Legal Notes: Napster’s Muscle Falls to Indie Label Rounder Records in NY Federal Court Battle

February 20, 2011 by  

FEDERAL DISTRICT COURT, SOUTHERN DISTRICT, MANHATTAN: Picture it, the Internet, 1999. Napster launches out of a college dorm room in Massachusetts, and becomes one of the biggest forces in the music industry to reckon with. Its mechanism of peer-to-peer music file-sharing causes nothing short of a music-technology revolution, and major record labels are forced to grapple with learning how to co-exist with, if not under, Napster.

Napster vs. Rounder Records started when Napster claimed that Rounder Records didn't posess the proper mechanical licenses.

Flash forward to life twelve years later in 2011 and we are faced with many new remarkable realities. For one, as aptly alluded to by Napster Co-Founder Sean Parker’s character in  the blockbuster hit movie The Social Network, the creation of Napster led to the demise of CD sales and  practically the elimination of most major record stores because of the ease in (unfortunately) acquiring illegal music downloads on the Internet.

Another new remarkable reality is that while Napster has had such a profound effect on the recent history of music, the muscle it once had in the music industry has largely diminished, leaving behind a memory of the giant music industry influence it once was. The recent court decision of Napster v. Rounder Records in a Manhattan Federal District court echoed this reality when a federal judge gave a huge score to indie record label Rounder Records, while simultaneously providing a bit of a blow to the ego of Napster.

Napster, which had adjusted their business model to provide a service where users can legally stream and download music, had privately settled a claim brought against them by music publisher MCS America for failing to possess mechanical licenses (permissions to create copies of music under the copyright law) for their music. While the amount that Napster and MCS settled for is unknown, Napster made a bold move by subsequently bringing a $1.3 million law suit against Rounder, one of the many Indie record labels it entered into a deal with under their legal download/legal streaming operations, for failing to possess mechanical licenses for the music they provided to Napster. Rounder licensed some of its music from MCS and many people viewed Napster’s suit against Rounder as a means of unfairly attempting to obtain reimbursement for the settlement Napster paid to MCS.

While going up against Napster in a court battle is no small feat for Rounder Records or any Indie Label to handle, their lawyer, David Baum, a partner with the law firm of SNR Denton based out of their NYC Office in downtown Manhattan, was able to pull a huge victory for Rounder by getting the case not only dismissed, but additionally sanctioned in Federal Court.

David Baum of SNR Denton took on Napster for Rounder Records in Manhattan's Federal District Court.

“Rounder is a very special record company to me and I think to a lot of people, both artists and fans alike,” Baum commented. “When I got this lawsuit or at least the claim of the case before it was filed that Napster was going to go after a company like Rounder on such a claim that I thought was frivilous, I was offended for Rounder…I told Napster at the outset of the case before they filed the case that if they filed it we would fight it and get it dismissed, and in the process we would seek to get it sanctioned.”

Napster may have had somewhat of a viable argument that a 2001 agreement they made with Rounder contained language which rendered Rounder responsible for securing mechanical licenses for the music they provided in addition to an indeminification clause (legalise for a clause that allowed Napster to sue Rounder for any third party claims brought about by Rounder’s conduct). However, a subsequent agreement that the parties signed in 2006 alleviated the mechanical license responsibility from Rounder, leaving it fully on Napster’s lap; and most importantly, contained a clause which noted that it “terminated and superceeded” the terms of the 2001 agreement, including the indemnification clause.

“The Court threw the case out on a total of three grounds” Baum said. “The first one being that the 2001 agreement did not apply to the parties relationship anymore, and that under the 2006 agreement, ‘A,’ it was Napster’s responsibility to get the licenses for the compositions and not Rounder’s, and ‘B,’ in any event there was an indemnification provision, but in order for Napster to have relied on that indemnification provision, they needed to get a certain kind of consent.”

For indie labels entering music-technology deals to have their music streamed or downloaded online, Baum offers very simple advice: “Pay attention to your contracts and be very precise with the language because language matters.” He further adds: “If you are out there and making successive agreements with the same party, its very important for you to be careful about how you are characterizing these agreements – are they all supposed to exist at the same time, or is one supposed to replace the other? And if one replaces the other, you better have it say so.”

Words by Shamita Carriman – Entertainment lawyer, founder/ managing partner of Carriman Law Group PLLC, Board of Director of Women In Music, and music tech enthusiast. She can be contacted at info@carrimanlawgroup.com