Originally, file-sharing was an unorganized activity. The launch of Napster in 1999 changed everything. That year, college student Shawn Fanning developed a system that made peer-to-peer sharing of MP3 music files easy to do. Named after Fanning’s nickname, the development caused an explosion in the popularity of peer-to-peer sharing. College students loved it, but they were by no means the only ones using Napster. Practically overnight, millions were using Napster.

Napster’s system allowed music on one computer hard drive to be copied by other Napster users. Digital MP3 files are created from an audio compact disk CD by a process called “ripping.” Ripping software allows a CD user to compress the audio information on the CD into the MP3 format, and copy it directly onto a computer’s hard drive. Napster users used Napster’s centralized servers to search for MP3 files stored on other computers. Then, exact copies of the MP3 file could be transferred from one computer to another via the Internet. The compressed format of the MP3 file is what makes the rapid transmission from one computer to another feasible. Napster’s MusicShare software made this all possible. The software was available for free download at the Napster web site. Napster also provided technical support for users. Some estimates estimate up to sixty million people used Napster at the height of its popularity.

Major record companies quickly realized Napster’s threat to their profits. They brought suit, charging Napster with contributory and vicarious copyright infringement. A federal district judge in California entered a preliminary injunction against Napster. The judge ordered the company to block users from exchanging copyrighted material.

Napster appealed to the Ninth Circuit Court of Appeals. In 2001, the appellate court upheld most of the lower court’s ruling. The Ninth Circuit found that plaintiffs had established a prima facie case of direct copyright infringement. To establish their case, the record labels needed to show ownership of the allegedly infringed material. They also needed to demonstrate that the alleged infringers violated at least one exclusive right granted to copyright holders. The record companies’ evidence showed that they owned approximately 70 percent of the files available through Napster. They also established that a majority of Napster users used the Napster system to download and upload copyrighted material.

Napster argued that it had engaged in fair use of the copyrighted material. If so, Napster did not violate copyright laws. The doctrine of fair use first developed in court decisions, but it was later made a part of copyright law, in section 107 of U.S. copyright law. According to the law, a reproduction of a particular work may be considered “fair” if used for purposes such as criticism, comment, news reporting, teaching, scholarship, or research. The law also provides four factors to be used in determining whether or not a particular use is fair:

• The purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes;
• The nature of the copyrighted work;
• The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
• The effect of the use upon the potential market for or value of the copyrighted work.

Determining whether a use is fair use or an infringement of copyright is often difficult. For example, when examining the amount of a work that has been used, there is no specific number of words, lines, or notes that may safely be taken without permission. Moreover, merely acknowledging the source of copyrighted material is not a substitute for obtaining permission from the copyright holder.

Napster contended that its system was fair use, rather than infringement. It supported this argument with claims that Napster users used the service to make temporary copies before purchasing music (“sampling”), and to access music its users already owned in CD format (“space shifting”). The district and appellate court rejected both these claims. Sampling was a commercial use, the court ruled, even if some of the users eventually purchased the music. Moreover, although wholesale copying does not preclude a claim of fair use, it militates against such a finding. In addition, the recording industry established that its marketability had been affected by Napster.

The appellate court found that Napster could be liable for contributory copyright infringement. Contributory copyright infringement is defined as “one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another.” The Ninth Circuit determined that the district court did not err when it concluded that plaintiffs would likely prevail on this point: “Napster, by its conduct, knowingly encourages and assists the infringement of plaintiffs’ copyrights.”

The recording companies were ordered to provide Napster with lists of recordings. Once that had been done, Napster had the burden to promptly remove those recordings from its system. In 2001 Napster agreed to use screening technology to block distribution of files identified by the recording companies.