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U.S. District Judge Marilyn Hall Patel of the Northern District of California may have jump-started settlement discussions between Napster Inc. and the recording industry earlier this month when she gave the music-swapping service a green light to look into whether the major labels violated antitrust rules. According to a transcript of a Jan. 16 hearing before Patel, a portion of which became available Wednesday, the judge said she was going to allow some discovery to go forward on the issue of copyright misuse. Redwood City, Calif.-based Napster had argued that the labels misused their copyright by imposing restrictive terms on licensing their music in violation of antitrust rules. “I decided there are some significant issues with respect to misuse that defendants ought to be able to pursue, and I’d be first to say that it’s anything but a clear area of the law,” Patel said. “Because the case law is so murky, then at least it justifies some inquiry.” Howard King, a partner at Los Angeles’ King, Purtich, Holmes, Paterno & Berliner, said Patel’s decision to pursue the antitrust issue could benefit Napster. “I’m sure it will encourage settlement considerations because it raises the specter — no matter how small it may be — that [the record labels] could lose at trial.” Labels also face the problem, he said, of disclosing confidential business information “that some are not in favor of doing ever.” King represented Metallica and Dr. Dre in their copyright suits against Napster. That litigation settled last summer. Patel did not issue an order on the antitrust issue. After the hearing, four of the five major record labels, joined by Napster, requested Patel to suspend the labels’ copyright infringement suit against Napster. On Jan. 18 Patel issued a 30-day stay in the case. Napster first raised the copyright misuse argument at an October hearing before Patel. The company claimed that unfair restrictions were imposed by the terms of a licensing agreement it had signed with a music subscription service that was owned in part by three of the major labels. Napster contended that such antitrust violations were a defense for infringement liability. At the time, Patel was critical of the record labels’ joint licensing venture, saying that even if it passed an antitrust analysis it “still looks bad, sounds bad and smells bad.” Patel’s decision to allow Napster to pursue this angle may have thrown the company a life preserver. It needs to resolve its legal battle with the labels and get access to their music in order to launch its own paid subscription service. Napster has said it plans to release the new service in the first quarter of the year. But the recording industry dismissed the suggestion that antitrust claims were compelling the labels to settle with Napster. “Napster is not the first defendant to make claims like this in an effort to forestall judgement, and we have always prevailed before,” Cary Sherman, general counsel of the Recording Industry Association of America, said in a statement Wednesday. “Our companies are not worried about these claims. They are worried that time is running out on Napster’s ability to pay damages.” “I wouldn’t necessarily draw a line between granting discovery [on copyright misuse] and a stay,” added Jeffrey Knowles, a partner at San Francisco’s Coblentz, Patch, Duffy & Bass who represented music composers in a similar suit against Napster that settled last year. “They may not be connected.” Knowles added that as a general rule, courts give “a pretty free rein when it comes to discovery.” Napster’s public relations firm said the company had no comment on the matter. Patel also appointed a special master, Neil Boorstyn, counsel at San Francisco-based McCutchen, Doyle, Brown & Enersen, to look into Napster’s question of whether the record labels actually own all the works that they say Napster has infringed. Napster raised the ownership and antitrust issues in October when the record labels requested a motion for summary judgement on Napster’s liability for infringing 213 recordings.

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