United States: The Challenge Of Making Napster Legit

As the final details of the injunction ordered by the Ninth Circuit Court of Appeal is being hammered out between the parties and the district court, attention is already being shifted to the future. Napster must consider adapting to a business world that complies with the law.

The Court of Appeal found Napster to be liable for what is called vicarious copyright infringement, because the Internet service does not police an operation that enables its users to infringe copyrights.

The appeals court therefore ordered the district court to fashion an injunction prohibiting Napster from allowing its users to download copyrighted material and to police the system to ferret out postings of unauthorized music, to the extent possible under existing technology.

There are numerous problems associated with legitimizing the Napster operation.

First of all, licenses must be secured from as many copyright owners as possible to provide the widest base of legitimate content. Licenses from record companies can take the form of blanket licenses allowing Napster to permit the downloading of all material owned by that record company either on a flat-fee basis or per-use basis.

Since the model for making copies of copyrighted music when records are involved (the mechanical royalty) is well-established and fixed at the so-called statutory rate (currently 0.755¢ per copy), a similar model applying to downloads will probably be adopted. The same is not true in respect to sound recordings. Royalties will need to be negotiated with each owner, without a standard royalty as a framework.

The second problem is developing a system to bar unauthorized content from the system. And this presents a far greater technological problem. Software must be developed to search all files made available on the system for peer-to-peer sharing and bar those that are not licensed. The sheer number of files being transferred creates an enormous problem in this regard.

Additionally, assuming licenses are acquired from a large number of copyright owners, how can the system distinguish between the content for which licenses exist and that for which no licenses exist, especially if no uniform titling system is used? Some method needs to be developed to identify licensed content and allow it onto the system, while keeping off unlicensed material.

The third problem area involves the development of software acceptable to licensors to track all downloads and account to the owners for whatever royalties have been agreed upon. Even under a blanket license, such tracking needs to be done to enable the royalty recipients to allocate the flat fee they receive among all their sound recordings so as to be able to pay artists and producers. And to owners of music, a flat fee will probably not be acceptable to them, and thus tracking would be the only way to account and pay these copyright owners. Under a per-use license, each use must be separately accounted and paid for.

The last problem is for Napster to choose a business model that allows it to pay agreed royalties, pay operating and other expenses and make a profit. The system most likely to be adopted is a subscription system that allows users to sign up monthly for unlimited downloads. It may also be possible to have different levels of subscriptions allowing access to a limited number of downloads for a lower price.

The key question is how to generate enough revenues to pay all expenses and royalties and have a profit. Perhaps the best arrangement for Napster would be a system which simply divides up monthly, among owners. a pot of money from revenue sources received by Napster based upon the downloads of their sound recordings. For example, if the average number of downloads per month could be predicted, the mechanical statutory rate for each musical composition downloaded could be set aside from the pot. Operating and other expenses could then be deducted, and the remainder divided among the owners of the sound recordings. Each would receive a proportion of the monthly distributable pot based upon the proportion that the total downloads of their sound recordings bears to the total number of downloads of all sound recordings in that month. The owner of the sound recording would in turn divide this sum with the artists and producers. The usual standard in other flat fee type licenses is that the record company receives 50% and the artist and producer the other 50%. Of course, nothing would prevent artists and producers and record companies from negotiating different splits.

As to the owners of the musical compositions, they would receive exactly the same statutory rate royalty or percentage thereof that they would have received had the sound recording been sold in brick and mortar stores. The one complication is that the statutory rate applies only to sales within the United States. Every country has a different rate formula for mechanical license royalties. Accordingly, since Napster is worldwide, it will have to be agreed what rate applies to each download. Even if Napster software can track the download on a country-by-country basis, would different rates be payable depending on the country of download? Or would the country of origin, i.e., where the sound recording is being transferred from, control rather than the country in which the download occurs? If there were different owners of the same copyright in different territories, would separate agreements be necessary with each of them?

Similar questions arise in respect to different owners of sound recordings in different countries and further complicate the royalty structure.

These questions currently have no answers, but will need to be addressed by Napster and its potential licensors before an all-encompassing royalty structure can be devised to satisfy everyone.

This article is necessarily general in nature and is not a substitute for legal advice with respect to any particular case. Readers should consult with an attorney before taking any action affecting their interests.

© 2001 firehose