Tables turned on labels in Napster case

A day before the major record labels asked for a one-month halt in their lawsuit against file-swapping start-up Napster, a federal judge told them she would turn close scrutiny on their online practices.
According to transcripts of a Jan. 16 meeting, released Wednesday, Judge Marilyn Hall Patel was about to open a process examining whether the big record labels had "misused" their copyrights in their dealings with online rivals. One day later, the labels asked for a 30-day halt to the case to pursue settlement talks more vigorously.

"I decided there are some significant issues with respect to (copyright) misuse that (Napster) ought to be able to pursue," Patel told lawyers from both sides, according to the transcript. "The case law is a bit murky. But...if we can see it, maybe we'll know it."

The issue of copyright misuse--a kind of little brother to antitrust law that could theoretically see the labels lose the right to sue people over copyright issues--has quietly been a part of Napster's defense for more than a year. But last October, the company brought up specifics about the way that the labels' online joint ventures, MusicNet and Pressplay, had acted. For the first time, Patel took serious notice of the issue.

MusicNet, which is jointly owned by AOL Time Warner, Bertelsmann and the EMI Group, had struck a deal with Napster that barred the start-up from making a similar deal with Pressplay. That, in addition to the big labels' decision to work together in joint ventures, deserved scrutiny, Patel said.

"I'm really confused as to why the plaintiffs came upon this way of getting together in a joint venture," Patel said in October. "Even if it passes antitrust analysis, it looks bad, sounds bad, smells bad."

The labels are already under potentially more serious scrutiny from the U.S. Department of Justice, which has been conducting an antitrust inquiry into their online businesses since the middle of 2000.

In Patel's Jan. 16 transcript, the judge also said she would open up some scrutiny as to whether labels can prove they own the songs they say Napster users have been stealing.

The Recording Industry Association of America says its request for a temporary cessation of hostilities stemmed from more immediate concerns, however. It wants to make sure a settlement is made before Napster's wallet runs dry, the group says.

"Our companies are not worried about these claims," RIAA general counsel Cary Sherman said in a statement. "They are worried that time is running out on Napster's ability to pay damages."

Napster is unlikely to pay for any damages--which could climb into the hundreds of millions of dollars--out of its own thinning pockets. For the last year, most of its large expenditures of funds, including a $36 million payment to music publishers to settle another part of its ongoing lawsuit, have come from German giant Bertelsmann.

In an interview late last year, Napster CEO Konrad Hilbers said Bertelsmann Chief Executive Thomas Middelhoff was willing to support the start-up through settlement with the major music labels, although there would be a limit to the money.

"There is an end to (Bertelsmann's) money," Hilbers said. "It's not like they're going to spend billions."

In return for its loans, which total well over $100 million, Bertelsmann has obtained warrants to acquire a majority equity interest in Napster once it launches a legal music subscription service.

The temporary stay in the labels' suit will expire in mid-February. Hilbers has said he expects to have a final settlement before the end of the first quarter.