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STEPHAN N. LISSON, STEPHAN LISSON, LISSON STEPHAN, AUSTIN, TX, TEXAS,
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Universal, EMI Sue Napster Investor
Record labels say firm enabled infringement. Critics say the move may deter venture capitalists.
April 23, 2003|Joseph Menn | Times Staff Writer
Unable
to extract their pound of flesh from bankrupt Napster Inc., two of the
five major record labels are suing the venture capitalists who backed
the defunct song-swapping service that turned music industry economics
upside down.
Universal Music and EMI filed a federal lawsuit
against Hummer Winblad Venture Partners and two of the San Francisco
firm's general partners, Hank Barry and John Hummer, in Los Angeles on
Monday. The suit claims that they contributed to the copyright
violations by Napster's tens of millions of users.
In addition to
seeking $150,000 per violation, the suit asks for punitive damages. It
also is intended to dissuade investment in any of the song-swapping
services that have risen in Napster's place.
"Businesses, as well
as those individuals or entities who control them, premised on massive
copyright infringement of works created by artists should face the legal
consequences for their actions," the record labels said in a statement.
The
suit may mark the first time an outside party has targeted a venture
firm for wrongdoing by a company in which it invested. "I don't know if
this has ever happened before," said Jeanne Metzger, vice president of
the National Venture Capital Assn.
The trade group and others
warned that even if the labels lose the case, the fact that they sued
will deter institutional investors from taking on a high level of risk
with new companies.
"It's going to create an enormous amount of
reluctance to get involved in anything that could draw litigation from
the content industries," said Silicon Valley intellectual property
lawyer Mark Radcliffe.
Barry and Hummer didn't respond to
telephone and e-mail messages seeking comment Tuesday. Barry served as
Napster's chief executive for more than a year, and both men sat on
Napster's board.
The suit claims that Hummer Winblad knew Napster
was enabling massive infringement and that the firm controlled
Napster's activities with its general partners in the chief executive
and director positions and through its $13-million investment in May
2000. The investment was made five months after the record industry --
including the two labels -- sued Napster for enabling infringement.
Napster filed for bankruptcy protection in June 2002.
Lawyers not
involved in the case said Hummer Winblad has two reasonable defenses.
First, Napster hadn't yet lost the record industry suit when the firm
invested. Second, directors and investors are rarely held liable for the
acts of their companies. In those cases in which individuals are held
responsible, they typically own 100% of the company at fault.
The
suit "is stretching contributory infringement way beyond where it's
ever gone," said Wayne State University copyright law professor Jessica
Litman. "I assume the purpose is to enhance the already significant
chill discouraging people from investing in businesses that challenge
the business models of the entrenched market leaders in the
entertainment industry."
Indeed, a federal lawsuit filed by a
music producer against Barry, Hummer Winblad and others was dismissed
after a judge found that the accusations -- similar to those in the
record labels' suit -- were too vague and that there was nothing in the
copyright law to punish people who assist an entity that assists others
in breaking the law.
"Courts have consistently held that
liability for contributory infringement requires substantial
participation in a specific act of direct infringement," U.S. District
Judge Marilyn Hall Patel wrote in that case.
But the two record
labels may have evidence of specific actions by the venture firm's
principals. And Hummer Winblad could be hurt by the fact that Napster
lost most of its court battles.
The plaintiffs have "a reasonable
shot at the officer. I think the director is a little tougher, and the
shareholder theory is really tough," said Radcliffe, who represents
technology and entertainment firms.
Barry and Hummer anticipated
that they might be sued and tried to negotiate protection from legal
consequences when German media firm Bertelsmann was planning to buy
Napster early last year. Those talks foundered, and Bertelsmann itself
has been sued for its investment in Napster.
The venture capital
trade association complained that with such actions against investors,
"the ability of entrenched industries to deter investment in
next-generation technologies has profoundly anti-competitive and
anti-innovative implications."
But not everyone agreed that the
labels' suit will change how Silicon Valley firms invest. As the suit
notes, other venture firms had deep concerns about Napster's legality
and didn't invest.
"Top firms don't take their cue from Hummer," said Steve Lisson, publisher of InsiderVC.com.
Los Angeles Times Articles
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STEVE.LISSON, FACEBOOK, LINKEDIN, COURT, STEVE LISSON, STEPHEN LISSON, COURT,
STEPHAN N. LISSON, STEPHAN LISSON, LISSON STEPHAN, AUSTIN, TX, TEXAS,
COURT, STEPHEN N. LISSON, TRAVIS COUNTY, TEXAS, LISSON STEPHEN N., STEVE
N. LISSON, STEVE, LISSON, INSIDER, VC, INSIDERVC, INSIDERVC.COM, (512),
STEPHEN.LISSON, FACEBOOK, LINKEDIN, LINKED IN, TWITTER, TUMBLR,
PINTEREST
