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Napster Inc.’s two-year battle with the recording industry took a surprising turn Wednesday when the music-swapping service claimed antitrust violations by record labels as a defense for infringement liability. Lawyers for Napster revealed a licensing deal with an online music service owned in part by three major record labels that they say unfairly limits the ability of consumers to download music on Napster’s Web site. Lawyers for the record companies immediately dismissed the agreement as irrelevant to their attempt to gain damages for copyright infringement against Napster. But U.S. District Judge Marilyn Hall Patel of the Northern District of California seemed taken aback by the news and indicated it could bog down the long-running litigation. “I’m curious why plaintiffs, or some of them, got together in a joint venture which certainly, if it passed an antitrust analysis, still looks bad, sounds bad and smells bad,” Patel said. The terms of the agreement were revealed at a hearing to address a motion for summary judgment on Napster’s liability for copyright infringement of 213 recordings. The Redwood City, Calif.-based company was sued in 1999 by the bulk of the recording industry for allowing consumers to download copyrighted music from its online servers. Patel issued a preliminary injunction in July 2000, and in March, at the request of the 9th U.S. Circuit Court of Appeals, issued a modified injunction to prevent further infringement. Napster is now faced with massive liability and is scrambling to find an exit strategy from the litigation that keeps the company from going under. Under copyright law the maximum liability for willful infringement is $100,000 per infringement. In addition to the 213 works now at issue, the labels claim that Napster infringed tens of thousands of other works. Wednesday’s move to reveal the terms of the licensing deal seemed to provide Napster with some breathing room. Patel made no ruling on summary judgment and asked that the parties select a lawyer to serve as a special master to review the licensing agreement to determine if further discovery was required. Under the deal, Napster was allowed access to content on MusicNet — an online music subscription joint venture between RealNetworks and three record labels, Bertelsmann’s BMG Entertainment, EMI Recorded Music and Vivendi Universal’s Warner Music Group. The deal between Napster and MusicNet is under seal. Napster attorney Celia Barenholtz, a partner at New York’s Kronish Lieb Weiner & Hellman, said the June 1 deal prohibits Napster from entering a licensing agreement with other record labels for an exclusive period. After this time period, “if Napster chooses to enter an agreement with other major labels, MusicNet has the right to terminate the contract,” Barenholtz said. Napster submitted a declaration by Stanford University economics professor Roger Noll who found that the MusicNet joint venture and a separate joint venture — Pressplay — between Sony Music Entertainment and Universal Music Group “appear to be horizontal anticompetitive restraints,” Barenholtz said. Barenholtz argued that there is evidence the recording industry has a long history of anti-competitive behavior. “Napster is entitled to discovery to find out just how dirty the plaintiffs’ hands are,” she said. Attorneys for the record labels decried Napster’s arguments as a maneuver to get out of paying for past damages. Kevin Baine, a partner with Washington, D.C.’s Williams & Connolly, who represents the Warner Music Group, questioned how “Napster can be engaged in two years of outright theft and escape damages because the terms of licensing were too restrictive.” That they “should be forgiven of sins of the past two years” because a provision may be anti-competitive is ridiculous, Baine said. But Patel didn’t buy that argument. Why did you “mess up with this?” she asked. Russell Frackman, a partner with Los Angeles’ Mitchell Silberberg & Knupp who represents the record labels, responded that his clients didn’t know the terms of the agreement until Napster raised it in court. He said each record label had signed a separate deal with the joint venture. But Patel seemed unmoved: “Mr. Frackman, I find it curious that all these people came together, and shrouding it in a joint venture doesn’t get you out of the pickle.” Patel said the issue “could have the effect of stopping everything and having massive discovery.” Patel questioned the recording industry’s use of “work for hire” terminology in its copyright applications — a point Napster contends means the labels may not actually own the music. Though Patel gave Napster leeway with its argument on the issue, she said she doubted whether the company uses it to its advantage. However, she said the special master appointed to the case should look at the ownership issue. Despite the drama surrounding the licensing agreement, Patel gave no indication she was backing down from her view that Napster engaged in willful infringement. The law “is not that uncharted when there is wholesale infringement,” Patel said. “Every CD [on Napster's service] practically had a copyright. To say you didn’t know that defeats reason and common sense.”

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