Too Little Too Late?

Last week, Napster announced that it had reached a preliminary agreement with US songwriters and music publishers to settle a class action lawsuit currently pending in federal court in California. The beleaguered company says the agreement includes terms under which the songwriters and music publishers will license their music to Napster's new membership-based service.

The deal is now subject to the approval of District Court Chief Judge Marilyn Hall Patel, the plaintiffs in the class action, and the National Music Publishers Association (NMPA) Board of Directors. Songwriters Jerry Leiber and Mike Stoller, as well as Frank Music, are the representative plaintiffs in the class action.

Napster says that it is optimistic that the agreement will be approved by the court, and along with the NMPA, thanked several members of Congress, in particular Orrin Hatch, for their support throughout the negotiations. Napster's Konrad Hilbers says, "This landmark agreement marks a huge stepping stone toward building a digital music marketplace and we're pleased to have played such a key role in moving the market forward."

The terms agreed to by the parties include the payment by Napster to music creators and copyright owners of $26 million in settlement of damages for past unauthorized uses of music. Napster also says it will submit an advance against future licensing royalties of $10 million, under a payment structure based on the Audio Home Recording Act, which allocates royalties to songwriters and music publishers in a one-third to two-thirds ratio with copyright owners of sound recordings.

Napster also reports that the Harry Fox Agency, which is the licensing subsidiary of NMPA, will license rights, collect and distribute royalties, and monitor compliance under the agreement, on behalf of the copyright owners. Napster adds that it intends to launch its new membership-based file-sharing service later this year, with recordings from hundreds of independent record labels. Napster says it will also separately offer music from the BMG, EMI, and AOL/Time Warner labels through its MusicNet service.

As the music industry gears up to launch its own Internet music services, it's also going after "Napster clones" that it claims are enabling massive piracy. On Tuesday, October 2, a consortium of 28 entertainment industry companies—including MGM Studios, Columbia Pictures, Sony Music Entertainment, and Warner Music Group—launched a federal lawsuit against three "peer-to-peer" services.

The three— Inc., Grokster Ltd., and Consumer Empowerment—all of whom provide software that lets users find and retrieve files from each others' computers, were sued in federal court in Los Angeles. The suit accuses the three companies of infringing copyrights by providing a method for making free unauthorized copies of movies and music. The suit is similar to the music industry's successful campaign against Redwood City, CA–based Napster; if the plaintiffs triumph, damage settlements could run into billions of dollars. Aimster, another Napster clone, was hit with a lawsuit in New York in May, in which the plaintiffs are a group of music and movie companies.

What's unique about the new suit is that only one of the services, MusicCity, provider of the popular Morpheus software, is based in the United States, in Franklin, TN. Consumer Empowerment ("KaZaA" software) is based in Amsterdam, and Grokster ("FastTrack") is based in Nevis, West Indies. Some observers believe that peer-to-peer networks will increasingly be run from outside the US to make such lawsuits difficult to pursue.

Unlike Napster, none of the three services depends on a central server, relying instead on software installed in users' computers for file-sharing. Plaintiffs in the LA suit will need to prove that peer-to-peer services either were in control of users' behavior or knew that they were engaged in piracy. Incontrovertible proof of either may be difficult to come up with. MusicCity's Steve Griffin stated that his company simply makes software that "allows people to communicate with each other." Morpheus is a "format-agnostic" software that lets users share almost anything—including music, movies, and even computer operating systems. MusicCity has no way of knowing what consumers are sharing with each other, he asserted.

Recording Industry Association of America general counsel Matt Oppenheim claimed that his industry and MusicCity executives are "acutely aware" that consumers use Morpheus to download copyrighted songs and movies. The defendants may have a hard time pleading ignorance, given the amount of publicity that free downloading has received, he stated. The Napster case established that peer-to-peer services have a responsibility to prevent piracy, music industry attorney Jeffrey Knowles told the Los Angeles Times.