SAN FRANCISCO (AP) Napster must stop allowing the millions of music fans who use its free Internet-based service to share copyrighted material, a federal appeals court ruled yesterday.

Paul Wong
Napster Inc. founder Shawn Fanning looks down during a press conference in San Francisco yesterday.<br><br>AP PHOTO

The three-judge panel allowed Napster to remain in business but told a lower court judge to rewrite her injunction that ordered Napster to shut down pending a trial in a lawsuit filed by the recording industry.

The 9th U.S. Circuit Court of Appeals also said Napster must lock out those users who exchange copyrighted songs without permission.

The appellate court had earlier issued a stay of the injunction.

“This is a clear victory,” said Hilary Rosen, president and CEO of the Recording Industry Association of America. “The court of appeals found that the injunction is not only warranted, but required. And it ruled in our favor on every legal issue presented.”

Napster can stay in business until U.S. District Judge Marilyn Hall Patel retools her injunction, which the appellate court”s 58-page opinion called overbroad. In fact, minutes after the panel”s decision, thousands of Napster users were still trading music files on just one of the company”s more than 100 servers.

The panel said Napster may be liable if it does not actively prohibit its users from swapping protected material. Rather than placing the entire burden on Napster, however, the court said the recording industry must warn Napster that copyrighted work is on the service before the company is found liable.

The court did not specify what kind of sanctions Napster might face.

In a statement, Napster said it was “disappointed” by the ruling and said it would appeal. “We look forward to getting more facts into the record. We will pursue every avenue in the courts and the Congress to keep Napster operating.”

The judges said it was apparent that “Napster has knowledge, both actual and constructive, of direct infringement,” adding that the recording industry “would likely prevail” in its suit against the file-swapping service.

“We affirm the district court”s conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the contributory copyright infringement claim,” the ruling said.

“We, therefore, conclude that the district court made sound findings related to Napster”s deleterious effect on the present and future digital download market,” the appeals court ruled. “Having digital downloads available for free on the Napster system necessarily harms the copyright holders” attempts to charge for the same downloads.”

Napster argued that it was not to blame for its subscribers” use of copyrighted material, citing the Sony Betamax decision of 1984, in which the U.S. Supreme Court refused to hold VCR manufacturers and videotape retailers liable for people copying movies.

Fearing an immediate shutdown of the service that has changed the face of music, millions of users flooded the company”s computer servers this weekend to download free music. Napster has an estimated 50 million users.

Webnoize, which monitors the digital entertainment economy, estimated that 250 million songs were downloaded using Napster over the weekend and that on average, 1.5 million users were logged on at any one time.

Major record labels hoped yesterday”s ruling would force millions of computer users to pay for music the on-line music swapping service has allowed them to get for free.

Had Napster won, the ruling could have given new life to other business ventures that have been waiting for guidance on whether a “personal use” exception to copyright law allows or prohibits trading songs over the Internet.

The digital music technology Napster made popular is here to stay either way. The recording industry appears stymied by the notion of funneling music to consumers via the Internet for a price while freely available computer applications allow even the computer novice to do it for free.

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