Court Tosses Napster’s $1.3 Million Suit Against Rounder Records

Napster, LLC v. Rounder Records Corp., No. 09 Civ. 318 PAC (S.D.N.Y. January 25, 2011)

Last week, Napster simultaneously proved to the world that, 1) they still exist; and 2) they probably wish they didn’t.  For those not in the know (and I doubt anyone other than Best Buy will blame you for not being in the know on this one), Napster in its current incarnation sells subscriptions to their site, where users can stream and download music legally.  In order to do so, Napster strikes deals with record labels and other music rights owners to provide their content to its subscribers.

Enter Rounder Records, the 40 year old label from Massachusetts that started off with bluegrass and hippie folk acts but has survived and flourished ever since, scoring its biggest hit a few years back with Robert Plant and Alison Krauss’ smash album, Rising Sand.  In between, Rounder has released a diverse spate of records by artists such as John Fahey, They Might Be Giants, and even Steve Martin.* They’re also responsible for a series of important releases with the terrific Alan Lomax Collection.  So all in all, Rounder is not exactly a tiny indie label, but they definitely aren’t one of the big boys either.

* Complete aside, but I won’t deny it; I’ve always loved Steve Martin.

Napster wanted to make Rounder’s music available to its subscribers, so the pair struck a deal in 2001 to allow Napster to stream and provide for download music from Rounder’s catalog on its site.  The agreement required Rounder to ensure that it possessed all mechanical licenses for the musical works embodied in the sound recordings it licensed to Napster.  Moreover, the agreement contained a standard indemnity clause.  The basic idea here, as it relates to this case, is that the parties agreed that if a third party sued claiming that Napster’s use of Rounder’s music infringes the third party’s rights, Rounder foots the bill.

In 2006, Rounder and Napster rescinded the 2001 agreement and struck a new one, with a few important differences.  Now Napster was responsible for securing any necessary mechanical licenses, and Napster now had to first receive Rounder’s consent prior to racking up legal bills for which they might demand indemnification under the indemnity clause.  Can you guess what happened?  In late 2006, third party MCS Music America, a music publishing company, sued Napster claiming that it did not possess proper mechanical licenses for musical works MCS owns, including several of the songs licensed from Rounder.  Napster ultimately settled with MCS and turned around and sued Rounder for reimbursement pursuant to the indemnity clause, to the tune of $1.3 million, the amount of the settlement Napster claimed corresponded to Rounder’s music.

Score one for the little(r) guys, as Judge Paul A. Crotty ruled in Rounder’s favor and threw out Napster’s lawsuit in its entirety.  Not only had Napster failed to seek and receive Rounder’s consent prior to settling with MCS, as required for indemnification, but pursuant to the 2006 agreement, the mechanical license issue at the heart of the MCS lawsuit was entirely Napster’s, not Rounder’s, problem.*

* Since the 2006 agreement expressly rescinded the 2001 agreement, the latter, with its requirement that Rounder be responsible for the mechanical licenses, no longer applied.  Napster has to hate that 2006 agreement with a $1.3 million passion.

Though I admittedly haven’t read the briefings, it’s a little hard to even understand where Napster is coming from with this lawsuit.  In the written opinion, Judge Crotty repeatedly lambastes the company for failing to comply with the requirements of the 2006 agreement and even for egregiously misunderstanding New York and federal law.  It does seem as though Napster was throwing its weight around with the smaller (and presumably less funded) Rounder.  Either way, Napster once again found itself of the receiving end of the legal system’s ire, allowing Rounder to resume issuing Steve Martin records.