A LEGAL MALPRACTICE CLAIM BY MP3.COM:
In The Changing Area Of Cyberlaw, Is A Crystal Ball Necessary To Avoid Liability?

Who should predict the future of law in cyberspace? This is a difficult question, and one that is becoming increasingly significant - with hundreds of millions of dollars at stake.

Last month, MP3.com, Inc. filed a malpractice suit for over $175 million against its legal representative, the San Francisco law firm of Cooley Godward. MP3.com contended that the law firm's advice was responsible for MP3.com's decision to launch its music distribution service, MYMP3.com - a decision that resulted in dozens of copyright suits being filed against the company.

At the heart of this lawsuit lies a difficult question: Where should the responsibility, and liability, fall when a business fails because of adverse developments in an unsettled and hard-to-predict area of law such as cyberlaw? Should responsibility lie with the company - which was, after all, willing to utilize a business model it knew was fraught with liability risks, and might, in a different world, have profited from taking those very risks? Or should it lie with the lawyer, who may have recommended taking the risk because he or she made an inaccurate prediction as to what future legal developments would be?

With the rapid pace of change in Internet law, such questions are going to be increasingly commonly posed - and increasingly important. Yet beneath this debate lie deeper questions still: What will the future of lawyering among the shifting sands of Internet regulation look like? Is correct prediction about the outcome of a legal question even possible in this day and age?

The Digital Music Revolution, Brought to You by MP3.Com

An "MP3" is a tool that compresses the size of a digital music recording, enabling songs to be transmitted quickly and efficiently to others via the Internet. In the late 90's, a company called MP3.Com sought to capitalize on this technology by offering a way to access MP3s quickly and easily, for a small fee. Its service was called MYMP3.com.

The service had two key aspects. First, it allowed users to purchase a CD online, through various cooperating sites, and placed the contents of the CD into the customer's MP3 account, so that the music could be "streamed" to his or her computer, wherever it was located.

Second, if the user inserted a CD he already owned into his disk drive, the "Beam-It" service allowed the consumer to access the contents of the same CD from MP3.Com's library - which consisted of tens of thousands of CDs that had been purchased by MP3.Com and copied onto its servers. Because of the library, a user did not have to store space-consuming copies of her CDs onto her own hard drive in order to access the music on the CDs via the Internet. Moreover, by using the library, the user could access the music from any location - not just the location of the hard drive.

The company hoped to differentiate itself from Napster by requiring users to prove ownership of CDs before they downloaded their contents in MP3 format. The idea - and the legal defense to copyright claims - was that the user was not pirating a MP3 by gaining access to it for free; rather, he was only listening to music for which he had already paid.

Profit Without Copyright; Service Without Product

MYMP3.com was revolutionary - not only because it made the location of the physical CDs beside the point and allowed music to be accessed anywhere, but also because it therefore shifted the music business' focus from a product (the CD and its underlying copyright) to a service (providing music access to the user).

MP3.com did not seek to corner the market on copyrights; indeed, for its service to work, it believed it did not have to own a single one. Instead, it aimed to profit through the use of subscription services and advertising, not through owning any other rights connected to the underlying work. Its users would take care of the copyright issue when they obtained, by purchasing CDs, a license to use them.

Or so MP3.com thought. In fact, the copyright issue was not so simple. MP3.Com soon received a "cease and desist" letter from the Recording Industry Association of America, claiming a "blatant" violation of copyright laws and demanding that MP3.Com take down its site immediately. MP3.Com refused and the RIAA sued, requesting over $100 million in damages.

The RIAA claimed copyrights were violated when MP3.COM "copied" the CDs it had purchased into its library. The right to listen to purchased music, the RIAA argued, did not encompass the right to copy it and let others listen to it as well.

The RIAA's argument suggested that MP3.Com was really not so different from Napster after all; Napster users, on the RIAA's theory, were exceeding the license to use music they bought by bartering it for other music, while MP3.com was exceeding its license to use music it bought by selling its library for the price of a subscription.

MP3.Com's "Fair Use" Argument

Lawyers and scholars studying the case suggested that a "fair use" argument could be made, despite the business' commercial intent. "Fair use" is a provision of copyright law that permits some infringement if certain conditions are met. Specifically, a court deciding if a use is fair must consider the following factors: (1) the purpose and character of the use, whether commercial or non-commercial; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the value of the copyrighted work. If the use is non-commercial, or transformative, or if only very little of the underlying work is used, an infringer can sometimes avoid a determination of liability.

MP3.Com argued that its use was fair because it merely facilitated the storage of works the consumer had already bought. As Lawrence Lessig has pointed out, the system did not facilitate any more piracy than already existed, nor did it make it any easier for Internet users to download music and engage in piracy. Even without the service, anyone could "rip" his or her CD's and post them onto a site. Moreover, anyone could borrow someone else's CD and make a copy.

An Adverse Decision That Suggested the Law Was Crystal Clear

The district court was not convinced. Indeed, the court seemed to think the issue was a no-brainer, with MP3.com on the losing side: "The complex marvels of cyberspatial communication may create difficult legal issues," district court judge Jed Rakoff wrote in his opinion, "but not in this case." "Defendant's copyright infringement was clear," the court observed, "and the mere fact that it was clothed in the exotic webbing of the Internet does not disguise its illegality."

Judge Rakoff ruled that MP3.com's infringement was clear-cut. It was re-playing recordings that it had converted from CD to MP3 format and copied into its library - all without proper authorization. The court ruled that this was not a permitted "transformative" use of the existing work; it was a copyright-infringing unauthorized retransmission.

The court also held that it did not matter whether or not, as MP3.com had argued, the market for CDs was undiminished (or, was even increased) by the presence of MYMP3.com. The district court held that a copyrightholder's "exclusive" rights to the copyrighted work included the absolute right to curb the development of derivative market by refusing to license or permit them, regardless of whether they financially harmed the market for the original.

Finally, in a later ruling, the district court determined that MP3.Com's infringement was "willful." The court found that MP3.Com had offered no credible evidence to rebut the RIAA's contention that it "knew at all times that its copying of plaintiffs' CD's was presumptively unlawful, that its fair use justification was factually and legally very doubtful, and that no one but its outside counsel could be relied upon to advise it as to whether there was, nonetheless, a good faith basis for proceeding." In a stunning determination, the court imposed the astronomical sum of approximately $118,000,000 in damages to the RIAA.

Perhaps unsurprisingly, shortly thereafter MP3.Com sued its outside counsel, Cooley Godward. It alleged that Cooley did not provide it with meaningful advice as to whether it would prevail, and what liability it would face, in an infringement suit. It also alleged that Cooley falsely represented to MP3.Com that it had secured expert opinion testimony that there were viable defenses to be asserted in favor of the company's business model.

Malpractice in Cyberspace?

Malpractice is defined as a failure to meet a standard of care recognized by the profession, in a way that causes injury to a client. An attorney cannot, however, be held liable for malpractice simply because an issue of law was unsettled or debatable at the time, and then is resolved adversely to the client. Rather, all that the law requires is that the attorney undertake reasonable research to ascertain relevant legal principles, and make an informed decision as to what course of conduct to recommend, based on an intelligent assessment of the problem.

Did Cooley Godward fail to meet a reasonable standard of care? Probably not - although without seeing all the evidence, it is impossible to know for sure. It is important to remember that at the time Cooley advised MP3.com, the area of online music was a legal morass of unsettled questions. There were many scholars and lawyers - including prominent Internet law specialist Lawrence Lessig - who thought that a fair-use argument could be credibly made in favor of MP3.com's business, in part because MP3.com, as mentioned above, makes nothing possible that the Internet itself, in combination with CD "ripping" technology, does not make possible already.

Judge Rakoff did not agree - and thought the law was clear. In part, that is because he believed that real world principles can be easily and literally translated into the digital context. Under this view, the digital world offers only a new canvas for a familiar painting: intellectual property protections have not been been altered by the digital world. However, another judge might have taken the copyright law less literally, and recognized that translating copyright principles into the cyberspace context requires re-conforming them for a profoundly different environment.

Recording companies suffered negligible injury to their CD sales as a result of MP3.com, while MP3.com offered CD buyers an exciting new way to make their music more accessible. Given these facts, and given prior decisions such as the Supreme Court's opinion validating the use of VCR technology, it was not at all self-evident at the time - to Cooley or anyone else - that MP3.com was inevitably doomed.

On the contrary, a finding that the doctrine of "fair use" applied was very possible. If Cooley Godward so advised MP3.com, it should not be held liable, for it simply adopted a view that many other reasonable attorneys also endorsed.

Brave New World, Or Just the Same Old One?

The malpractice case of MP3.Com forces lawyers to ask themselves whether "Internet Law" is a new world entirely, or whether it is simply an old cast of characters in a different setting. This debate between Old and New worlds is one that has replayed itself in a host of different arenas, both inside and outside the courtroom.

As lawyers, we are skilled at navigating the divide between the two worlds for our clients; indeed, that is our job. However, we should find it chilling that clients now seek to reallocate responsibility for the outcome of a judge's determination - claiming attorneys should have been able to offer not only a clear, but an infallible, view of a murky legal world.

This is an astonishing possibility. To be sure, there is a palpable divide between the lawyers and recording industry executives who seek to apply the same old rules--and the lawyers, scholars, and high tech companies who seek to reexamine them in light of the new technology. And judges have so far been more likely to be persuaded by the former view than the latter.

Nevertheless, examples such as the back-and-forth between Judge Marilyn Patel and the Ninth Circuit Court of Appeals in the Napster case have shown that judges, while inherently conservative about changes in the law, are nevertheless hardly all of one mind on cyberspace issues. Many expected Napster to be shut down entirely, not forced to use filtering technology. Indeed, few would have predicted that the seemingly more innocuous MP3.com would be quickly shut down while the (supposedly) more dastardly Napster dickered over which filters it would use.

No cyberspace lawyer should issue advice without a caveat about judicial conservatism, and the possibility that the old copyright rules will simply be applied mechanistically to cyberspace. Still, this possibility is not a certainty - and malpractice suits should not force lawyers to become eternal pessimists, shutting down companies before they start on the theory that the new arguments, and way of thinking, will never win in court. No one has a crystal ball in this area - and we need not all use one that affords only the bleakest view.