And the last part, including the part about how the injunction should be modified:
VII
Napster contends that even if the district court's preliminary 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 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. Nimmer & David Nimmer, Nimmer On Copyright 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 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 district court, however, was not convinced "that the record companies 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 hastening 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. 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) (stating 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.
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 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' copyrighted 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 Lasercomb, 911 F.2d 970 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). The district court correctly stated that "most of the cases" that recognize the affirmative defense of copyright misuse involve unduly restrictive licensing schemes. See Napster, 114 F. Supp. 2d at 923; see also Lasercomb, 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 a unilateral refusal to license a copyright may constitute wrongful exclusionary conduct giving rise to a claim of misuse, but assume that the "desire to exclude others . . . is a presumptively valid business justification for any immediate harm to consumers." See Image Tech. Servs. v. Eastman 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)). There is no evidence here that plaintiffs seek to 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. ß 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 reproduction 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 contributory 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 prevent 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 preclude 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 distributing" 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 system. 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 system 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 Amendment concerns in copyright are allayed by the presence of the fair use doctrine. See 17 U.S.C. ß 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 district court should have imposed a constructive royalty payment 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.
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 Nimmer, Nimmer On Copyright ß 14.06[B] (1988)), aff'd, 495 U.S. 207 (1990). We are at a total loss to find any "special circumstances" simply because this case requires us to apply well-established doctrines of copyright law to a new technology. Neither do we agree with Napster that an injunction would cause "great public injury." Further, we narrowly construe 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. ß 115.
The Copyright Act provides for various sanctions for infringers. See, e.g., 17 U.S.C. ßß 502 (injunctions); 504 (damages); and 506 (criminal penalties); see also 18 U.S.C. ß 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 violation 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 choosing to continue and pay royalties or shut down. On the other hand, the wronged parties would be forced to do business with a company that profits from the wrongful use of intellectual properties. Plaintiffs would lose the power to control 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 requirements 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 modification, appellees have substantially and primarily prevailed on appeal. Appellees shall recover their statutory costs on appeal. See Fed. R. App. P. 39(a)(4) ("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.
COUNSEL LISTING
David Boies, Jonathan Schiller and Robert Silver, Boies, Schiller & Flexner, Armonk, New York, Laurence F. Pulgram, David L. Hayes, Daniel Johnson, Jr. and Darryl M. Woo, Fenwick & West, Palo Alto, California, for defendant-appellant.
Russell J. Frackman, George M. Borkowski, Jeffrey D. Goldman, Roy L. Shults and Peter B. Gelblum, Mitchell, Silberberg & Knupp, Los Angeles, California; Carey R. Ramos, Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, for plaintiffs-appellees.
Hannah Bentley, San Anselmo, California, for amicus Casanova 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 Association; Information Technology Association of America; Netcoalition.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.
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 Marketing Association, Association of American Publishers, American Society of Media Photographers, Professional Photographers Association, Graphic Artists Guild, Interactive Digital Software Association, American Society of Composers, Authors and Publishers, Broadcast Music, Inc., Producers Guild of America, Directors Guild of America, Inc., Writers Guild of America, West, Inc., American Federation of Musicians 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 America, 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 Professors Erwin Chemerinsky, Kenneth L. Karst, Steven Shiffrin, 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., FullAudio Corporation, InterTrust Technologies Corporation, Oak Technology, Inc., Reciprocal, Inc., RioPort, Inc., RPK SecureMedia Inc., Verance Corporation, and VNU USA, Inc.
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 Education 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, University of Minnesota; Professor Julie Cohen, Georgetown University School of Law; Professors Christine Haight Farley and Peter Jaszi, Washington College of Law, American University; Professor Lydia Pallas Loren, Lewis and Clark College Northwestern School of Law; Professor Pamela Samuelson, Boalt Hall School of Law, University of California 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 Diame Zimmerman, New York University School of Law, and Professor Dennis Karjala, Arizona State University College of Law, for amicus Copyright Law Professors. |
