Hummer Winblad could answer for Napster's sins
by Ryan Tate
August 04, 2000
Legal experts say there is a good chance the flush venture capital firm Hummer Winblad stands to lose more than its $13 million investment in Napster Inc. if the music-swapping firm is fined for music piracy.

All of Hummer Winblad's assets, including an investment hoard it valued last year at more than $500 million, could be exposed if a lawyer can successfully argue the firm's principals are "controlling persons" behind Napster's music piracy.

While that interpretation of copyright law may sound far-fetched, law professors and lawyers say it cannot be dismissed. There are no precedents that would preclude a courtroom assault on Napster's investors.

What's more, recent legal decisions, including a 1996 9th U.S. Circuit Court of Appeals case involving a Los Angeles swap meet, have stretched copyright law to cover more and more types of indirect "vicarious infringement." The stretch threatens Napster's investors just as it threatens Napster itself, the experts say. Finally, Hummer Winblad is so tightly intertwined with Napster that it would have a tough time arguing it did not influence the company's actions.

Suing Hummer Winblad for the sins of Napster is no mere academic fantasy. Howard King, the lawyer seeking $20 million in damages from Napster on behalf of rapper Dr. Dre and heavy-metal band Metallica, says he is considering adding Hummer Winblad to the list of defendants in his suit.

He may do so only with the court's approval, but says he is confident he could win a green light. (A Recording Industry Association of America spokesman could not immediately comment on whether the music industry coalition had considered naming Hummer Winblad as a defendant in the case.) Hank Barry, Napster's temporary chief executive and a Hummer Winblad partner, says he is "comfortable with the legal structure" as it relates to Napster and Hummer Winblad.

Major implications
If King or any other lawyer successfully prosecutes Hummer Winblad, it could have profound implications for the burgeoning community of venture capitalists, who invested $34.3 billion in the tech industry last year, according to VentureFinance. To be sure, Napster was a particularly risky venture, and most startup companies do not operate on the fringes of copyright law, as it does. But Silicon Valley of late is agog over peer-to-peer technology startups, firms whose networks can speed the distribution and cataloging of copyrighted material.

Such firms include InfraSearch, which counts Netscape co-founder Marc Andreessen among its investors, and Centrata, a Kleiner-Perkins-backed firm. Both companies plan to harness the power of millions of computers by lashing ordinary PCs together in a massive computer network.

InfraSearch would use its network to power an up-to-the-second accurate search engine, while Centrata would pay people to use slivers of their computers' processors and hard disks for everything from content distribution to multimedia file search.

But for all of their grand plans, hot p-to-p plays like Centrata and InfraSearch could turn into massive liabilities for their investors, who could be sued if a copyright infringement precedent is established with Hummer Winblad and if intellectual property owners ever have cause to sue the firms.

'Borderline case'
Whether such a chill ever sweeps the VC world or not, legal scholars are clearly intrigued by the particular case of Hummer Winblad and its possible legal exposure in the Napster case. "I think it's a really interesting, borderline case," says Margaret Jane Radin, a professor at Stanford University who teaches copyright law.

Radin and other lawyers concede there is very little chance the lawyers prosecuting Napster could "pierce the corporate veil," a legal phenomenon whereby corporate barriers are dissolved outright. The sins of an incorporated entity then are visited upon an officer of the company or on another corporate entity altogether.

Such shifts are difficult to affect under corporate law, and usually involve fraud, complete dominion or control or anomalous breaches of corporate formality.

'Vicarious' infringement
But copyright law is broader and more flexible than corporate law. It allows for prosecution for vicarious copyright infringement, an idea developed by the courts in a string of decisions dating back as far as 1918.

Vicarious infringement occurs when parties several layers removed from a case of copyright infringement may be held responsible for piracy. The vicarious infringers do not have to actually commit piracy, as in direct copyright infringement, or even assist in piracy, as in contributory infringement and the case against Napster Inc. Rather, they need only the ability to influence the infringing act and to derive a benefit from the act. The scope of influence and amount of benefit required for vicarious infringement has been under debate in the courts for some time.

In the 1963 landmark case on vicarious liability, Shapiro, Bernstein and Co. v. H.L. Green Co., the 2nd U.S. Circuit Court held that a department store chain was liable for the copyright infringements of a concessionaire who was selling counterfeit recordings. The court reasoned that even though the department store was ignorant of the infringement, it had the power to stop what the retailer was doing and derived a direct financial benefit from it.

The department store should have exercised its formal, contractual power over the vendor, the court said, especially since it was receiving a commission on the vendor's fraudulent sales.

Decision broadened
That decision was reaffirmed and broadened in a 1996 ruling by the 9th Circuit Court of Appeals, Fonovisa v. Cherry Auction. The case pitted a Los Angeles swap meet against a Latin/Hispanic music company. The company sued after Cherry Auction failed to stop a bootlegger who was selling his music at the swap meet.

The court -- the same court that handed down a ruling in the Napster case last week -- found that the swap meet committed vicarious infringement. Reversing a lower court ruling, it said the swap meet had the power to stop the infringement, even though such power was not formalized in writing, as in Shapiro v. Green. It also found the swap meet reaped financial rewards from the vendors' piracy, if only by collecting admission and parking fees from customers, rather than by collecting a commission, as in Shapiro v. Green.

Quoting a 1971 Circuit Court ruling, the court said that, "even in the absence of an employer-employee relationship, one may be vicariously liable if he has the right and ability to supervise the infringing activity and also has a direct financial interest in such activities."

Making the argument
It is quite possible that Hummer Winblad meets those conditions, the lawyers say. "It's an interesting case -- whether venture capitalists would be more like the swap meet as opposed to regular shareholders," says Radin. "Maybe it is more like a swap meet, maintaining facilities for the purposes of making money, knowing that piracy is going on."

R. Anothony Reese, who teaches courses on copyright and intellectual property in cyberspace at the University of Texas, Austin, law school, says there is merit in that assessment.

"You could certainly make the argument that they fit within those requirements for imposing liability," he says. "The rules are general enough to apply to lots of different situations. The fact that it's a swap meet would not preclude its application to a venture capitalist."

While lawyers agree that Napster's investors could be prosecuted under copyright law, they add such a prosecution could be significantly easier in Hummer Winblad's case, since Hummer Winblad partner Hank Barry is the company's chief executive, the firm is far and away the company's largest investor and has two officers on Napster's board of directors.

"An active management role is something the courts would look at," says Laurence Helfer, who teaches copyright law at Loyola-Marymount University in Los Angeles. "The more active the management, the more you have a situation where there's the right and opportunity to control."

Reese agrees. "If one of the investors is running the day-to-day operations, it may be easier for the plaintiffs to establish that the investor had the right and ability to control the infringement. ... If you own 10 shares of AOL (AOL), you have some financial interest, but it is clear it doesn't give you any ability to control what AOL does. An investor who is able to put an individual in a position to operate the company probably makes it easier to show control."

Barry 'comfortable'
Fred Von Lohmann, a copyright attorney with the San Francisco law firm of Morrison & Foerster, says he is surprised that Napster CEO Hank Barry didn't resign his Hummer Winblad position when he took on the Napster job in May. "It just seems like they'd want to step back a little," he says.

Barry, himself an accomplished lawyer, said in an interview that his CEO job is temporary and that the company is searching for a replacement. He declines to comment on what sorts of legal risks, if any, Hummer Winblad identified in an investigation conducted before the company invested in Napster, but says he is "very comfortable with the legal structure and what it means for Napster and Hummer Winblad."

He calls the question of Hummer's legal exposure "a credible issue" but says "the case law is very clear that the purpose of a corporation is to allow people to carry on activities under that corporation" without implicating investors and other separate entities with their activities.

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