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Bumps rising in Napster buyout

A small music-software company says it holds licenses over pieces of the Napster technology that must be resolved before Bertelsmann can acquire the struggling file swapper.

Napster's road to being acquired by German giant Bertelsmann is getting bumpier, thanks to a small music-software company with a history of David-and-Goliath battles.

In documents filed with a Delaware court Tuesday, PlayMedia Systems said it provided key parts of the Napster technology, which the company couldn't automatically transfer to Bertelsmann.

PlayMedia, which created the MP3-playing functions of Napster's original file-swapping software, along with some of the security features of the planned subscription service, says it isn't trying to derail the $8 million bankruptcy buyout. It's just notifying the court, which is still in the early stages of the bankruptcy proceedings, that it has an interest, the company's attorney said.

"We're just trying to protect PlayMedia's licenses," said Richard Riley, the Delaware attorney representing the company. "Depending on what (Napster's) position is on the PlayMedia license, we may have to object to the transaction."

PlayMedia is far from a household name, but it has made headlines before. In 1999, it sued Nullsoft, the company that created the popular Winamp MP3 software, for $20 million, contending Nullsoft had used its code to create the software. When America Online agreed to buy Nullsoft later that year, it quickly settled with PlayMedia. The terms of that settlement were not made public.

Last year, a judge temporarily barred AOL from distributing a new version of its flagship Internet software, saying it had likely violated its license with PlayMedia.

While unlikely to derail Bertelsmann's acquisition of struggling file swapper Napster, PlayMedia's involvement could delay the transfer or make it more expensive for the German media company, which has already spent more than $85 million keeping its protege afloat.

Bertelsmann agreed to buy Napster for $8 million last month, just days after an earlier, pricier buyout bid collapsed. As part of the deal, the file-swapping company filed for Chapter 11 bankruptcy protection, which will help it clear much of its accumulated debt.

As part of the bankruptcy proceedings, the door must be opened to other bids and to objections by creditors, however.

Other bidders are expected to be scarce in this case--any company that steps in would inherit as debt the tens of millions of dollars Bertelsmann loaned Napster. But the process does allow other companies, such as PlayMedia, an opportunity to have their claims heard in court.

PlayMedia's filing contained some interesting insight into how Napster had been working in its difficult late days. The original contact to provide Napster's MP3-playing capabilities was a written, nonexclusive license, the company's attorney said. Legally, that means it can't automatically be transferred to Bertelsmann, Riley said.

But there is no written contract for the PlayMedia technology inside Napster's new subscription service, which--according to the filing--included MP3 playing and security features. Instead, that contract is "oral and implied," the filing said. Napster has not asked permission to transfer either license, the company said.

A Napster representative had no immediate comment on the filing.