Universal in $17 billion lawsuit against Bertelsmann over Napster

Bertelsmann, which owns BMG, one of the world’s largest music companies, had invested more than $85 million in Napster in the hope of turning it into a legitimate, profitable subscription service.

At the same time, several record companies, including BMG, were suing Napster for copyright infringement. It was this action that led to the shut-down of the service in June 2001.

The costs of the lawsuit forced Napster into Chapter 11 bankruptcy proceedings, a means of keeping the company going whilst restricting the rights of its creditors. When Napster’s assets were offered for sale at auction as a going concern, Bertelsmann was the only serious bidder and this would have brought its total investment in the on-line service to over $100 million.

A US bankruptcy court ruled, however, that the media giant could should not be allowed to buy Napster, on the basis of objections raised by the file-swapping service’s creditors.

As a result, Napster’s assets were eventually bought by CD-burning software provider Roxio for $5.3 million in cash. Roxio did not, however, assume any of Napster’s pending liabilities.

The lawsuit against Bertelsmann was originally filed in February in a federal court in Manhattan. It was brought by a group of music publishers and songwriters, including those behind hits like “Stand By Me” and “Unchained Melody”. They claim that Bertelsmann’s financial support to Napster facilitated copyright infringement by prolonging the life of the service and allowing millions of users to swap copyright protected music on-line.

The suit further alleges that Bertelsmann knowingly colluded with Napster in the infringement of copyright, since the funding was not conditional on the illicit sharing of music being stopped.

Bertelsmann made, according to the filing, “a deliberate and calculated business decision to continue the infringing service in order to preserve Napster’s valuable user base for Bertelsmann’s own benefit.”

The music publishers are seeking damages of at least $17 billion (£10.6bn). The lawsuit also sought class-action status to include approximately 150,000 songwriters and music publishers – which now appear to include Universal.

According to Reuters, Universal said yesterday: "Bertelsmann did not merely provide a loan to Napster; nor was it merely a passive investor in Napster. Rather, it took control of the Napster system to financially benefit itself at the expense of Universal and its artists."