers and made it clear that she has not developed any sympathy for the company's past file-swapping model.
The judge did not rule on a record industry motion for summary judgment, which would declare Napster guilty of copyright infringement and move directly to deciding how much damages the company would have to pay. By signaling that she was considering a new special master in the case, however, Patel appeared unlikely to rule in favor of the record industry's attempt to bring the trial to a quick end.