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NEW YORK — When the Recording Industry Association of America sent Verizon Internet Services Inc. a subpoena last year seeking the identity of a subscriber who may have illegally downloaded music online, Verizon didn’t just say no. The Internet service provider complained loudly and in public that the request was an unprecedented assault on digital privacy. Verizon Associate General Counsel and Vice President Sarah Deutsch then cobbled together a coalition of other ISPs and privacy and consumer advocates to battle the powerful Washington, D.C.-based lobbying group’s request. The subpoenas “are not going to solve any of [the RIAA's] problems,” says Jason Schultz, attorney for the digital rights group, the Electronic Frontier Foundation. “It’s a publicity stunt.” Naturally, the RIAA — and the music industry it represents — sings a different tune. “The problem of piracy is staggering,” says Jim Cooperman, acting co�general counsel of BMG, one of the recording industry’s “Big Five” labels. “People feel they don’t have to buy the music anymore because they’re stealing it.” Despite all the sound and fury, the subpoenas were ruled valid this spring. Emboldened, the RIAA sent shockwaves through campuses and computer dens across the nation this summer as it filed a blitz of subpoenas at other ISPs to name names of illegal online music downloaders. The industry has tried other ways of snaring digital pirates but, since its victory over Napster two years ago, it hasn’t been as successful. Last spring it lost the first round of litigation against the leading software companies — or peer-to-peer (P2P) networks — behind online music “sharing.” The ISP subpoenas, and an expedited appeal in the P2P cases (granted as this issue went to press) are the latest twists in an increasingly bitter litigation and public relations war. In-house lawyers like Cooperman, their businesses, and the RIAA are locked in seemingly mortal combat against millions of people who once were their best customers — young music fans who prefer downloading their favorite songs onto their computers or MP3 players for free rather than buying them from the local music superstore. “There’s this sense of entitlement, like it’s a God-given right to have access to music,” says Cooperman, 41, who himself looks oddly boyish seated behind a big desk in his sleek black and gray corner office in Bertelsmann AG’s Times Square building in New York (BMG is owned by the German entertainment giant). A music fan who plays the drums while listening to old Who albums in his basement, Cooperman says, “We need to convince people to look at [this problem] differently.” The stark numbers show the business’s plight: What was a $40 billion music industry in 2000 shriveled to $26 billion in 2002. The industry blames illegal downloads, estimated at more than 2.6 billion a month, for most of the damage. A third of the nation’s record stores have closed in the past few years, too; including 107 Musicland stores, while the chain Wherehouse Entertainment, Inc., filed for Chapter 11 protection, and Tower Records faces bankruptcy if it cannot find a buyer. Observers say, however, that the recording business needs to accept that the Internet, as a distribution vehicle for music, is here to stay. Indeed, the industry has started to make some concessions, including striking licensing deals with Apple Computer, Inc.’s iTunes Music Store to sell music online. That’s just the beginning. Longer term, “the revenues will come from Webcasting, satellite performance royalties [live Web and television concerts], and deals with Apple and Microsoft for digital distribution,” says Walter McDonough, general counsel of Future of Music, a Washington, D.C.-based nonprofit group that helps record companies and recording artists address digital issues. Industry in-house lawyers, of course, will play a significant role in creating these newfangled arrangements. “What we as lawyers at a record company would do was fairly stable for a long time,” says Susan Hilderley, director of business and legal affairs, Interscope and Geffen music division, at Universal Music Group. “With all of the new technology, we all had a lot of learning to do.” While the industry figures out how to win back the music-buying public, it’s also been in full attack mode on the litigation front. And if it seems like the Big Five sing in harmony when it comes to lawsuits, it’s because they coordinate their battles through the RIAA. The powerful industry group acts as a clearinghouse for both music business advocacy and legal action, and performs such mundane tasks as certifying sales figures for gold and platinum albums. But aggressive litigation right now is a top priority. Matt Oppenheim, senior vice president for business and legal affairs at the RIAA, says that he and the litigation chiefs at the record labels discuss strategy at least once a week via conference calls. And he and industry GCs confer frequently as well. BMG vice president-legal and business affairs Wade Leak adds, “No decisions [at the RIAA] are made without the companies’ input,” including the consent of senior management over potential protracted and costly court battles. The group has had some success. The RIAA and the labels took an aggressive stance as soon as online music file sharing became popular. They won an early victory in 2001 by shutting down the seminal music-sharing service Napster. The site was an easy target because Napster physically maintained the computer servers where illegal music files, typically in high-fidelity, compressed, download-friendly MP3 format, were stored. (With P2P networks, the files are stored on individual user computers; special software lets consumers “see” the files and download them onto their own hard drives.) The industry was hoping to repeat its Napster victory when it set its sights on the companies that make P2P software. In October 2001, 28 of the leading entertainment companies (including movie studios) sued the Nevis, West Indies-based Grokster Ltd.; Woodland Hills, Calif.-based StreamCast Networks Inc. (the company that makes the Morpheus file-sharing software); and Sharman Networks, which makes KaZaA, a rival file-sharing program, for encouraging copyright infringement by creating software that allows users to download copyrighted material for free. But the plaintiffs hadn’t anticipated how hard the software companies would fight back. To be sure, going up against the giants of the worldwide entertainment industry wasn’t easy or affordable for these small companies. Charles Baker, a partner at the Austin, Texas-based Munsch Hardt Kopf & Harr, says his client StreamCast had originally hired the high-tech legal powerhouse Wilson Sonsini Goodrich & Rosati of Palo Alto. (Neither StreamCast nor Grokster, both with just a handful of employees, has an in-house legal department.) But StreamCast says legal bills were racking up, and it started looking for cheaper lawyers. Baker, then at the now defunct Brobeck, Phleger & Harrison, heard about StreamCast’s search for alternate counsel and gathered up a team of six litigators and IP lawyers for “the usual dog and pony show” over Memorial Day 2002 weekend. They got the job, and prepared for an October trial. To battle the software makers, the entertainment companies hired a vast arsenal of outside law firms — including New York’s Paul, Weiss, Rifkind, Wharton & Garrison, and Los Angeles-based firms O’Melveny & Myers and Richard, Silberberg & Knupp, the last of which represents the RIAA. Oppenheim says nothing less than the recording industry’s viability was at stake. “The availability of music online from these illegal networks is a predominant reason why individuals are not buying more music,” he says. The industry lawyers were confident, to a fault. “Every other word out of their mouth was ‘This is another Napster,’” recalls Baker. Still, he and Grokster’s lawyers used the same basic defense that Napster used unsuccessfully. Now known as the “Sony Betamax defense,” they argued that their clients were merely providing software that had many legitimate uses, such as allowing PC users to share their own work with one another. What users did with the software was not the companies’ responsibility. That argument won the day — at least for now. U.S. District Court Judge Stephen Wilson of Los Angeles ruled in April in favor of StreamCast and Grokster. “Defendants distribute and support software, the users of which can and do choose to employ it for both lawful and unlawful ends,” Judge Wilson wrote in his opinion. (The Dutch company that makes KaZaA received a “no liability” ruling from a court in the Netherlands.) The case is far from over; Oppenheim points out that the Ninth Circuit U.S. Court of Appeals granted an expedited appeal in July, which, he says, means there’s a good chance that the RIAA will prevail. Grokster President Wayne Rosso, who calls what the RIAA is doing “genocidal litigation,” agrees that the case likely will go further. “It has Supremes [the U.S. Supreme Court] written all over it,” he says. With the battle against the software companies at a temporary stalemate, the music industry decided to go after the illegal downloaders themselves. But they faced a logistical problem: How could the RIAA identify the culprits, most of whom use colorful screen names when they log on to the P2P networks? The 1998 Digital Millennium Copyright Act appeared to contain a streamlined subpoena procedure that would help the RIAA track down alleged offenders. Instead of filing a lawsuit and obtaining a judge’s approval for a subpoena, the RIAA believed that it could merely fill out forms at any court in a jurisdiction where the ISPs have subscribers. The RIAA would allege copyright infringement, and the court clerk would send subpoenas to the ISPs demanding that they turn over information about their customers. Oppenheim says the group sent out 100 subpoenas as a test to various ISPs around the country and all but one complied: Verizon Internet Services, a subsidiary of Verizon Communications Inc. The ISP refused to meet the RIAA’s demand that it unmask a subscriber who had allegedly used KaZaA software to illegally download music. Verizon’s lawyers were outraged. “If you want to go after users, you should go through the proper legal process, where the users get notice that someone is seeking their identity and have a right to defend themselves,” says Verizon’s Deutsch. Oppenheim says that he and record company GCs sought the subpoenas only after they asked Verizon to remove copyrighted material from its network; the ISP refused, saying that the content wasn’t on its servers, but on its subscribers’ PCs. Oppenheim notes, too, that Verizon and other ISPs hype their broadband Internet services by boasting about their short download times for music, images, and other large digital files. “We just sent Verizon a subpoena,” says Oppenheim. “They’ve blown it up into being the Pentagon Papers.” The subpoenas galvanized the ISP industry, and created a powerful enemy for the music business. In a motion for summary judgment to the D.C. district court, 45 organizations — from the American Civil Liberties Union to the National Coalition Against Domestic Violence, which says this subpoena process could allow abusive husbands to track down their battered wives –signed an amicus brief warning that a ruling in the RIAA’s favor could dangerously erode Internet users’ privacy protections and due process rights. In April, D.C. federal court judge John Bates ruled that the subpoena was valid. Verizon has appealed, and Deutsch and her colleagues are asking Congress to amend the Digital Millennium Copyright Act. Buoyed by its success, the RIAA isn’t waiting for the outcome of those efforts. In June, RIAA President Cary Sherman announced that the group would search out individuals illegally distributing music online; as of press time, nearly 1,000 subpoenas had been filed, with the first batch in Washington, where the RIAA is based. The litigation against online pirates shows no sign of ending, and while industry GCs are closely involved with the RIAA’s efforts, in-house lawyers at the “Big Five” are also looking for other ways to resolve these issues. One tack is to develop relationships with artists that take into account the new digital era. Under traditional contracts, the music company gives an artist an advance. Most of that sum goes toward expensive recording studio time. The music company shoulders manufacturing and marketing costs, and then, hopefully, fans snap up CDs, and the business “deducts” the advance and marketing costs from the album’s profits. But with such services as Apple’s iTunes Music Store and the recently announced BuyMusic.com, says McDonough of Future of Music, “if you are going into a nonphysical universe, what’s the point of having deductions?” McDonough adds that music companies and musicians will soon share publishing, live fees, movie licensing and other revenue, instead of relying mainly on CD sales. In fact, Cooperman says that BMG is ending its usual practice of deducting marketing and other expenses from CD sales revenue, and instead will try to work out alternative deals with its acts. BMG will also increase the royalty rates paid to artists from digital downloads. Still, McDonough is skeptical that music GCs can change with the times. “Unfortunately, I don’t think that the in-house lawyers for the labels are used to doing these sorts of deals,” he says. “It brings up all sorts of issues, like creating joint ventures with people that never existed before. They need to figure out how they can lower the revenues based on physical distribution and expand the percentage based on nonphysical distribution and licensing. That’s the only way out for them.” But Universal’s Hilderley says that she and her in-house peers are already adapting, and won’t be singing their swan song anytime soon: “We have talented, creative people who take artists with potential and turn them into something polished and ready to sell millions of records. While the models may change, I don’t think we’re going anywhere.” Daphne Eviatar wrote this story for Corporate Counsel , a Recorder affiliate based in New York. Corporate Counsel staff reporter Eriq Gardner contributed to this story.

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