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The recording industry took a few lumps from a 9th U.S. Circuit Court of Appeals panel Monday in its quest to stop Napster Inc. from enabling millions of users to swap copyrighted songs on the Web. The three-judge panel honed in on whether it would be fair to shut down the Napster site, eliminated a key plank in the recording industry’s case and failed to ask about a standard of review — a line of question that’s typical of a court seeking to uphold a lower court judge’s ruling. Nevertheless, it’s still not entirely clear how the panel will rule. Even veteran court watchers say they are uncertain about how things went for either side. “It’s very difficult to predict how it’s going to go,” said Mark Radcliffe, a copyright partner at Palo Alto, Calif.-based Gray Cary Ware & Freidenrich. He added, however, that “Napster did better than I expected them to do.” The panel — which included Judges Richard Paez and Mary Schroeder and Senior Judge Robert Beezer — heard oral arguments Monday on a July injunction against the music-swapping service handed down by U.S. District Chief Judge Marilyn Hall Patel. Patel’s injunction would have effectively shut down Napster for the duration of a pair of copyright infringement cases — A&M Records Inc. v. Napster Inc., 99-5183, and Leiber v. Napster, 00-0074 — brought by record companies and music composers. Just hours before the service was to shut down, however, the 9th Circuit issued an emergency stay that allowed Napster to stay online. During Monday’s arguments, recording industry lawyers were pressed by Schroeder about whether the injunction would shut down Napster’s operations — a key argument made by Napster in its appeal to halt the injunction. Russell Frackman, counsel for the Recording Industry Association of America, attempted to skirt the issue, but cited Patel’s ruling that said that Napster could eventually restart its service after dealing with its copyright infringement problems. Frackman, a partner at L.A.’s Mitchell, Silberberg & Knupp, attempted to undercut Napster’s key argument — that it falls under the Supreme Court’s 1984 decision that allowed the marketing of videocassette recorders. He argued that Napster is nothing like the VCR as it is “designed to be a gatekeeper of an entire system” that provides content. “Napster user number 1 cannot find user number 2 or connect to or verify what number 2 has without Napster,” Frackman said. “It’s no different than saying [Napster acts like] a swap meet.” Frackman was citing 1996′s Fonovisa Inc. v. Cherry Auction Inc., 76 F3d 259, a case holding that flea market operators were liable for contributory infringement for the sale of counterfeit music recordings by independent vendors. The RIAA cited the case numerous times in its appeal brief. The Fonovisa opinion was issued by Schroeder, and she quickly dismissed the RIAA’s interpretation. “This is really different,” she said. A swap meet operator “could go in and look at what was there and control what was on his premises.” Beezer also quizzed Frackman about how Napster is “expected to have knowledge of what is on [a user's] computer.” He said he found this issue “extremely troublesome.” Frackman responded that Napster was designed as a pirate system. He said the founder of Napster stated in company documents that it was intended for the exchange of pirated music. The judges had nothing to say about standard of review. The recording industry said in its brief that a preliminary injunction is reversible only for abuse of discretion by the trial court judge. But the 9th Circuit panel focused only on the extent to which the injunction would have an impact on Napster’s business. Napster didn’t come away unscathed, however. In an exchange with Napster attorney David Boies, Beezer asked if a distinction could be made between a mechanical device and a service. Boies responded that Napster is both a device and a service. But Beezer responded that “the VCR is from beginning to end a device” while Napster “seems to be a series of service items that constitute infringing conduct.” For injunctive relief, Beezer said, the distinction takes on meaning. “You said you will have to shut down, but with a device you could continue to operate.” Schroeder, meanwhile, gave a hint as to one possible ruling. She asked Boies — famed for his role in prosecuting the Microsoft antitrust case — if he had any objection “to an injunction limited to specific works.” The courtroom action came as Napster floated the possibility of a settlement with the recording industry. At a press conference following the hearing, Napster CEO Hank Barry said the company hopes to resolve the case outside court. He said Napster had offered record labels a “substantial percentage of their expected revenues,” adding that a conservative figure was “over half a billion dollars in the first year alone.” The money would come from charging a monthly subscription fee, such as $4.95, to its users. The RIAA rejected this proposal. And Carey Ramos, counsel for the music composers, said his clients have never been offered a settlement. He said his clients have told Napster that the U.S. Copyright Office has set a rate of 7.5 cents per downloadable song. “If they don’t like that they can make another proposal,” said Ramos, partner at New York’s Paul, Weiss, Rifkind, Wharton & Garrison. “They never made us an offer.” The Napster hearing brought a horde of media and Internet savvy observers to the 9th Circuit building. By 6:30 a.m., people were already in line outside the courthouse. More than 300 people — including 220 members of the press — squeezed into the courtroom and an overflow room.

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