Case Study on Business Ethics: The Napster Case

Napster is an online service that allows computer users to share high-quality digital copies (MP3s) of music recordings through the Internet. The San Mateo-based company does not actually store the songs but instead provides an access to every user’s hard drive if he is currently logged on to the service. Napster therefore functions as a sort of clearinghouse, which collects stores and disseminates music recordings. Members can log onto this service, search for the song of their choice, by artist or song title, identify where MP3s of interest are and then download them from another user’s computer hard drive. Napster claiming to have around 15 million users in just a years’ time, has become one of the most popular sites on the Internet. Indeed, students were using Napster so much that many universities had to block the website in order to regain bandwidth.

Case Study on Business Ethics - The Napster Case

Right from its launch, the Napster case had been almost as controversial as it was popular. Barely a year after its launch, it was sued by the Recording Industry Association of America (RIAA). The RIAA represents major recording companies such as BMG, Universal Music, Warner Music Group, EMI and Sony Music. The RIAA said that Napster is violating the copyright laws, by allowing users to exchange digital copies of music recordings for free. The RIAA also demanded that Napster should stop its service immediately. Apart from this the RIAA wanted Napster to pay a huge sum as compensation for the revenues that were lost in the past one year after Napster’s launch.

This E-commerce case related to international business because we know that people from all over the world use Napster to download music. Napster is doing nothing but an International trade of music. This poses a big problem to the BMG, Sony Music and other major recording companies because, once one person has bought the CD and loaded it to his hard drive, the rest of the population can download it for free if they are a member of this Napster service. This brought in a huge loss of revenues for all these companies. The loss due to this type of music swapping by Napster and other related firms accounts to about $300 million. Since Napster is accused of having violated the copyright laws, this becomes a Business Ethics related case.

Rise and Fall off Napster

Napster was created between 1998 and 1999 by a 19 year old called Shawn Fanning while he attended Boston’s North Eastern University. The program was initially written to solve a friend’s problem, who wanted to find music more easily available on the Internet. It was named after Fanning’s Nickname.

The system was called ‘Peer to Peer’ because it allowed music tracks available on one user’s hard drive to be searched and downloaded to another Internet User’s computer. Truly speaking, the service was not a pure ‘Peer to Peer’ since central services which indexed the tracks available and their locations, are similar to the way which instant messaging (IM) works. The capability of the Napster service proved irresistible and Napster use peaked with 26.4 million users all over the world in February 2001.

Within a year of its launch, several major recording companies backed by the RIAA Recording launched a lawsuit against Napster. Some individual bands also sued Napster for allowing free download of music recordings. Metallica, the rock band found that a demo of their song ‘I disappear’ was eventually played on the radio after being circulated in the Napster network for quite some time. Other well-known artists like Madonna and Eminem also vented their intense anger on Napster.

In December 1999, as a representative of many major record companies in the music industry, the Recording Industry Association of America initiated legal actions against Napster foe the following copyright violation on the complainant’s exclusive rights for reproduction and distribution of their copyright works:

  1. Napster users were directly violating the complainant’s copyright.
  2. Napster was liable for contributory violation of the complainant’s copyright.
  3. Napster was liable for vicarious violation of the complainant’s copyright.

However, some artists found this service turning out to be useful to them. Radiohead, a UK band pre-released some tracks of their album ‘Kid A’ on to Napster and this album subsequently became Number 1 in the US despite failing to achieve this previously.

Finally on March 5th 2001 as a result of legal action an order was issued asking Napster to cease trading of copyrighted material. Napster complied with this order, but tried to make a deal with the record companies saying that Napster will pay past copyright fees and also turn the service into a legal subscription service. In the following year, a deal was agreed with Bertelsmann AG, a German media company to purchase Napster’s assets for $8 million as part of agreement when Napster filed for Chapter 11 bankruptcy in the United States. This sale was blocked and the web site was closed. Eventually, the Napster brand was purchased by Roxio Inc. who used the brand to rebrand their Pressplay service. Pressplay is and online music store that was created in 2002. It is a joint venture between Sony Music Entertainment and Universal Music Group.

Since this time, other ‘Peer to Peer’ services such as Grokster, Kazaa and Gnutella have prospered because it has been more difficult for the copyright owners to sue in court. However, many individuals have now been sued in the US and Europe and the associations of these services with spyware and adware has damaged these services. This eventually reduced the popularity of these services.

Legal Arguments Used

Napster did not dispute the allegations of direct violation by its users. Therefore the court accused at least some of Napster’s users to be direct violaters through their activities of reproducing and distributing copyright material (music) without permission.

Contributory violation of copyright requires that the defendant should have had some knowledge of the direct violation undertaken by the exterior party and must have materially contributed to the direct violation. The court had already determined that Napster’s users directly violated the plaintiff’s copyright. Napster’s knowledge of these violating activities was proven by the appearance of well-known song titles in promotion screens, a list of 12,000 files that had been subject to copyright violations via Napster and the down loading done by company executives. Finally, material contribution was demonstrated via Napster’s provision of the site and facilities used in directly violating activities. The court consequently said that Napster was liable for contributory violation of the plaintiff’s copyright.

When there is a financial benefit due to the failure to supervise or control a direct violation of copyright where there is a possibility of doing so, a vicarious liability is said to arise. Thus the court said that Napster was liable for vicarious violation as it retained the right to block a user from accessing the network. This detainment amounted to the ability of Napster to control violating activities. However Napster failed to exercise this right for this purpose. Napster’s major attraction for the use of the system relied on the violation of its users. Also, the systems financial viability was directly related to the size of its data base. Thus the court found that Napster obtained direct financial benefit from the violation of users.

Defenses by Napster and Final Decision

Napster unsuccessfully argued four defenses to the allegations made against them.

  1. Firstly Napster argued that their right to free speech allowed the legal continuance of their system. The courts determined that free speech is not applicable to the illegal down loading of files without a redeeming purpose.
  2. Secondly, Napster argued that the placement of any ban against the company would result in a lot of financial suffering. However the court held that the hardship borne by Napster is not higher than the interest of the copyright holder.
  3. Thirdly, Napster relied on a legal principle (the Betamax Defence) which states that creators of new technology should not bear the burden of preventing copyright violation where technology is capable of substantial non-violating use. The courts determined that despite Napster non-infringing uses, this principle did not apply as Napster possessed actual knowledge of specific violations and maintained the ability to control them without doing so.
  4. Finally Napster attempted to rely on section 512(a) Digital Millennium Copyright Act (DMCA). This piece of American legislation allows an Internet service provider to provide connections for material that is temporarily stored on its service with impunity under certain conditions. However, Napster could not prove to the court that it fell under the classification of a service provider under the Act.

The District Court ordered Napster to monitor the activities of its network and to also asked them to block access to violating material when notified. Unable to do this Napster consequently shut down its service in July 2001. Due to the outcome of the case Napster eventually declared bankruptcy in 2002 and sold its assets. The Napster trademark was sold to Roxio and a new subscription service using the name was launched in October 2003.

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