The link between purpose-led businesses, ‘B Corp’ certification and the Better Business Act
Out-Law Guide | 30 Mar 2005 | 1:31 am | 8 min. read
This article first appeared in E-commerce Law & Policy in 2001. Since that date, Napster has become a licensed and very different music service under new ownership and the Copyright Directive has been implemented in UK Law. As such, this article does not necessarily represent and up to date commentary on the law in this area. But legal battles over P2P continue, so some of the points raised here are still relevant today.
First, Napster felt the wrath of the music industry. Then came stories about services called Scour, Gnutella, Freenet, Aimster – which became Madster, MusicNet, Grokster, Morpheus, AudioGalaxy, KaZaA, MusicCity, MMO Japan and others. The stories show no sign of ending.
These services are the best known forms of what is called peer-to-peer, or P2P, computing. This article looks at the growth of these services and the consequent legal battles and argues that the law cannot be applied independently of the commercial reality – and that this is where the music industry is making a mistake.
On the internet, P2P is a term usually used to describe a network that allows a group of computer users with the same networking software to connect with each other and directly access files from each other's hard drives. In 1999, at the age of 18, Shawn Fanning wrote the Napster networking software, and brought the potential of P2P into focus.
P2P has uses beyond the swapping of MP3 files. Its advantage is that content does not need to be pushed across the internet or centralised on a server to be accessible. Instead, any form of digital content can be created and maintained in its original location by its original author. This has great value to businesses that have growing demands for more and faster access to information. Instant messaging is another form of P2P because, unlike email, it opens and holds a direct link to an individual user. Distributed computing, which can leverage the processing, storage and distribution power of a huge network of users, is another form of P2P.
Napster operated a "centralised" P2P system, meaning that its users had to access Napster's central server to identify what MP3 music files were available for downloading from the computers of other Napster users. Its popularity was such that almost every popular song ever released was available at almost any time.
Napster was first sued by 18 record companies in 1999 and its legal battles are ongoing. Basically, the record industry, led by the world's five major record labels and the Recording Industry Association of America (RIAA), argued that Napster was guilty of contributory and vicarious copyright infringement. This concept is familiar to US law, but not to UK law. The argument ran that, although Napster was not hosting the songs itself (they only resided on the hard drives of its users' computers), it facilitated copyright infringement by the users. The record industry acknowledged that Napster could be used to swap songs of artists willing to waive their copyrights; but pointed out that the vast majority of the traffic did not fall into this category.
Napster was taken off-line in July 2001 to comply with an interim injunction. It has announced that it plans to restructure as a licensed subscription service but to date has failed to agree licensing terms with the five major labels. One of these labels, Bertelsmann AG, has said that it hopes to buy Napster for an undisclosed sum. It blames in-fighting among Napster's shareholders for failure to agree a deal.
If Napster had been sued under UK copyright laws, it would have been more difficult to stop than under US laws because the UK does not share the US concept of contributory copyright infringement. Instead, the Copyright, Designs and Patents Act 1988 provides that copyright in a work is infringed by one who "authorises" another to do any of the restricted acts, such as copying. Napster would say that it was not authorising anyone to copy particular MP3s – it merely provided a platform for the exchange of files.
It would be supported by a House of Lords' finding in 1988 that Amstrad was not infringing copyrights by selling a double cassette deck which simplified the copying of cassettes. In his ruling, Lord Templeman said that "no manufacturer and no machine confers on the purchaser authority to copy unlawfully. The purchaser or other operator of the recorder determines whether he shall copy and what he shall copy. By selling the recorder Amstrad may facilitate copying in breach of copyright but do not authorise it."
Lord Templeman appeared to consider it relevant that the technology had lawful purposes as well as unlawful ones and also that, after sale, Amstrad had no control over the use of its technology. In the latter respect, Napster differs from Amstrad, because users had to access the site and "declare" what they were looking for. However, as will be discussed below, Napster's centralised architecture has been left behind, thereby dashing any hopes that the record industry may put in this distinction.
The Copyright Directive was introduced, in part, to address the problems presented by Napster and its ilk. It is due to be implemented into the laws of Member States before 22nd December 2002. In the UK, the DTI is currently preparing a draft Statutory Instrument which will undergo a three month period of public consultation.
The Directive states that:
"Member States shall provide for the exclusive right to authorise or prohibit the making available to the public, by wire or wireless means, in such a way that members of the public may access them from a place and at a time individually chosen by them [...] for phonogram producers, of their phonograms".
It also allows private, non-commercial use, but only where the copyright owner receives "fair compensation," which is undefined in the Directive.
These provisions are as close as the Directive gets to addressing P2P services. The likely argument of any such service is that it does not make MP3s available to the public – it only allows its users to make the files available. It falls far short of a simple ban on P2P services that do not control their users.
The new P2P champion is KaZaA. Currently, its P2P software is downloaded around three million times each week, making it the most popular internet download. To date, the site claims that its software has been downloaded over 60 million times.
This free service is surely the realisation of the music and movie industries' nightmares. It is allowing users to trade a variety of file types at no charge, it is enormously popular and it is, at least in theory, impossible to shut down because, unlike Napster, it is decentralised. Even if kazaa.com ceases to exist as a web site, those with its P2P software can keep the network alive, and in any case, it is foreseeable that the networking software would soon become available from other web sites.
KaZaA BV was sued by Buma/Stemra, a music copyright body and, in November 2001, the District Court of Amsterdam found it liable for copyright infringement and ordered it to take measures to stop future infringements, albeit KaZaA said that there was nothing it could do. It appealed the ruling and won. In March 2002, the Court of Appeals stated that "in so far as any infringing use is being made by the means of KaZaA, these acts are committed by its users, not by KaZaA." It added, "It is not correct that [...] KaZaA's computer program may exclusively be used for copyrighted works."
The ruling is largely academic, and not just because the service was sold to an Australian company before the appeal. The real reason is that, if the network itself cannot be shut down, shutting down a company that launched or promotes it will have little effect.
Despite the apparent futility of suing a decentralised P2P service, the entertainment industries continue to mobilise their legal teams with each new iteration of Shawn Fanning's original. The myriad of users could be sued, but the users know that this is financially and logistically unrealistic. The users' ISPs could be threatened (which has happened), but the legal basis of any such action is nebulous. Another approach, outside the control of the industry, is to impose a levy on sales of blank media and copying equipment, to compensate copyright owners. The UK and US have long considered such levies unfair and there are problems in identifying what should and should not be subject to the levy.
The entertainment industry is investing more and more in copy protection so that it becomes more difficult to "rip" a CD or DVD, the practice of converting the disc into a digital file for compression then uploading to another P2P user. Early attempts have been unpopular and unsuccessful. Even if a CD were made with unbreakable copy protection, it could still be ripped as an analogue signal and the loss in sound quality may be an acceptable price to pay for MP3 fans.
These technical and practical realities make it imprudent to study the law in isolation.
At its peak in February 2001, Napster claimed to have 60 million registered users – approximately the same number that have since downloaded KaZaA's software, (according to the site). Unlike KaZaA users, each Napster user had to supply contact information and had to visit the site before every download in order to connect to another user's computer. At the time, users downloaded three billion songs each month.
The music industry saw no value in this because the users paid nothing to them (although, for broadband providers and manufacturers of CD burners, Napster was possibly the first "killer app" to accelerate sales). The music industry tried to stop the site and, eventually, succeeded—but it was in denial about the threat that was already emerging from the decentralised services.
Perhaps the music industry should have worked with Napster. The site could have tracked user preferences to deliver personalised marketing to 60 million music fans, keeping them up to date on new albums, concert tickets or merchandise from their favourite artists. Instead, its legal action only paved the way for rivals that are difficult or impossible to control and that do not know who their users are.
Tony Wilson, founder of Factory Records, recently argued that music fans would be prepared to pay for downloads of songs from "authorised" sites, provided the price is reasonable. He suggested that the record labels would be able to maintain their profit margins by offering downloads for around £0.33 per track. Currently, they charge much more than this, which, in his opinion, is what deters the fans from paying for downloads. Others argue that fans will not pay for downloads for as long as they can get them for free.
It is still feasible that, if the record labels can agree to work together (which they have so far failed to do), they could offer a profitable download service, providing the pricing is reasonable. They have advantages: the popular P2P systems are not very user friendly; the user has no idea what he or she is really downloading (it could be a virus or, more commonly, it's just not the song that the file description suggests); download times are slow if the provider has a slow internet connection; and downloads are frequently broken by poor connections or the provider going off-line. Also, the record labels have the support of their artists, meaning they can be first to offer material that would otherwise be unreleased, such as live recordings.
Global music sales fell by five per cent in 2001 according to the International Federation of the Phonographic Industry. The music industry largely blamed P2P; the P2P companies blamed the recession. Nobody knows for certain if the entertainment industries can profit on-line for as long as free services are available. What seems more certain is that legal proceedings cannot permanently stop the free services. Perhaps these companies should spend less on their legal budgets and more on setting up some competition.
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The link between purpose-led businesses, ‘B Corp’ certification and the Better Business Act