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11. a&m Records, Inc. v. Napster, Inc., 239 f.3d 1004 (9th Cir

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  9/14/2017A&M RECORDS, INC. v. NAPSTER, INC., 239 F.3d 1004 (9th Cir. 2001)https://www.law.cornell.edu/copyright/cases/239_F3d_1004.htm1/13 A&M RECORDS, Inc. v. NAPSTER, INC., 239 F.3d 1004 (9th Cir. 2001) Before: SCHROEDER, Chief Judge, BEEZER and PAEZ, Circuit Judges.  BEEZER, Circuit Judge:[1] Plaintiffs are engaged in the commercial recording, distribution and sale of copyrighted musical compositionsand sound recordings. The complaint alleges that Napster, Inc. ( �  Napster  � ) is a contributory and vicariouscopyright infringer. On July 26, 2000, the district court granted plaintiffs �  motion for a preliminary injunction. Theinjunction 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 facilitatingothers in copying, downloading, uploading, transmitting, or distributing plaintiffs' copyrighted musical compositionsand sound recordings, protected by either federal or state law, without express permission of the rights owner. �  Id.at 927. Federal Rule of Civil Procedure 65(c) requires successful plaintiffs to post a bond for damages incurred bythe enjoined party in the event that the injunction was wrongfully issued. The district court set bond in this case at $5million.[2] We entered a temporary stay of the preliminary injunction pending resolution of this appeal. We have jurisdiction pursuant to 28 U.S.C. �  1292(a)(1). We affirm in part, reverse in part and remand. I [3] We have examined the papers submitted in support of and in response to the injunction application and it appearsthat Napster has designed and operates a system which permits the transmission and retention of sound recordingsemploying digital technology.[4] In 1987, the Moving Picture Experts Group set a standard file format for the storage of audio recordings in adigital format called MPEG-3, abbreviated as � MP3. �  Digital MP3 files are created through a process colloquiallycalled � 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. TheMP3's compressed format allows for rapid transmission of digital audio files from one computer to another byelectronic mail or any other file transfer protocol.[5] Napster facilitates the transmission of MP3 files between and among its users. Through a process commonlycalled �  peer-to-peer  �  file sharing, Napster allows its users to: (1) make MP3 music files stored on individualcomputer 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 toanother via the Internet. These functions are made possible by Napster  � s MusicShare software, available free of charge from Napster  � s Internet site, and Napster  � s network servers and server-side software. Napster providestechnical support for the indexing and searching of MP3 files, as well as for its other functions, including a � chatroom, �  where users can meet to discuss music, and a directory where participating artists can provide informationabout their music. A. Accessing the System [6] In order to copy MP3 files through the Napster system, a user must first access Napster  � s Internet site anddownload [n1] 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 [7] If a registered user wants to list available files stored in his computer  � s hard drive on Napster for others toaccess, he must first create a � user library �  directory on his computer  � s hard drive. The user then saves his MP3files in the library directory, using self-designated file names. He next must log into the Napster system using hisuser name and password. His MusicShare software then searches his user library and verifies that the available filesare properly formatted. If in the correct MP3 format, the names of the MP3 files will be uploaded from the user  � scomputer to the Napster servers. The content of the MP3 files remains stored in the user  � s computer.[8] 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  9/14/2017A&M RECORDS, INC. v. NAPSTER, INC., 239 F.3d 1004 (9th Cir. 2001)https://www.law.cornell.edu/copyright/cases/239_F3d_1004.htm2/13 [9] Napster allows a user to locate other users �  MP3 files in two ways: through Napster  � s search function andthrough its � hotlist �  function.[10] Software located on the Napster servers maintains a � search index �  of Napster  � s collective directory. Tosearch the files available from Napster users currently connected to the network servers, the individual user accessesa form in the MusicShare software stored in his computer and enters either the name of a song or an artist as theobject of the search. The form is then transmitted to a Napster server and automatically compared to the MP3 filenames listed in the server  � s search index. Napster  � s server compiles a list of all MP3 file names pulled from thesearch index which include the same search terms entered on the search form and transmits the list to the searchinguser. The Napster server does not search the contents of any MP3 file; rather, the search is limited to � a text searchof the file names indexed in a particular cluster. Those file names may contain typographical errors or otherwiseinaccurate descriptions of the content of the files since they are designated by other users. �    Napster  , 114 F. Supp.2d at 906.[11] To use the � hotlist �  function, the Napster user creates a list of other users �  names from whom he hasobtained 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 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 thehotlisted user  � s MP3 file are not stored on the Napster system. D. Transferring Copies of an MP3 file [12] To transfer a copy of the contents of a requested MP3 file, the Napster server software obtains the Internetaddress of the requesting user and the Internet address of the � host user  �  (the user with the available files). See generally Brookfield Communications, 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 Internetaddress to the requesting user. The requesting user  � s computer uses this information to establish a connection withthe host user and downloads a copy of the contents of the MP3 file from one computer to the other over the Internet, �  peer-to-peer. �  A downloaded MP3 file can be played directly from the user  � s hard drive using Napster  � sMusicShare program or other software. The file may also be transferred back onto an audio CD if the user has accessto equipment designed for that purpose. In both cases, the quality of the srcinal sound recording is slightlydiminished by transfer to the MP3 format.[13] This architecture is described in some detail to promote an understanding of transmission mechanics as opposedto the content of the transmissions. The content is the subject of our copyright infringement analysis. II [14] We review a grant or denial of a preliminary injunction for abuse of discretion. Gorbach v. Reno , 219 F.3d1087, 1091 (9th Cir. 2000) (en banc). Application of erroneous legal principles represents an abuse of discretion bythe district court.  Rucker v. Davis , __ F.3d __, 2001 WL 55724, at *4 (9th Cir. Jan. 24, 2001) (en banc). If the districtcourt is claimed to have relied on an erroneous legal premise in reaching its decision to grant or deny a preliminaryinjunction, 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)).[15] On review, we are required to determine, � whether the court employed the appropriate legal standardsgoverning the issuance of a preliminary injunction and whether the district court correctly apprehended the law withrespect to the underlying issues in the case. �    Id  . � As long as the district court got the law right, � it will not bereversed simply because the appellate court would have arrived at a different result if it had applied the law to thefacts 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)).[16] Preliminary injunctive relief is available to a party who demonstrates either: (1) a combination of probablesuccess on the merits and the possibility of irreparable harm; or (2) that serious questions are raised and the balanceof 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 irreparableharm increases as the probability of success decreases. �    Id  . III [17] Plaintiffs claim Napster users are engaged in the wholesale reproduction and distribution of copyrighted works,all constituting direct infringement.[n2] The district court agreed. We note that the district court � s conclusion that plaintiffs have presented 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 [18] Plaintiffs must satisfy two requirements to present a prima facie case of direct infringement: (1) they must showownership of the allegedly infringed material and (2) they must demonstrate that the alleged infringers violate at  9/14/2017A&M RECORDS, INC. v. NAPSTER, INC., 239 F.3d 1004 (9th Cir. 2001)https://www.law.cornell.edu/copyright/cases/239_F3d_1004.htm3/13 least one exclusive right granted to copyright holders under 17 U.S.C. �  106. See  17 U.S.C. �  501(a) (infringementoccurs when alleged infringer engages in activity listed in �  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 . . . . � ). Plaintiffshave sufficiently demonstrated ownership. The record supports the district court � s determination that � as much aseighty-seven percent of the files available on Napster may be copyrighted and more than seventy percent may beowned or administered by plaintiffs. �    Napster  , 114 F. Supp. 2d at 911.[19] The district court further determined that plaintiffs �  exclusive rights under �  106 were violated: � here theevidence 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. July26, 2000) (transcript of proceedings). 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, �  106(1); and distribution, �  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.[20] Napster asserts an affirmative defense to the charge that its users directly infringe plaintiffs �  copyrightedmusical compositions and sound recordings. B. Fair Use [21] Napster contends that its users do not directly infringe plaintiffs �  copyrights because the users are engaged infair use of the material. See  17 U.S.C. �  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 awork before purchasing; space-shifting, where users access a sound recording through the Napster system that theyalready own in audio CD format; and permissive distribution of recordings by both new and established artists.[22] The district court considered factors listed in 17 U.S.C. �  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 � amountand substantiality 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. �  107. The district court first conducted ageneral analysis of Napster system uses under �  107, and then applied its reasoning to the alleged fair usesidentified by Napster. The district court concluded that Napster users are not fair users.[n3] We agree. We firstaddress the court � s overall fair use analysis. 1. Purpose and Character of the Use [23] This factor focuses on whether the new work merely replaces the object of the srcinal creation or instead addsa further purpose or different character. In other words, this factor asks � whether and to what extent the new work is � transformative. ��   See Campbell v. Acuff-Rose Music, Inc. , 510 U.S. 569, 579 (1994).[24] 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 have been reluctant to find fair use when ansrcinal work is merely retransmitted in a different medium. See, e.g., Infinity Broadcast Corp. v. Kirkwood  , 150F.3d 104, 108 (2d Cir. 1994) (concluding that retransmission of radio broadcast over telephone lines is nottransformative); UMG Recordings, Inc. v. MP3.com, Inc. , 92 F. Supp. 2d 349, 351 (S.D.N.Y.) (finding thatreproduction 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 infringement was clear, and the mere fact that it was clothed in theexotic webbing of the Internet does not disguise its illegality. � ).[25] This �  purpose and character  �  element also requires the district court to determine whether the allegedlyinfringing use is commercial or noncommercial. See Campbell, 510 U.S. at 584-85. A commercial use weighsagainst a finding of Napster users engage in commercial use of the copyrighted materials largely because (1) � ahost user sending a file cannot be said to engage in a personal use when distributing that file to an anonymousrequester  �  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.[26] Direct economic benefit is not required to demonstrate a commercial use. Rather, repeated and exploitativecopying of copyrighted works, even if the copies are not offered for sale, may constitute a commercial use. SeeWorldwide Church of God v. Philadelphia Church of God  , 227 F.3d 1110, 1118 (9th Cir. 2000) (stating that churchthat copied religious text for its members � unquestionably profit[ed] �  from the unauthorized � distribution anduse 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 the record before us, commercial use is demonstrated by ashowing that repeated and exploitative unauthorized copies of copyrighted works were made to save the expense of  purchasing authorized copies. See Worldwide Church , 227 F.3d at 1117-18; Sega Enters. Ltd. v. MAPHIA , 857 F.  9/14/2017A&M RECORDS, INC. v. NAPSTER, INC., 239 F.3d 1004 (9th Cir. 2001)https://www.law.cornell.edu/copyright/cases/239_F3d_1004.htm4/13 Supp. 679, 687 (N.D. Cal. 1994) (finding commercial use when individuals downloaded copies of video games � toavoid having to buy video game cartridges � );  see also American Geophysical  , 60 F.3d at 922. Plaintiffs made sucha showing before the district court. [n4][27] We also note that the definition of a financially motivated transaction for the purposes of criminal copyrightactions includes trading infringing copies of a work for other items, � including the receipt of other copyrightedworks. �   See  No Electronic Theft Act ( �  NET Act � ), Pub. L. No. 105-147, 18 U.S.C. �  101 (defining � FinancialGain � ). 2. The Nature of the Use [28] 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 musicalcompositions and sound recordings are creative in nature . . . which cuts against a finding of fair use under thesecond factor. �    Napster  , 114 F. Supp. 2d at 913. We find no error in the district court � s conclusion. 3. The Portion Used  [29] � While � wholesale copying does not preclude fair use per se, �  copying an entire work � militates against afinding of 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 � wholesalecopying �  of copyrighted work because file transfer necessarily � involves copying the entirety of the copyrightedwork. �    Napster  , 114 F. Supp. 2d at 913. We agree. We note, however, that under certain circumstances, a court willconclude 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 necessarily involvedmaking a full copy of a protected work). 4. Effect of Use on Market  [30] � Fair use, when properly applied, is limited to copying by others which does not materially impair themarketability of the work which is copied. �    Harper & Row Publishers, Inc. v. Nation Enters. , 471 U.S. 539, 566-67(1985). [T]he importance of this [fourth] factor will vary, not only with the amount of harm, but also with therelative strength of the showing on the other factors. Campbell  , 510 U.S. at 591 n.21. The proof required todemonstrate present or future market harm varies with the purpose and character of the use:A challenge to a noncommercial use of a copyrighted work requires proof either that the particular useis harmful, or that if it should become widespread, it would adversely affect the potential market for thecopyrighted work. . . .  If the intended use is for commercial gain, that likelihood [of market harm] maybe presumed. But if it is for a noncommercial purpose, the likelihood must be demonstrated.Sony , 464 U.S. at 451 (emphases added).[31] Addressing this factor, the district court concluded that Napster harms the market in � at least �  two ways: itreduces audio CD sales among college students and it � raises barriers to plaintiffs �  entry into the market for thedigital downloading of music. �    Napster  , 114 F. Supp. 2d at 913. The district court relied on evidence plaintiffssubmitted to show that Napster use harms the market for their copyrighted musical compositions and soundrecordings. In a separate memorandum and order regarding the parties �  objections to the expert reports, the districtcourt 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 totrack their reasons for using Napster and the impact Napster had on their music purchases. Id. at *2. The courtrecognized 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 injunctionmotion. �    Id  . at *3.[32] Plaintiffs also offered a study conducted by Michael Fine, Chief Executive Officer of Soundscan, (the � FineReport � ) to determine the effect of online sharing of MP3 files in order to show irreparable harm. Fine found thatonline file sharing had resulted in a loss of � album �  sales within college markets. After reviewing defendant � sobjections to the Fine Report and expressing some concerns regarding the methodology and findings, the districtcourt refused to exclude the Fine Report insofar as plaintiffs offered it to show irreparable harm.  Id  . at *6.[33] Plaintiffs �  expert Dr. David J. Teece studied several issues ( � Teece Report � ), including whether plaintiffshad suffered or were likely to suffer harm in their existing and planned businesses due to Napster use.  Id  . Napster objected that the report had not undergone peer review. The district court noted that such reports generally are notsubject to such scrutiny and overruled defendant � s objections.  Id  .[34] As for defendant � s experts, plaintiffs objected to the report of Dr. Peter S. Fader, in which the expertconcluded that Napster is beneficial   to the music industry because MP3 music file-sharing stimulates more audio CDsales than it displaces.  Id  . at *7. The district court found problems in Dr. Fader  � s minimal role in overseeing the

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