UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
A&M RECORDS, INC., a
corporation; GEFFEN RECORDS, INC.,
a corporation; INTERSCOPE
RECORDS; SONY MUSIC
ENTERTAINMENT, INC.; MCA
RECORDS, INC.; ATLANTIC
No. 00-16401
RECORDING CORP.; ISLAND RECORDS,
D.C. No.
INC.; MOTOWN RECORD CO.; CV-99-05183-MHP
CAPITOL RECORDS, INC.,
Plaintiffs-Appellees,
v.
NAPSTER, INC.,
Defendant-Appellant.
JERRY LEIBER, individually and
doing business as, JERRY LEIBER
MUSIC; MIKE STOLLER and FRANK No. 00-16403
MUSIC CORP., on behalf of
D.C. No.
themselves and all others similarly CV-00-00074-MHP
situated,
ORDER AND
Plaintiffs-Appellees,
AMENDED
v.
OPINION
NAPSTER, INC.,
Defendant-Appellant.
Appeals from the United States District Court
for the Northern District of California
Marilyn Hall Patel, Chief District Judge, Presiding
Argued and Submitted
October 2, 2000--San Francisco, California
4213
Filed February 12, 2001
Amended April 3, 2001
Before: Mary M. Schroeder, Chief Judge, Robert R. Beezer
and Richard A. Paez, Circuit Judges.
Opinion by Judge Beezer
_________________________________________________________________
COUNSEL
David Boies, Jonathan Schiller and Robert Silver, Boies,
Schiller & Flexner, Armonk, New York, Laurence F. Pul-
4219
gram, David L. Hayes, Daniel Johnson, Jr. and Darryl M.
Woo, Fenwick & West, Palo Alto, California, for the
defendant-appellant.
Russell J. Frackman, George M. Borkowski, Jeffrey D. Gold-
man, Roy L. Shults and Peter B. Gelblum, Mitchell, Silber-
berg & Knupp, Los Angeles, California; Carey R. Ramos,
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New
York, for the plaintiffs-appellees.
Hannah Bentley, San Anselmo, California, for amicus Casa-
nova Records.
Andrew P. Bridges, Wilson, Sonsini, Goodrich & Rosati, Palo
Alto, California, for amicus Digital Media Association.
Scott E. Bain, Wiley, Rein & Fielding, Washington, D.C., for
amici Ad Hoc Copyright Coalition; Commercial Internet
Exchange; Computer & Communications Industry Associa-
tion; Information Technology Association of America; Net-
coalition.com; United States Internet Industry Association,
and United States Telecommunications Association.
Scott R. McIntosh, Civil Division, Department of Justice,
Washington, D.C., for amicus United States.
Ann Brick, San Francisco, California, for amici American
Civil Liberties Union and the American Civil Liberties Union
of Northern California.
Judith B. Jennison, Perkins Coie, San Francisco, California,
for amicus Scour, Inc.
Ralph Oman, Dechert, Price & Rhoads, Washington, D.C., as
amicus. Christopher Tayback, Quinn, Emanuel, Urquhart,
Oliver & Hedges, Los Angeles, California, for amicus
National Academy of Recording Arts & Sciences.
4220
E. Edward Bruce, Covington & Burling, Washington, D.C.,
for amicus Business Software Alliance.
Kevin T. Baine, Williams & Connolly, Washington, D.C., for
amici Motion Picture Association of America, Inc., Software
& Information Industry Association, American Film Market-
ing Association, Association of American Publishers, Ameri-
can Society of Media Photographers, Professional
Photographers Association, Graphic Artists Guild, Interactive
Digital Software Association, American Society of Compos-
ers, Authors and Publishers, Broadcast Music, Inc., Producers
Guild of America, Directors Guild of America, Inc., Writers
Guild of America, West, Inc., American Federation of Musi-
cians of the United States and Canada, Reed Elsevier, Inc.,
American Federation of Television and Radio Artists, Office
of the Commissioner of Baseball, Songwriters Guild of Amer-
ica, and AmSong, Inc.; Joel M. Litvin, New York, New York,
for amicus National Basketball Association.
Salvatore A. Romano, Seyfarth, Shaw, Washington, D.C., for
amici National Association of Recording Merchandisers, Inc.
and Video Software Dealers Association.
Erwin Chemerinsky, University of Southern California
School of Law, Los Angeles, California, for amicus Law Pro-
fessors Erwin Chemerinsky, Kenneth L. Karst, Steven Shif-
frin, Rodney A. Smolla and Marcy Strauss.
Barry I. Slotnick, Richards & O'Neil, New York, New York,
for amicus Association for Independent Music.
Morton David Goldberg, Cowan, Liebowitz & Latman, New
York, New York, for amici Alliance Entertainment Corp.,
Audible Inc., Blue Spike, Inc., The Clandestine Group, Inc.,
Digimarc Corporation, Digital Media on Demand, Inc., Full-
Audio Corporation, InterTrust Technologies Corporation, Oak
Technology, Inc., Reciprocal, Inc., RioPort, Inc., RPK
SecureMedia Inc., Verance Corporation, and VNU USA, Inc.
4221
Richie T. Thomas, Squire, Sanders & Dempsey, Washington,
D.C., for amici Consumer Electronics Association, Digital
Future Coalition, and Computer & Communications Industry
Association.
Karen B. Tripp, Houston, Texas, for amici Association of
American Physicians & Surgeons, Inc. and Eagle Forum Edu-
cation and Legal Defense Fund.
Professor Jessica Litman, Wayne State University Law
School, Detroit, Michigan; Professor Keith Aoki, University
of Oregon School of Law; Professor Ann Bartow, University
of South Carolina School of Law; Professor Dan Burk, Uni-
versity of Minnesota; Professor Julie Cohen, Georgetown
University School of Law; Professors Christine Haight Farley
and Peter Jaszi, Washington College of Law, American Uni-
versity; Professor Lydia Pallas Loren, Lewis and Clark Col-
lege Northwestern School of Law; Professor Pamela
Samuelson, Boalt Hall School of Law, University of Califor-
nia Berkeley; Professor Shubha Ghosh, University at Buffalo,
SUNY; Professors Paul J. Heald, Allen Post Professor of
Law, L. Ray Patterson, Pope Brock Professor of Law, and
Laura N. Gasaway, University of Georgia School of Law;
Professor Michael Madison, University of Pittsburgh School
of Law; Professor Ruth Okediji, University of Oklahoma Law
School; Alfred C. Yen, Associate Dean for Academic Affairs
and Professor of Law, Boston College Law School; Professor
Diane Zimmerman, New York University School of Law, and
Professor Dennis Karjala, Arizona State University College of
Law, for amicus Copyright Law Professors.
_________________________________________________________________
ORDER
The Opinion filed February 12, 2001 in this appeal is
amended as follows:
4222
Slip opinion at 2196, lines 4-6- delete the see generally
citation to "Copyright Infringement Issues on the Internet"
and insert: "see generally 3 Melville B. Nimmer & David
Nimmer, Nimmer On Copyright SS 12.04[A][2] & [A][2][b]
(2000) (confining Sony to contributory infringement analysis:
"Contributory infringement itself is of two types -- personal
conduct that forms part of or furthers the infringement and
contribution of machinery or goods that provide the means to
infringe")."
Slip opinion at 2203, first full paragraph, lines 1-2- insert
"not" between "Napster argues that the district court erred in"
and "finding that . . ."
Slip opinion at 2204, last paragraph, line 5- delete"911
F.2d 970 at 976-77" and insert "911 F.2d at 976-77"
_________________________________________________________________
OPINION
BEEZER, Circuit Judge:
Plaintiffs are engaged in the commercial recording, distri-
bution and sale of copyrighted musical compositions and
sound recordings. The complaint alleges that Napster, Inc.
("Napster") is a contributory and vicarious copyright
infringer. On July 26, 2000, the district court granted plain-
tiffs' motion for a preliminary injunction. The injunction was
slightly modified by written opinion on August 10, 2000.
A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896
(N.D. Cal. 2000). The district court preliminarily enjoined
Napster "from engaging in, or facilitating others in copying,
downloading, uploading, transmitting, or distributing plain-
tiffs' copyrighted musical compositions and sound recordings,
protected by either federal or state law, without express per-
mission of the rights owner." Id. at 927. Federal Rule of Civil
Procedure 65(c) requires successful plaintiffs to post a bond
4223
for damages incurred by the enjoined party in the event that
the injunction was wrongfully issued. The district court set
bond in this case at $5 million.
We entered a temporary stay of the preliminary injunction
pending resolution of this appeal. We have jurisdiction pursu-
ant to 28 U.S.C. S 1292(a)(1). We affirm in part, reverse in
part and remand.
I
We have examined the papers submitted in support of and
in response to the injunction application and it appears that
Napster has designed and operates a system which permits the
transmission and retention of sound recordings employing
digital technology.
In 1987, the Moving Picture Experts Group set a standard
file format for the storage of audio recordings in a digital for-
mat called MPEG-3, abbreviated as "MP3." Digital MP3 files
are created through a process colloquially called "ripping."
Ripping software allows a computer owner to copy an audio
compact disk ("audio CD") directly onto a computer's hard
drive by compressing the audio information on the CD into
the MP3 format. The MP3's compressed format allows for
rapid transmission of digital audio files from one computer to
another by electronic mail or any other file transfer protocol.
Napster facilitates the transmission of MP3 files between
and among its users. Through a process commonly called
"peer-to-peer" file sharing, Napster allows its users to: (1)
make MP3 music files stored on individual computer hard
drives available for copying by other Napster users; (2) search
for MP3 music files stored on other users' computers; and (3)
transfer exact copies of the contents of other users' MP3 files
from one computer to another via the Internet. These func-
tions are made possible by Napster's MusicShare software,
available free of charge from Napster's Internet site, and Nap-
4224
ster's network servers and server-side software. Napster pro-
vides technical support for the indexing and searching of MP3
files, as well as for its other functions, including a "chat
room," where users can meet to discuss music, and a directory
where participating artists can provide information about their
music.
A. Accessing the System
In order to copy MP3 files through the Napster system, a
user must first access Napster's Internet site and download1
the MusicShare software to his individual computer. See
http://www.Napster.com. Once the software is installed, the
user can access the Napster system. A first-time user is
required to register with the Napster system by creating a
"user name" and password.
B. Listing Available Files
If a registered user wants to list available files stored in his
computer's hard drive on Napster for others to access, he
must first create a "user library" directory on his computer's
hard drive. The user then saves his MP3 files in the library
directory, using self-designated file names. He next must log
into the Napster system using his user name and password.
His MusicShare software then searches his user library and
verifies that the available files are properly formatted. If in the
correct MP3 format, the names of the MP3 files will be
uploaded from the user's computer to the Napster servers. The
content of the MP3 files remains stored in the user's com-
puter.
_________________________________________________________________
1 "To download means to receive information, typically a file, from
another computer to yours via your modem . . . . The opposite term is
upload, which means to send a file to another computer." United States v.
Mohrbacher, 182 F.3d 1041, 1048 (9th Cir. 1999) (quoting Robin Wil-
liams, Jargon, An Informal Dictionary of Computer Terms 170-71
(1993)).
4225
Once uploaded to the Napster servers, the user's MP3 file
names are stored in a server-side "library" under the user's
name and become part of a "collective directory " of files
available for transfer during the time the user is logged onto
the Napster system. The collective directory is fluid; it tracks
users who are connected in real time, displaying only file
names that are immediately accessible.
C. Searching For Available Files
Napster allows a user to locate other users' MP3 files in
two ways: through Napster's search function and through its
"hotlist" function.
Software located on the Napster servers maintains a "search
index" of Napster's collective directory. To search the files
available from Napster users currently connected to the net-
work servers, the individual user accesses a form in the
MusicShare software stored in his computer and enters either
the name of a song or an artist as the object of the search. The
form is then transmitted to a Napster server and automatically
compared to the MP3 file names listed in the server's search
index. Napster's server compiles a list of all MP3 file names
pulled from the search index which include the same search
terms entered on the search form and transmits the list to the
searching user. The Napster server does not search the con-
tents of any MP3 file; rather, the search is limited to "a text
search of the file names indexed in a particular cluster. Those
file names may contain typographical errors or otherwise
inaccurate descriptions of the content of the files since they
are designated by other users." Napster, 114 F. Supp. 2d at
906.
To use the "hotlist" function, the Napster user creates a list
of other users' names from whom he has obtained MP3 files
in the past. When logged onto Napster's servers, the system
alerts the user if any user on his list (a "hotlisted user") is also
logged onto the system. If so, the user can access an index of
4226
all MP3 file names in a particular hotlisted user's library and
request a file in the library by selecting the file name. The
contents of the hotlisted user's MP3 file are not stored on the
Napster system.
D. Transferring Copies of an MP3 file
To transfer a copy of the contents of a requested MP3 file,
the Napster server software obtains the Internet address of the
requesting user and the Internet address of the "host user" (the
user with the available files). See generally Brookfield Com-
munications, Inc. v. West Coast Entm't Corp., 174 F.3d 1036,
1044 (9th Cir. 1999) (describing, in detail, the structure of the
Internet). The Napster servers then communicate the host
user's Internet address to the requesting user. The requesting
user's computer uses this information to establish a connec-
tion with the host user and downloads a copy of the contents
of the MP3 file from one computer to the other over the Inter-
net, "peer-to-peer." A downloaded MP3 file can be played
directly from the user's hard drive using Napster's Music-
Share program or other software. The file may also be trans-
ferred back onto an audio CD if the user has access to
equipment designed for that purpose. In both cases, the qual-
ity of the original sound recording is slightly diminished by
transfer to the MP3 format.
This architecture is described in some detail to promote an
understanding of transmission mechanics as opposed to the
content of the transmissions. The content is the subject of our
copyright infringement analysis.
II
We review a grant or denial of a preliminary injunction for
abuse of discretion. Gorbach v. Reno, 219 F.3d 1087, 1091
(9th Cir. 2000) (en banc). Application of erroneous legal prin-
ciples represents an abuse of discretion by the district court.
Rucker v. Davis, _______ F.3d _______, 2001 WL 55724, at *4 (9th
4227
Cir. Jan. 24, 2001) (en banc). If the district court is claimed
to have relied on an erroneous legal premise in reaching its
decision to grant or deny a preliminary injunction, we will
review the underlying issue of law de novo. Id. at *4 (citing
Does 1-5 v. Chandler, 83 F.3d 1150, 1152 (9th Cir. 1996)).
On review, we are required to determine, "whether the
court employed the appropriate legal standards governing the
issuance of a preliminary injunction and whether the district
court correctly apprehended the law with respect to the under-
lying issues in the case." Id. "As long as the district court got
the law right, `it will not be reversed simply because the
appellate court would have arrived at a different result if it
had applied the law to the facts of the case.' " Gregorio T. v.
Wilson, 59 F.3d 1002, 1004 (9th Cir. 1995) (quoting Sports
Form, Inc. v. United Press, Int'l, 686 F.2d 750, 752 (9th Cir.
1982)).
[1] Preliminary injunctive relief is available to a party who
demonstrates either: (1) a combination of probable success on
the merits and the possibility of irreparable harm; or (2) that
serious questions are raised and the balance of hardships tips
in its favor. Prudential Real Estate Affiliates, Inc. v. PPR
Realty, Inc., 204 F.3d 867, 874 (9th Cir. 2000)."These two
formulations represent two points on a sliding scale in which
the required degree of irreparable harm increases as the prob-
ability of success decreases." Id.
III
Plaintiffs claim Napster users are engaged in the wholesale
reproduction and distribution of copyrighted works, all consti-
tuting direct infringement.2 The district court agreed. We note
_________________________________________________________________
2 Secondary liability for copyright infringement does not exist in the
absence of direct infringement by a third party. Religious Tech. Ctr. v.
Netcom On-Line Communication Servs., Inc., 907 F. Supp. 1361, 1371
(N.D. Cal. 1995) ("[T]here can be no contributory infringement by a
defendant without direct infringement by another."). It follows that Nap-
ster does not facilitate infringement of the copyright laws in the absence
of direct infringement by its users.
4228
that the district court's conclusion that plaintiffs have pre-
sented a prima facie case of direct infringement by Napster
users is not presently appealed by Napster. We only need
briefly address the threshold requirements.
A. Infringement
[2] Plaintiffs must satisfy two requirements to present a
prima facie case of direct infringement: (1) they must show
ownership of the allegedly infringed material and (2) they
must demonstrate that the alleged infringers violate at least
one exclusive right granted to copyright holders under 17
U.S.C. S 106. See 17 U.S.C. S 501(a) (infringement occurs
when alleged infringer engages in activity listed inS 106); see
also Baxter v. MCA, Inc., 812 F.2d 421, 423 (9th Cir. 1987);
see, e.g., S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1085 n.3
(9th Cir. 1989) ("The word `copying' is shorthand for the
infringing of any of the copyright owner's five exclusive
rights . . . ."). Plaintiffs have sufficiently demonstrated owner-
ship. The record supports the district court's determination
that "as much as eighty-seven percent of the files available on
Napster may be copyrighted and more than seventy percent
may be owned or administered by plaintiffs." Napster, 114 F.
Supp. 2d at 911.
[3] The district court further determined that plaintiffs'
exclusive rights under S 106 were violated:"here the evidence
establishes that a majority of Napster users use the service to
download and upload copyrighted music. . . . And by doing
that, it constitutes--the uses constitute direct infringement of
plaintiffs' musical compositions, recordings." A&M Records,
Inc. v. Napster, Inc., Nos. 99-5183, 00-0074, 2000 WL
1009483, at *1 (N.D. Cal. July 26, 2000) (transcript of pro-
ceedings). The district court also noted that "it is pretty much
acknowledged . . . by Napster that this is infringement." Id.
We agree that plaintiffs have shown that Napster users
infringe at least two of the copyright holders' exclusive rights:
the rights of reproduction, S 106(1); and distribution,
4229
S 106(3). Napster users who upload file names to the search
index for others to copy violate plaintiffs' distribution rights.
Napster users who download files containing copyrighted
music violate plaintiffs' reproduction rights.
Napster asserts an affirmative defense to the charge that its
users directly infringe plaintiffs' copyrighted musical compo-
sitions and sound recordings.
B. Fair Use
Napster contends that its users do not directly infringe
plaintiffs' copyrights because the users are engaged in fair use
of the material. See 17 U.S.C. S 107 ("[T]he fair use of a
copyrighted work . . . is not an infringement of copyright.").
Napster identifies three specific alleged fair uses: sampling,
where users make temporary copies of a work before purchas-
ing; space-shifting, where users access a sound recording
through the Napster system that they already own in audio CD
format; and permissive distribution of recordings by both new
and established artists.
[4] The district court considered factors listed in 17 U.S.C.
S 107, which guide a court's fair use determination. These
factors are: (1) the purpose and character of the use; (2) the
nature of the copyrighted work; (3) the "amount and substan-
tiality of the portion used" in relation to the work as a whole;
and (4) the effect of the use upon the potential market for the
work or the value of the work. See 17 U.S.C.S 107. The dis-
trict court first conducted a general analysis of Napster system
uses under S 107, and then applied its reasoning to the alleged
fair uses identified by Napster. The district court concluded
that Napster users are not fair users.3 We agree. We first
address the court's overall fair use analysis.
_________________________________________________________________
3 Napster asserts that because plaintiffs seek injunctive relief, they have
the burden of showing a likelihood that they would prevail against any
affirmative defenses raised by Napster, including its fair use defense under
4230
1. Purpose and Character of the Use
This factor focuses on whether the new work merely
replaces the object of the original creation or instead adds a
further purpose or different character. In other words, this fac-
tor asks "whether and to what extent the new work is `trans-
formative.' " See Campbell v. Acuff-Rose Music, Inc., 510
U.S. 569, 579 (1994).
[5] The district court first concluded that downloading MP3
files does not transform the copyrighted work. Napster, 114
F. Supp. 2d at 912. This conclusion is supportable. Courts
_________________________________________________________________
17 U.S.C. S 107. See Atari Games Corp. v. Nintendo, 975 F.2d 832, 837
(Fed. Cir. 1992) (following Ninth Circuit law, and stating that plaintiff
must show likelihood of success on prima facie copyright infringement
case and likelihood that it would overcome copyright misuse defense); see
also Dr. Seuss Enters. v. Penguin Books USA, 924 F. Supp. 1559, 1562
(S.D. Cal. 1996) ("The plaintiff's burden of showing a likelihood of suc-
cess on the merits includes the burden of showing a likelihood that it
would prevail against any affirmative defenses raised by the defendant."),
aff'd, 109 F.3d 1394 (9th Cir. 1997); Religious Tech. Ctr. v. Netcom On-
Line Communication Servs., 923 F. Supp. 1231, 1242 n.12 (1995) (same);
2 William W. Schwarzer et al., California Practice Guide, Federal Civil
Procedure Before Trial P 13:47 (2000) (advising that when a preliminary
injunction is sought "plaintiff must demonstrate a likelihood of prevailing
on any affirmative defense as well as on plaintiff's case in chief"). But see
Fair Use of Copyrighted Works, H.R. Rep. 102-836 n.3 (criticizing a
Northern District of New York case in which "the district court errone-
ously held that where the copyright owner seeks a preliminary injunction,
the copyright owner bears the burden of disproving the [fair use]
defense"); see also 1 William F. Patry, Copyright Law & Practice, 725,
725 n.27 (1994) (citing cases placing burden on defendant at preliminary
injunction stage).
The district court stated that "defendant bears the burden of proving . . .
affirmative defenses." Napster, 114 F. Supp. 2d at 912. Plaintiffs assert
that the district court did not err in placing the burden on Napster. We con-
clude that even if plaintiffs bear the burden of establishing that they would
likely prevail against Napster's affirmative defenses at the preliminary
injunction stage, the record supports the district court's conclusion that
Napster users do not engage in fair use of the copyrighted materials.
4231
have been reluctant to find fair use when an original work is
merely retransmitted in a different medium. See, e.g., Infinity
Broadcast Corp. v. Kirkwood, 150 F.3d 104, 108 (2d Cir.
1994) (concluding that retransmission of radio broadcast over
telephone lines is not transformative); UMG Recordings, Inc.
v. MP3.com, Inc., 92 F. Supp. 2d 349, 351 (S.D.N.Y.) (find-
ing that reproduction of audio CD into MP3 format does not
"transform" the work), certification denied, 2000 WL 710056
(S.D.N.Y. June 1, 2000) ("Defendant's copyright infringe-
ment was clear, and the mere fact that it was clothed in the
exotic webbing of the Internet does not disguise its illegali-
ty.").
[6] This "purpose and character " element also requires the
district court to determine whether the allegedly infringing
use is commercial or noncommercial. See Campbell , 510 U.S.
at 584-85. A commercial use weighs against a finding of fair
use but is not conclusive on the issue. Id. The district court
determined that Napster users engage in commercial use of
the copyrighted materials largely because (1) "a host user
sending a file cannot be said to engage in a personal use when
distributing that file to an anonymous requester " and (2)
"Napster users get for free something they would ordinarily
have to buy." Napster, 114 F. Supp. 2d at 912. The district
court's findings are not clearly erroneous.
Direct economic benefit is not required to demonstrate a
commercial use. Rather, repeated and exploitative copying of
copyrighted works, even if the copies are not offered for sale,
may constitute a commercial use. See Worldwide Church of
God v. Philadelphia Church of God, 227 F.3d 1110, 1118 (9th
Cir. 2000) (stating that church that copied religious text for its
members "unquestionably profit[ed]" from the unauthorized
"distribution and use of [the text] without having to account
to the copyright holder"); American Geophysical Union v.
Texaco, Inc., 60 F.3d 913, 922 (2d Cir. 1994) (finding that
researchers at for-profit laboratory gained indirect economic
advantage by photocopying copyrighted scholarly articles). In
4232
the record before us, commercial use is demonstrated by a
showing that repeated and exploitative unauthorized copies of
copyrighted works were made to save the expense of purchas-
ing authorized copies. See Worldwide Church, 227 F.3d at
1117-18; Sega Enters. Ltd. v. MAPHIA, 857 F. Supp. 679,
687 (N.D. Cal. 1994) (finding commercial use when individu-
als downloaded copies of video games "to avoid having to
buy video game cartridges"); see also American Geophysical,
60 F.3d at 922. Plaintiffs made such a showing before the dis-
trict court.4
We also note that the definition of a financially motivated
transaction for the purposes of criminal copyright actions
includes trading infringing copies of a work for other items,
"including the receipt of other copyrighted works." See No
Electronic Theft Act ("NET Act"), Pub. L. No. 105-147, 18
U.S.C. S 101 (defining "Financial Gain").
2. The Nature of the Use
[7] Works that are creative in nature are "closer to the core
of intended copyright protection" than are more fact-based
works. See Campbell, 510 U.S. at 586. The district court
determined that plaintiffs' "copyrighted musical compositions
and sound recordings are creative in nature . . . which cuts
against a finding of fair use under the second factor." Napster,
114 F. Supp. 2d at 913. We find no error in the district court's
conclusion.
3. The Portion Used
[8] "While `wholesale copying does not preclude fair use
per se,' copying an entire work `militates against a finding of
_________________________________________________________________
4 Napster counters that even if certain users engage in commercial use
by downloading instead of purchasing the music, space-shifting and sam-
pling are nevertheless noncommercial in nature. We address this conten-
tion in our discussion of these specific uses, infra.
4233
fair use.' " Worldwide Church, 227 F.3d at 1118 (quoting
Hustler Magazine, Inc. v. Moral Majority, Inc., 796 F.2d
1148, 1155 (9th Cir. 1986)). The district court determined that
Napster users engage in "wholesale copying" of copyrighted
work because file transfer necessarily "involves copying the
entirety of the copyrighted work." Napster , 114 F. Supp. 2d
at 913. We agree. We note, however, that under certain cir-
cumstances, a court will conclude that a use is fair even when
the protected work is copied in its entirety. See, e.g., Sony
Corp. v. Universal City Studios, Inc., 464 U.S. 417, 449-50
(1984) (acknowledging that fair use of time-shifting necessar-
ily involved making a full copy of a protected work).
4. Effect of Use on Market
[9] "Fair use, when properly applied, is limited to copying
by others which does not materially impair the marketability
of the work which is copied." Harper & Row Publishers, Inc.
v. Nation Enters., 471 U.S. 539, 566-67 (1985)."[T]he impor-
tance of this [fourth] factor will vary, not only with the
amount of harm, but also with the relative strength of the
showing on the other factors." Campbell, 510 U.S. at 591
n.21. The proof required to demonstrate present or future mar-
ket harm varies with the purpose and character of the use:
A challenge to a noncommercial use of a copy-
righted work requires proof either that the particular
use is harmful, or that if it should become wide-
spread, it would adversely affect the potential market
for the copyrighted work. . . . If the intended use is
for commercial gain, that likelihood [of market
harm] may be presumed. But if it is for a noncom-
mercial purpose, the likelihood must be demon-
strated.
Sony, 464 U.S. at 451 (emphases added).
[10] Addressing this factor, the district court concluded that
Napster harms the market in "at least" two ways: it reduces
4234
audio CD sales among college students and it "raises barriers
to plaintiffs' entry into the market for the digital downloading
of music." Napster, 114 F. Supp. 2d at 913. The district court
relied on evidence plaintiffs submitted to show that Napster
use harms the market for their copyrighted musical composi-
tions and sound recordings. In a separate memorandum and
order regarding the parties' objections to the expert reports,
the district court examined each report, finding some more
appropriate and probative than others. A&M Records, Inc. v.
Napster, Inc., Nos. 99-5183 & 00-0074, 2000 WL 1170106
(N.D. Cal. August 10, 2000). Notably, plaintiffs' expert, Dr.
E. Deborah Jay, conducted a survey (the "Jay Report") using
a random sample of college and university students to track
their reasons for using Napster and the impact Napster had on
their music purchases. Id. at *2. The court recognized that the
Jay Report focused on just one segment of the Napster user
population and found "evidence of lost sales attributable to
college use to be probative of irreparable harm for purposes
of the preliminary injunction motion." Id. at *3.
Plaintiffs also offered a study conducted by Michael Fine,
Chief Executive Officer of Soundscan, (the "Fine Report") to
determine the effect of online sharing of MP3 files in order
to show irreparable harm. Fine found that online file sharing
had resulted in a loss of "album" sales within college markets.
After reviewing defendant's objections to the Fine Report and
expressing some concerns regarding the methodology and
findings, the district court refused to exclude the Fine Report
insofar as plaintiffs offered it to show irreparable harm. Id. at
*6.
Plaintiffs' expert Dr. David J. Teece studied several issues
("Teece Report"), including whether plaintiffs had suffered or
were likely to suffer harm in their existing and planned busi-
nesses due to Napster use. Id. Napster objected that the report
had not undergone peer review. The district court noted that
such reports generally are not subject to such scrutiny and
overruled defendant's objections. Id.
4235
As for defendant's experts, plaintiffs objected to the report
of Dr. Peter S. Fader, in which the expert concluded that Nap-
ster is beneficial to the music industry because MP3 music
file-sharing stimulates more audio CD sales than it displaces.
Id. at *7. The district court found problems in Dr. Fader's
minimal role in overseeing the administration of the survey
and the lack of objective data in his report. The court decided
the generality of the report rendered it "of dubious reliability
and value." The court did not exclude the report, however, but
chose "not to rely on Fader's findings in determining the
issues of fair use and irreparable harm." Id. at *8.
The district court cited both the Jay and Fine Reports in
support of its finding that Napster use harms the market for
plaintiffs' copyrighted musical compositions and sound
recordings by reducing CD sales among college students. The
district court cited the Teece Report to show the harm Napster
use caused in raising barriers to plaintiffs' entry into the mar-
ket for digital downloading of music. Napster , 114 F. Supp.
2d at 910. The district court's careful consideration of defen-
dant's objections to these reports and decision to rely on the
reports for specific issues demonstrates a proper exercise of
discretion in addition to a correct application of the fair use
doctrine. Defendant has failed to show any basis for disturb-
ing the district court's findings.
We, therefore, conclude that the district court made sound
findings related to Napster's deleterious effect on the present
and future digital download market. Moreover, lack of harm
to an established market cannot deprive the copyright holder
of the right to develop alternative markets for the works. See
L.A. Times v. Free Republic, 54 U.S.P.Q.2d 1453, 1469-71
(C.D. Cal. 2000) (stating that online market for plaintiff news-
papers' articles was harmed because plaintiffs demonstrated
that "[defendants] are attempting to exploit the market for
viewing their articles online"); see also UMG Recordings, 92
F. Supp. 2d at 352 ("Any allegedly positive impact of defen-
dant's activities on plaintiffs' prior market in no way frees
4236
defendant to usurp a further market that directly derives from
reproduction of the plaintiffs' copyrighted works."). Here,
similar to L.A. Times and UMG Recordings , the record sup-
ports the district court's finding that the "record company
plaintiffs have already expended considerable funds and effort
to commence Internet sales and licensing for digital down-
loads." 114 F. Supp. 2d at 915. Having digital downloads
available for free on the Napster system necessarily harms the
copyright holders' attempts to charge for the same downloads.
[11] Judge Patel did not abuse her discretion in reaching the
above fair use conclusions, nor were the findings of fact with
respect to fair use considerations clearly erroneous. We next
address Napster's identified uses of sampling and space-
shifting.
5. Identified Uses
Napster maintains that its identified uses of sampling and
space-shifting were wrongly excluded as fair uses by the dis-
trict court.
a. Sampling
Napster contends that its users download MP3 files to
"sample" the music in order to decide whether to purchase the
recording. Napster argues that the district court: (1) erred in
concluding that sampling is a commercial use because it con-
flated a noncommercial use with a personal use; (2) erred in
determining that sampling adversely affects the market for
plaintiffs' copyrighted music, a requirement if the use is non-
commercial; and (3) erroneously concluded that sampling is
not a fair use because it determined that samplers may also
engage in other infringing activity.
[12] The district court determined that sampling remains a
commercial use even if some users eventually purchase the
music. We find no error in the district court's determination.
4237
Plaintiffs have established that they are likely to succeed in
proving that even authorized temporary downloading of indi-
vidual songs for sampling purposes is commercial in nature.
See Napster, 114 F. Supp. 2d at 913. The record supports a
finding that free promotional downloads are highly regulated
by the record company plaintiffs and that the companies col-
lect royalties for song samples available on retail Internet
sites. Id. Evidence relied on by the district court demonstrates
that the free downloads provided by the record companies
consist of thirty-to-sixty second samples or are full songs pro-
grammed to "time out," that is, exist only for a short time on
the downloader's computer. Id. at 913-14. In comparison,
Napster users download a full, free and permanent copy of the
recording. Id. at 914-15. The determination by the district
court as to the commercial purpose and character of sampling
is not clearly erroneous.
[13] The district court further found that both the market
for audio CDs and market for online distribution are adversely
affected by Napster's service. As stated in our discussion of
the district court's general fair use analysis: the court did not
abuse its discretion when it found that, overall, Napster has an
adverse impact on the audio CD and digital download mar-
kets. Contrary to Napster's assertion that the district court
failed to specifically address the market impact of sampling,
the district court determined that "[e]ven if the type of sam-
pling supposedly done on Napster were a non-commercial
use, plaintiffs have demonstrated a substantial likelihood that
it would adversely affect the potential market for their copy-
righted works if it became widespread." Napster, 114 F.
Supp. 2d at 914. The record supports the district court's pre-
liminary determinations that: (1) the more music that sam-
pling users download, the less likely they are to eventually
purchase the recordings on audio CD; and (2) even if the
audio CD market is not harmed, Napster has adverse effects
on the developing digital download market.
Napster further argues that the district court erred in reject-
ing its evidence that the users' downloading of "samples"
4238
increases or tends to increase audio CD sales. The district
court, however, correctly noted that "any potential enhance-
ment of plaintiffs' sales . . . would not tip the fair use analysis
conclusively in favor of defendant." Id. at 914. We agree that
increased sales of copyrighted material attributable to unau-
thorized use should not deprive the copyright holder of the
right to license the material. See Campbell, 510 U.S. at 591
n.21 ("Even favorable evidence, without more, is no guaran-
tee of fairness. Judge Leval gives the example of the film pro-
ducer's appropriation of a composer's previously unknown
song that turns the song into a commercial success; the boon
to the song does not make the film's simple copying fair.");
see also L.A. Times, 54 U.S.P.Q.2d at 1471-72. Nor does posi-
tive impact in one market, here the audio CD market, deprive
the copyright holder of the right to develop identified alterna-
tive markets, here the digital download market. See id. at
1469-71.
We find no error in the district court's factual findings or
abuse of discretion in the court's conclusion that plaintiffs
will likely prevail in establishing that sampling does not con-
stitute a fair use.
b. Space-Shifting
[14] Napster also maintains that space-shifting is a fair use.
Space-shifting occurs when a Napster user downloads MP3
music files in order to listen to music he already owns on
audio CD. See id. at 915-16. Napster asserts that we have
already held that space-shifting of musical compositions and
sound recordings is a fair use. See Recording Indus. Ass'n of
Am. v. Diamond Multimedia Sys., Inc., 180 F.3d 1072, 1079
(9th Cir. 1999) ("Rio [a portable MP3 player ] merely makes
copies in order to render portable, or `space-shift,' those files
that already reside on a user's hard drive. . . . Such copying
is a paradigmatic noncommercial personal use."). See also
generally Sony, 464 U.S. at 423 (holding that "time-shifting,"
4239
where a video tape recorder owner records a television show
for later viewing, is a fair use).
[15] We conclude that the district court did not err when it
refused to apply the "shifting" analyses of Sony and Diamond.
Both Diamond and Sony are inapposite because the methods
of shifting in these cases did not also simultaneously involve
distribution of the copyrighted material to the general public;
the time or space-shifting of copyrighted material exposed the
material only to the original user. In Diamond , for example,
the copyrighted music was transferred from the user's com-
puter hard drive to the user's portable MP3 player. So too
Sony, where "the majority of VCR purchasers .. . did not dis-
tribute taped television broadcasts, but merely enjoyed them
at home." Napster, 114 F. Supp. 2d at 913. Conversely, it is
obvious that once a user lists a copy of music he already owns
on the Napster system in order to access the music from
another location, the song becomes "available to millions of
other individuals," not just the original CD owner. See UMG
Recordings, 92 F. Supp. 2d at 351-52 (finding space-shifting
of MP3 files not a fair use even when previous ownership is
demonstrated before a download is allowed); cf. Religious
Tech. Ctr. v. Lerma, No. 95-1107A, 1996 WL 633131, at *6
(E.D. Va. Oct. 4, 1996) (suggesting that storing copyrighted
material on computer disk for later review is not a fair use).
c. Other Uses
Permissive reproduction by either independent or estab-
lished artists is the final fair use claim made by Napster. The
district court noted that plaintiffs did not seek to enjoin this
and any other noninfringing use of the Napster system,
including: chat rooms, message boards and Napster's New
Artist Program. Napster, 114 F. Supp. 2d at 917. Plaintiffs do
not challenge these uses on appeal.
[16] We find no error in the district court's determination
that plaintiffs will likely succeed in establishing that Napster
4240
users do not have a fair use defense. Accordingly, we next
address whether Napster is secondarily liable for the direct
infringement under two doctrines of copyright law: contribu-
tory copyright infringement and vicarious copyright infringe-
ment.
IV
[17] We first address plaintiffs' claim that Napster is liable
for contributory copyright infringement. Traditionally, "one
who, with knowledge of the infringing activity, induces,
causes or materially contributes to the infringing conduct of
another, may be held liable as a `contributory' infringer."
Gershwin Publ'g Corp. v. Columbia Artists Mgmt., Inc., 443
F.2d 1159, 1162 (2d Cir. 1971); see also Fonovisa, Inc. v.
Cherry Auction, Inc., 76 F.3d 259, 264 (9th Cir. 1996). Put
differently, liability exists if the defendant engages in "per-
sonal conduct that encourages or assists the infringement."
Matthew Bender & Co. v. West Publ'g Co., 158 F.3d 693, 706
(2d Cir. 1998).
The district court determined that plaintiffs in all likelihood
would establish Napster's liability as a contributory infringer.
The district court did not err; Napster, by its conduct, know-
ingly encourages and assists the infringement of plaintiffs'
copyrights.
A. Knowledge
Contributory liability requires that the secondary infringer
"know or have reason to know" of direct infringement. Cable/
Home Communication Corp. Network Prods., Inc., 902 F.2d
829, 845 & 846 n.29 (11th Cir. 1990); Religious Tech. Ctr. v.
Netcom On-Line Communication Servs., Inc., 907 F. Supp.
1361, 1373-74 (N.D. Cal. 1995) (framing issue as "whether
Netcom knew or should have known of" the infringing activi-
ties). The district court found that Napster had both actual and
constructive knowledge that its users exchanged copyrighted
4241
music. The district court also concluded that the law does not
require knowledge of "specific acts of infringement" and
rejected Napster's contention that because the company can-
not distinguish infringing from noninfringing files, it does not
"know" of the direct infringement. 114 F. Supp. 2d at 917.
[18] It is apparent from the record that Napster has knowl-
edge, both actual and constructive,5 of direct infringement.
Napster claims that it is nevertheless protected from contribu-
tory liability by the teaching of Sony Corp. v. Universal City
Studios, Inc., 464 U.S. 417 (1984). We disagree. We observe
that Napster's actual, specific knowledge of direct infringe-
ment renders Sony's holding of limited assistance to Napster.
We are compelled to make a clear distinction between the
architecture of the Napster system and Napster's conduct in
relation to the operational capacity of the system.
The Sony Court refused to hold the manufacturer and retail-
ers of video tape recorders liable for contributory infringe-
ment despite evidence that such machines could be and were
used to infringe plaintiffs' copyrighted television shows. Sony
stated that if liability "is to be imposed on petitioners in this
case, it must rest on the fact that they have sold equipment
with constructive knowledge of the fact that their customers
may use that equipment to make unauthorized copies of copy-
righted material." Id. at 439 (emphasis added). The Sony
Court declined to impute the requisite level of knowledge
_________________________________________________________________
5 The district court found actual knowledge because: (1) a document
authored by Napster co-founder Sean Parker mentioned "the need to
remain ignorant of users' real names and IP addresses `since they are
exchanging pirated music' "; and (2) the Recording Industry Association
of America ("RIAA") informed Napster of more than 12,000 infringing
files, some of which are still available. 114 F. Supp. 2d at 918. The district
court found constructive knowledge because: (a) Napster executives have
recording industry experience; (b) they have enforced intellectual property
rights in other instances; (c) Napster executives have downloaded copy-
righted songs from the system; and (d) they have promoted the site with
"screen shots listing infringing files." Id. at 919.
4242
where the defendants made and sold equipment capable of
both infringing and "substantial noninfringing uses." Id. at
442 (adopting a modified "staple article of commerce" doc-
trine from patent law). See also Universal City Studios, Inc.
v. Sony Corp., 480 F. Supp. 429, 459 (C.D. Cal. 1979) ("This
court agrees with defendants that their knowledge was insuffi-
cient to make them contributory infringers."), rev'd, 659 F.2d
963 (9th Cir. 1981), rev'd, 464 U.S. 417 (1984); Alfred C.
Yen, Internet Service Provider Liability for Subscriber Copy-
right Infringement, Enterprise Liability, and the First Amend-
ment, 88 Geo. L.J. 1833, 1874 & 1893 n.210 (2000)
(suggesting that, after Sony, most Internet service providers
lack "the requisite level of knowledge" for the imposition of
contributory liability).
[19] We are bound to follow Sony , and will not impute the
requisite level of knowledge to Napster merely because peer-
to-peer file sharing technology may be used to infringe plain-
tiffs' copyrights. See 464 U.S. at 436 (rejecting argument that
merely supplying the " `means' to accomplish an infringing
activity" leads to imposition of liability). We depart from the
reasoning of the district court that Napster failed to demon-
strate that its system is capable of commercially significant
noninfringing uses. See Napster, 114 F. Supp. 2d at 916, 917-
18. The district court improperly confined the use analysis to
current uses, ignoring the system's capabilities. See generally
Sony, 464 U.S. at 442-43 (framing inquiry as whether the
video tape recorder is "capable of commercially significant
noninfringing uses") (emphasis added). Consequently, the dis-
trict court placed undue weight on the proportion of current
infringing use as compared to current and future noninfring-
ing use. See generally Vault Corp. v. Quaid Software Ltd.,
847 F.2d 255, 264-67 (5th Cir. 1997) (single noninfringing
use implicated Sony). Nonetheless, whether we might arrive
at a different result is not the issue here. See Sports Form, Inc.
v. United Press Int'l, Inc., 686 F.2d 750, 752 (9th Cir. 1982).
The instant appeal occurs at an early point in the proceedings
and "the fully developed factual record may be materially dif-
4243
ferent from that initially before the district court. . . ." Id. at
753. Regardless of the number of Napster's infringing versus
noninfringing uses, the evidentiary record here supported the
district court's finding that plaintiffs would likely prevail in
establishing that Napster knew or had reason to know of its
users' infringement of plaintiffs' copyrights.
This analysis is similar to that of Religious Technology
Center v. Netcom On-Line Communication Services, Inc.,
which suggests that in an online context, evidence of actual
knowledge of specific acts of infringement is required to hold
a computer system operator liable for contributory copyright
infringement. 907 F. Supp. at 1371. Netcom considered the
potential contributory copyright liability of a computer bulle-
tin board operator whose system supported the posting of
infringing material. Id. at 1374. The court, in denying Net-
com's motion for summary judgment of noninfringement and
plaintiff's motion for judgment on the pleadings, found that
a disputed issue of fact existed as to whether the operator had
sufficient knowledge of infringing activity. Id. at 1374-75.
The court determined that for the operator to have suffi-
cient knowledge, the copyright holder must "provide the nec-
essary documentation to show there is likely infringement."
907 F. Supp. at 1374; cf. Cubby, Inc. v. Compuserve, Inc., 776
F. Supp. 135, 141 (S.D.N.Y. 1991) (recognizing that online
service provider does not and cannot examine every hyperlink
for potentially defamatory material). If such documentation
was provided, the court reasoned that Netcom would be liable
for contributory infringement because its failure to remove the
material "and thereby stop an infringing copy from being dis-
tributed worldwide constitutes substantial participation" in
distribution of copyrighted material. Id.
[20] We agree that if a computer system operator learns of
specific infringing material available on his system and fails
to purge such material from the system, the operator knows
of and contributes to direct infringement. See Netcom, 907 F.
4244
Supp. at 1374. Conversely, absent any specific information
which identifies infringing activity, a computer system opera-
tor cannot be liable for contributory infringement merely
because the structure of the system allows for the exchange of
copyrighted material. See Sony, 464 U.S. at 436, 442-43. To
enjoin simply because a computer network allows for infring-
ing use would, in our opinion, violate Sony and potentially
restrict activity unrelated to infringing use.
[21] We nevertheless conclude that sufficient knowledge
exists to impose contributory liability when linked to demon-
strated infringing use of the Napster system. See Napster, 114
F. Supp. 2d at 919 ("Religious Technology Center would not
mandate a determination that Napster, Inc. lacks the knowl-
edge requisite to contributory infringement."). The record
supports the district court's finding that Napster has actual
knowledge that specific infringing material is available using
its system, that it could block access to the system by suppli-
ers of the infringing material, and that it failed to remove the
material. See Napster, 114 F. Supp. 2d at 918, 920-21.6
B. Material Contribution
[22] Under the facts as found by the district court, Napster
materially contributes to the infringing activity. Relying on
Fonovisa, the district court concluded that"[w]ithout the sup-
port services defendant provides, Napster users could not find
_________________________________________________________________
6 As stated by the district court:
Plaintiff[s] . . . demonstrate that defendant had actual notice of
direct infringement because the RIAA informed it of more than
12,000 infringing files. See Creighton 12/3/99 Dec., Exh. D.
Although Napster, Inc. purportedly terminated the users offering
these files, the songs are still available using the Napster service,
as are the copyrighted works which the record company plaintiffs
identified in Schedules A and B of their complaint. See Creighton
Supp. Dec. PP 3-4.
114 F. Supp. 2d at 918.
4245
and download the music they want with the ease of which
defendant boasts." Napster, 114 F. Supp. 2d at 919-20
("Napster is an integrated service designed to enable users to
locate and download MP3 music files."). We agree that Nap-
ster provides "the site and facilities" for direct infringement.
See Fonovisa, 76 F.3d at 264; cf. Netcom, 907 F. Supp. at
1372 ("Netcom will be liable for contributory infringement
since its failure to cancel [a user's] infringing message and
thereby stop an infringing copy from being distributed world-
wide constitutes substantial participation."). The district court
correctly applied the reasoning in Fonovisa, and properly
found that Napster materially contributes to direct infringe-
ment.
We affirm the district court's conclusion that plaintiffs have
demonstrated a likelihood of success on the merits of the con-
tributory copyright infringement claim. We will address the
scope of the injunction in part VIII of this opinion.
V
[23] We turn to the question whether Napster engages in
vicarious copyright infringement. Vicarious copyright liability
is an "outgrowth" of respondeat superior. Fonovisa, 76 F.3d
at 262. In the context of copyright law, vicarious liability
extends beyond an employer/employee relationship to cases
in which a defendant "has the right and ability to supervise
the infringing activity and also has a direct financial interest
in such activities." Id. (quoting Gershwin, 443 F.2d at 1162);
see also Polygram Int'l Publ'g, Inc. v. Nevada/TIG, Inc., 855
F. Supp. 1314, 1325-26 (D. Mass. 1994) (describing vicarious
liability as a form of risk allocation).
Before moving into this discussion, we note that Sony's
"staple article of commerce" analysis has no application to
Napster's potential liability for vicarious copyright infringe-
ment. See Sony, 464 U.S. at 434-435; see generally 3 Melville
B. Nimmer & David Nimmer, Nimmer On Copyright
4246
SS 12.04[A][2] & [A][2][b] (2000) (confining Sony to con-
tributory infringement analysis: "Contributory infringement
itself is of two types -- personal conduct that forms part of
or furthers the infringement and contribution of machinery or
goods that provide the means to infringe"). 617 PLI/Pat 455,
528 (Sept. 2, 2000) (indicating that the "staple article of com-
merce" doctrine "provides a defense only to contributory
infringement, not to vicarious infringement"). The issues of
Sony's liability under the "doctrines of `direct infringement'
and `vicarious liability' " were not before the Supreme Court,
although the Court recognized that the "lines between direct
infringement, contributory infringement, and vicarious liabil-
ity are not clearly drawn." Id. at 435 n.17. Consequently,
when the Sony Court used the term "vicarious liability," it did
so broadly and outside of a technical analysis of the doctrine
of vicarious copyright infringement. Id. at 435 ("[V]icarious
liability is imposed in virtually all areas of the law, and the
concept of contributory infringement is merely a species of
the broader problem of identifying the circumstances in which
it is just to hold one individual accountable for the actions of
another."); see also Black's Law Dictionary 927 (7th ed.
1999) (defining "vicarious liability" in a manner similar to the
definition used in Sony).
A. Financial Benefit
[24] The district court determined that plaintiffs had dem-
onstrated they would likely succeed in establishing that Nap-
ster has a direct financial interest in the infringing activity.
Napster, 114 F. Supp. 2d at 921-22. We agree. Financial ben-
efit exists where the availability of infringing material "acts
as a `draw' for customers." Fonovisa, 76 F.3d at 263-64 (stat-
ing that financial benefit may be shown "where infringing
performances enhance the attractiveness of a venue"). Ample
evidence supports the district court's finding that Napster's
future revenue is directly dependent upon "increases in user-
base." More users register with the Napster system as the
"quality and quantity of available music increases." 114 F.
4247
Supp. 2d at 902. We conclude that the district court did not
err in determining that Napster financially benefits from the
availability of protected works on its system.
B. Supervision
The district court determined that Napster has the right and
ability to supervise its users' conduct. Napster , 114 F. Supp.
2d at 920-21 (finding that Napster's representations to the
court regarding "its improved methods of blocking users
about whom rights holders complain . . . is tantamount to an
admission that defendant can, and sometimes does, police its
service"). We agree in part.
[25] The ability to block infringers' access to a particular
environment for any reason whatsoever is evidence of the
right and ability to supervise. See Fonovisa, 76 F.3d at 262
("Cherry Auction had the right to terminate vendors for any
reason whatsoever and through that right had the ability to
control the activities of vendors on the premises."); cf. Net-
com, 907 F. Supp. at 1375-76 (indicating that plaintiff raised
a genuine issue of fact regarding ability to supervise by pre-
senting evidence that an electronic bulletin board service can
suspend subscriber's accounts). Here, plaintiffs have demon-
strated that Napster retains the right to control access to its
system. Napster has an express reservation of rights policy,
stating on its website that it expressly reserves the "right to
refuse service and terminate accounts in [its ] discretion,
including, but not limited to, if Napster believes that user con-
duct violates applicable law . . . or for any reason in Napster's
sole discretion, with or without cause."
[26] To escape imposition of vicarious liability, the
reserved right to police must be exercised to its fullest extent.
Turning a blind eye to detectable acts of infringement for the
sake of profit gives rise to liability. See, e.g., Fonovisa, 76
F.3d at 261 ("There is no dispute for the purposes of this
appeal that Cherry Auction and its operators were aware that
4248
vendors in their swap meets were selling counterfeit record-
ings."); see also Gershwin, 443 F.2d at 1161-62 (citing Sha-
piro, Bernstein & Co. v. H.L. Greene Co., 316 F.2d 304 (2d
Cir. 1963), for the proposition that "failure to police the con-
duct of the primary infringer" leads to imposition of vicarious
liability for copyright infringement).
[27] The district court correctly determined that Napster
had the right and ability to police its system and failed to
exercise that right to prevent the exchange of copyrighted
material. The district court, however, failed to recognize that
the boundaries of the premises that Napster "controls and
patrols" are limited. See, e.g., Fonovisa, 76 F.2d at 262-63 (in
addition to having the right to exclude vendors, defendant
"controlled and patrolled" the premises); see also Polygram,
855 F. Supp. at 1328-29 (in addition to having the contractual
right to remove exhibitors, trade show operator reserved the
right to police during the show and had its "employees walk
the aisles to ensure `rules compliance' "). Put differently,
Napster's reserved "right and ability" to police is cabined by
the system's current architecture. As shown by the record, the
Napster system does not "read" the content of indexed files,
other than to check that they are in the proper MP3 format.
[28] Napster, however, has the ability to locate infringing
material listed on its search indices, and the right to terminate
users' access to the system. The file name indices, therefore,
are within the "premises" that Napster has the ability to
police. We recognize that the files are user-named and may
not match copyrighted material exactly (for example, the art-
ist or song could be spelled wrong). For Napster to function
effectively, however, file names must reasonably or roughly
correspond to the material contained in the files, otherwise no
user could ever locate any desired music. As a practical mat-
ter, Napster, its users and the record company plaintiffs have
equal access to infringing material by employing Napster's
"search function."
4249
[29] Our review of the record requires us to accept the dis-
trict court's conclusion that plaintiffs have demonstrated a
likelihood of success on the merits of the vicarious copyright
infringement claim. Napster's failure to police the system's
"premises," combined with a showing that Napster financially
benefits from the continuing availability of infringing files on
its system, leads to the imposition of vicarious liability. We
address the scope of the injunction in part VIII of this opinion.
VI
We next address whether Napster has asserted defenses
which would preclude the entry of a preliminary injunction.
Napster alleges that two statutes insulate it from liability.
First, Napster asserts that its users engage in actions protected
by S 1008 of the Audio Home Recording Act of 1992, 17
U.S.C. S 1008. Second, Napster argues that its liability for
contributory and vicarious infringement is limited by the Dig-
ital Millennium Copyright Act, 17 U.S.C. S 512. We address
the application of each statute in turn.
A. Audio Home Recording Act
The statute states in part:
No action may be brought under this title alleging
infringement of copyright based on the manufacture,
importation, or distribution of a digital audio record-
ing device, a digital audio recording medium, an
analog recording device, or an analog recording
medium, or based on the noncommercial use by a
consumer of such a device or medium for making
digital musical recordings or analog musical record-
ings.
17 U.S.C. S 1008 (emphases added). Napster contends that
MP3 file exchange is the type of "noncommercial use" pro-
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tected from infringement actions by the statute. Napster
asserts it cannot be secondarily liable for users' nonactionable
exchange of copyrighted musical recordings.
The district court rejected Napster's argument, stating that
the Audio Home Recording Act is "irrelevant" to the action
because: (1) plaintiffs did not bring claims under the Audio
Home Recording Act; and (2) the Audio Home Recording Act
does not cover the downloading of MP3 files. Napster, 114 F.
Supp. 2d at 916 n.19.
[30] We agree with the district court that the Audio Home
Recording Act does not cover the downloading of MP3 files
to computer hard drives. First, "[u]nder the plain meaning of
the Act's definition of digital audio recording devices, com-
puters (and their hard drives) are not digital audio recording
devices because their `primary purpose' is not to make digital
audio copied recordings." Recording Indus. Ass'n of Am. v.
Diamond Multimedia Sys., Inc., 180 F.3d 1072, 1078 (9th Cir.
1999). Second, notwithstanding Napster's claim that comput-
ers are "digital audio recording devices," computers do not
make "digital music recordings" as defined by the Audio
Home Recording Act. Id. at 1077 (citing S. Rep. 102-294)
("There are simply no grounds in either the plain language of
the definition or in the legislative history for interpreting the
term `digital musical recording' to include songs fixed on
computer hard drives.").
B. Digital Millennium Copyright Act
Napster also interposes a statutory limitation on liability by
asserting the protections of the "safe harbor " from copyright
infringement suits for "Internet service providers" contained
in the Digital Millennium Copyright Act, 17 U.S.C.S 512.
See Napster, 114 F. Supp. 2d at 919 n.24. The district court
did not give this statutory limitation any weight favoring a
denial of temporary injunctive relief. The court concluded that
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Napster "has failed to persuade this court that subsection
512(d) shelters contributory infringers." Id.
We need not accept a blanket conclusion that S 512 of the
Digital Millennium Copyright Act will never protect second-
ary infringers. See S. Rep. 105-190, at 40 (1998) ("The limita-
tions in subsections (a) through (d) protect qualifying service
providers from liability for all monetary relief for direct,
vicarious, and contributory infringement."), reprinted in Mel-
ville B. Nimmer & David Nimmer, Nimmer on Copyright:
Congressional Committee Reports on the Digital Millennium
Copyright Act and Concurrent Amendments (2000); see also
Charles S. Wright, Actual Versus Legal Control: Reading
Vicarious Liability for Copyright Infringement Into the Digi-
tal Millennium Copyright Act of 1998, 75 Wash. L. Rev.
1005, 1028-31 (July 2000) ("[T]he committee reports leave
no doubt that Congress intended to provide some relief from
vicarious liability").
[31] We do not agree that Napster's potential liability for
contributory and vicarious infringement renders the Digital
Millennium Copyright Act inapplicable per se. We instead
recognize that this issue will be more fully developed at trial.
At this stage of the litigation, plaintiffs raise serious questions
regarding Napster's ability to obtain shelter underS 512, and
plaintiffs also demonstrate that the balance of hardships tips
in their favor. See Prudential Real Estate, 204 F.3d at 874;
see also Micro Star v. Formgen, Inc. 154 F.3d 1107, 1109
(9th Cir. 1998) ("A party seeking a preliminary injunction
must show . . . `that serious questions going to the merits were
raised and the balance of hardships tips sharply in its
favor.' ").
Plaintiffs have raised and continue to raise significant ques-
tions under this statute, including: (1) whether Napster is an
Internet service provider as defined by 17 U.S.C.S 512(d); (2)
whether copyright owners must give a service provider "offi-
cial" notice of infringing activity in order for it to have
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knowledge or awareness of infringing activity on its system;
and (3) whether Napster complies with S 512(i), which
requires a service provider to timely establish a detailed copy-
right compliance policy. See A&M Records, Inc. v. Napster,
Inc., No. 99-05183, 2000 WL 573136 (N.D. Cal. May 12,
2000) (denying summary judgment to Napster under a differ-
ent subsection of the Digital Millennium Copyright Act,
S 512(a)).
The district court considered ample evidence to support its
determination that the balance of hardships tips in plaintiffs'
favor:
Any destruction of Napster, Inc. by a preliminary
injunction is speculative compared to the statistical
evidence of massive, unauthorized downloading and
uploading of plaintiffs' copyrighted works--as many
as 10,000 files per second by defendant's own
admission. See Kessler Dec. P 29. The court has
every reason to believe that, without a preliminary
injunction, these numbers will mushroom as Napster
users, and newcomers attracted by the publicity,
scramble to obtain as much free music as possible
before trial.
114 F. Supp. 2d at 926.
VII
Napster contends that even if the district court's prelimi-
nary determinations that it is liable for facilitating copyright
infringement are correct, the district court improperly rejected
valid affirmative defenses of waiver, implied license and
copyright misuse. We address the defenses in turn.
A. Waiver
"Waiver is the intentional relinquishment of a known right
with knowledge of its existence and the intent to relinquish
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it." United States v. King Features Entm't, Inc., 843 F.2d 394,
399 (9th Cir. 1988). In copyright, waiver or abandonment of
copyright "occurs only if there is an intent by the copyright
proprietor to surrender rights in his work." 4 Melville B. Nim-
mer & David Nimmer, Nimmer On CopyrightP 13.06 (2000);
see also Micro Star v. Formgen, Inc., 154 F.3d 1107, 1114
(9th Cir. 1998) (discussing abandonment).
Napster argues that the district court erred in not finding
that plaintiffs knowingly provided consumers with technology
designed to copy and distribute MP3 files over the Internet
and, thus, waived any legal authority to exercise exclusive
control over creation and distribution of MP3 files. The dis-
trict court, however, was not convinced "that the record com-
panies created the monster that is now devouring their
intellectual property rights." Napster, 114 F. Supp. 2d at 924.
We find no error in the district court's finding that "in hasten-
ing the proliferation of MP3 files, plaintiffs did[nothing]
more than seek partners for their commercial downloading
ventures and develop music players for files they planned to
sell over the Internet." Id.7
B. Implied License
Napster also argues that plaintiffs granted the company an
implied license by encouraging MP3 file exchange over the
Internet. Courts have found implied licenses only in "narrow"
circumstances where one party "created a work at[the
_________________________________________________________________
7 Napster additionally asserts that the district court improperly refused to
allow additional discovery into affirmative defenses and also erroneously
failed to hold an evidentiary hearing. The denial of an evidentiary hearing
is reviewed for abuse of discretion, Kenneally v. Lungren, 967 F.2d 329,
335 (9th Cir. 1992), as is the court's decision to deny further discovery.
See Sablan v. Dep't of Finance, 856 F.2d 1317, 1321 (9th Cir. 1988) (stat-
ing that decision to deny discovery will not be disturbed except upon a
clear showing "that the denial of discovery results in actual and substantial
prejudice"). We conclude that the court did not abuse its discretion in
denying further discovery and refusing to conduct an evidentiary hearing.
4254
other's] request and handed it over, intending that [the other]
copy and distribute it." SmithKline Beecham Consumer
Healthcare, L.P. v. Watson Pharms., Inc., 211 F.3d 21, 25 (2d
Cir. 2000) (quoting Effects Assocs., Inc. v. Cohen, 908 F.2d
555, 558 (9th Cir. 1990)), cert. denied, 121 S. Ct. 173 (2000).
The district court observed that no evidence exists to support
this defense: "indeed, the RIAA gave defendant express
notice that it objected to the availability of its members' copy-
righted music on Napster." Napster, 114 F. Supp. 2d at 924-
25. The record supports this conclusion.
C. Misuse
The defense of copyright misuse forbids a copyright holder
from "secur[ing] an exclusive right or limited monopoly not
granted by the Copyright Office." Lasercomb Am., Inc. v.
Reynolds, 911 F.2d 970, 977-79 (4th Cir. 1990), quoted in
Practice Mgmt. Info. Corp. v. American Med. Ass'n , 121 F.3d
516, 520 (9th Cir.), amended by 133 F.3d 1140 (9th Cir.
1997). Napster alleges that online distribution is not within
the copyright monopoly. According to Napster, plaintiffs have
colluded to "use their copyrights to extend their control to
online distributions."
We find no error in the district court's preliminary rejection
of this affirmative defense. The misuse defense prevents
copyright holders from leveraging their limited monopoly to
allow them control of areas outside the monopoly. See Laser-
comb, 911 F.2d at 976-77; see also Religious Tech. Ctr. v.
Lerma, No. 95-1107A, 1996 WL 633131, at *11 (E.D. Va.
Oct. 4, 1996) (listing circumstances which indicate improper
leverage).8 There is no evidence here that plaintiffs seek to
_________________________________________________________________
8 The district court correctly stated that "most of the cases" that recog-
nize the affirmative defense of copyright misuse involve unduly restrictive
licensing schemes. See Napster, 114 F. Supp. 2d at 923; see also Laser-
comb, 911 F.2d at 973 (stating that "a misuse of copyright defense is
inherent in the law of copyright"). We have also suggested, however, that
4255
control areas outside of their grant of monopoly. Rather,
plaintiffs seek to control reproduction and distribution of their
copyrighted works, exclusive rights of copyright holders. 17
U.S.C. S 106; see also, e.g., UMG Recordings, 92 F. Supp. 2d
at 351 ("A [copyright holder's] `exclusive' rights, derived
from the Constitution and the Copyright Act, include the
right, within broad limits, to curb the development of such a
derivative market by refusing to license a copyrighted work
or by doing so only on terms the copyright owner finds
acceptable."). That the copyrighted works are transmitted in
another medium--MP3 format rather than audio CD--has no
bearing on our analysis. See id. at 351 (finding that reproduc-
tion of audio CD into MP3 format does not "transform" the
work).
VIII
The district court correctly recognized that a preliminary
injunction against Napster's participation in copyright
infringement is not only warranted but required. We believe,
however, that the scope of the injunction needs modification
in light of our opinion. Specifically, we reiterate that contribu-
tory liability may potentially be imposed only to the extent
that Napster: (1) receives reasonable knowledge of specific
infringing files with copyrighted musical compositions and
sound recordings; (2) knows or should know that such files
are available on the Napster system; and (3) fails to act to pre-
_________________________________________________________________
a unilateral refusal to license a copyright may constitute wrongful exclu-
sionary conduct giving rise to a claim of misuse, but assume that the "de-
sire to exclude others . . . is a presumptively valid business justification
for any immediate harm to consumers." See Image Tech. Servs. v. East-
man Kodak Co., 125 F.3d 1195, 1218 (9th Cir. 1997). But see Intergraph
Corp. v. Intel Corp., 195 F.3d 1346, 1362 (Fed. Cir. 1999) ("[M]arket
power does not `impose on the intellectual property owner an obligation
to license the use of that property to others.' " (quoting United States
Dep't of Justice & Fed. Trade Comm'n, Antitrust Guidelines for the
Licensing of Intellectual Property 4 (1995)).
4256
vent viral distribution of the works. See Netcom , 907 F. Supp.
at 1374-75. The mere existence of the Napster system, absent
actual notice and Napster's demonstrated failure to remove
the offending material, is insufficient to impose contributory
liability. See Sony, 464 U.S. at 442-43.
Conversely, Napster may be vicariously liable when it fails
to affirmatively use its ability to patrol its system and pre-
clude access to potentially infringing files listed in its search
index. Napster has both the ability to use its search function
to identify infringing musical recordings and the right to bar
participation of users who engage in the transmission of
infringing files.
The preliminary injunction which we stayed is overbroad
because it places on Napster the entire burden of ensuring that
no "copying, downloading, uploading, transmitting, or distrib-
uting" of plaintiffs' works occur on the system. As stated, we
place the burden on plaintiffs to provide notice to Napster of
copyrighted works and files containing such works available
on the Napster system before Napster has the duty to disable
access to the offending content. Napster, however, also bears
the burden of policing the system within the limits of the sys-
tem. Here, we recognize that this is not an exact science in
that the files are user named. In crafting the injunction on
remand, the district court should recognize that Napster's sys-
tem does not currently appear to allow Napster access to
users' MP3 files.
Based on our decision to remand, Napster's additional
arguments on appeal going to the scope of the injunction need
not be addressed. We, however, briefly address Napster's
First Amendment argument so that it is not reasserted on
remand. Napster contends that the present injunction violates
the First Amendment because it is broader than necessary.
The company asserts two distinct free speech rights: (1) its
right to publish a "directory" (here, the search index) and (2)
its users' right to exchange information. We note that First
4257
Amendment concerns in copyright are allayed by the presence
of the fair use doctrine. See 17 U.S.C.S 107; see generally
Nihon Keizai Shimbun v. Comline Business Data, Inc. , 166
F.3d 65, 74 (2d Cir. 1999); Netcom, 923 F. Supp. at 1258
(stating that the Copyright Act balances First Amendment
concerns with the rights of copyright holders). There was a
preliminary determination here that Napster users are not fair
users. Uses of copyrighted material that are not fair uses are
rightfully enjoined. See Dr. Seuss Enters. v. Penguin Books
USA, Inc., 109 F.3d 1394, 1403 (9th Cir. 1997) (rejecting
defendants' claim that injunction would constitute a prior
restraint in violation of the First Amendment).
IX
We address Napster's remaining arguments: (1) that the
court erred in setting a $5 million bond, and (2) that the dis-
trict court should have imposed a constructive royalty pay-
ment structure in lieu of an injunction.
A. Bond
Napster argues that the $5 million bond is insufficient
because the company's value is between $1.5 and $2 billion.
We review objections to the amount of a bond for abuse of
discretion. Walczak v. EPL Prolong, Inc., 198 F.3d 725 (9th
Cir. 1999).
We are reluctant to dramatically raise bond amounts on
appeal. See GoTo.com, Inc. v. The Walt Disney Co., 202 F.3d
1199, 1211 (9th Cir. 2000); see also Fed. R. Civ. P. 65(c).
The district court considered competing evidence of Napster's
value and the deleterious effect that any injunction would
have upon the Napster system. We cannot say that Judge Patel
abused her discretion when she fixed the penal sum required
for the bond.
4258
B. Royalties
Napster contends that the district court should have
imposed a monetary penalty by way of a compulsory royalty
in place of an injunction. We are asked to do what the district
court refused.
Napster tells us that "where great public injury would be
worked by an injunction, the courts might . . . award damages
or a continuing royalty instead of an injunction in such special
circumstances." Abend v. MCA, Inc., 863 F.2d 1465, 1479
(9th Cir. 1988) (quoting 3 Melville B. Nimmer & David Nim-
mer, Nimmer On Copyright S 14.06[B ] (1988)), aff'd, 495
U.S. 207 (1990). We are at a total loss to find any "special cir-
cumstances" simply because this case requires us to apply
well-established doctrines of copyright law to a new technol-
ogy. Neither do we agree with Napster that an injunction
would cause "great public injury." Further, we narrowly con-
strue any suggestion that compulsory royalties are appropriate
in this context because Congress has arguably limited the
application of compulsory royalties to specific circumstances,
none of which are present here. See 17 U.S.C. S 115.
The Copyright Act provides for various sanctions for
infringers. See, e.g., 17 U.S.C. SS 502 (injunctions); 504
(damages); and 506 (criminal penalties); see also 18 U.S.C.
S 2319A (criminal penalties for the unauthorized fixation of
and trafficking in sound recordings and music videos of live
musical performances). These statutory sanctions represent a
more than adequate legislative solution to the problem created
by copyright infringement.
Imposing a compulsory royalty payment schedule would
give Napster an "easy out" of this case. If such royalties were
imposed, Napster would avoid penalties for any future viola-
tion of an injunction, statutory copyright damages and any
possible criminal penalties for continuing infringement. The
royalty structure would also grant Napster the luxury of either
4259
choosing to continue and pay royalties or shut down. On the
other hand, the wronged parties would be forced to do busi-
ness with a company that profits from the wrongful use of
intellectual properties. Plaintiffs would lose the power to con-
trol their intellectual property: they could not make a business
decision not to license their property to Napster, and, in the
event they planned to do business with Napster, compulsory
royalties would take away the copyright holders' ability to
negotiate the terms of any contractual arrangement.
X
We affirm in part, reverse in part and remand.
We direct that the preliminary injunction fashioned by the
district court prior to this appeal shall remain stayed until it
is modified by the district court to conform to the require-
ments of this opinion. We order a partial remand of this case
on the date of the filing of this opinion for the limited purpose
of permitting the district court to proceed with the settlement
and entry of the modified preliminary injunction.
Even though the preliminary injunction requires modifica-
tion, appellees have substantially and primarily prevailed on
appeal. Appellees shall recover their statutory costs on appeal.
See Fed. R. App. P. 39(a)(4) ("[i]f a judgment is affirmed in
part, reversed in part, modified, or vacated, costs are taxed
only as the court orders.").
AFFIRMED IN PART, REVERSED IN PART AND
REMANDED.
4260