Bertelsmann won a partial victory yesterday (March 14) in its ongoing battle
with labels and publishers over the German company's financial contribution
to the original Napster. The Ninth Circuit Court of Appeal held that
Bertelsmann does not have to turn over confidential communications with its
lawyers regarding the transaction.

Bertelsmann loaned the peer-to-peer service operator about $85 million
between 2000-2001 to fund Napster's anticipated transition to a licensed
digital music distribution system. The deal occurred while copyright holders
were suing Napster for copyright infringement. Napster failed to fully
launch the new system before it declared bankruptcy.

In the current action, filed in 2003 by EMI and Universal labels as well as
publishers, the copyright holders claim that Bertelsmann is secondarily
liable for infringement by Napster's users. They argue that by lending
Napster the money, Bertelsmann assumed control over the service or prolonged
its allegedly infringing operations in order to avoid losing the estimated
40 million Napster users before the licensed service launched.

In November 2005, labels and publishers asked the federal District Court in
San Francisco to order Bertelsmann to turn over all so-called
attorney-client communications related to the loan. These types of
communications are confidential – and protected as such by the law. But
there is an exception to the attorney-client privilege of confidentiality
when a client consults an attorney for advice that will service him in the
commission of a fraud. Those communications may not be confidential.

The labels and publishers argued that when drafting the loan documents,
Bertelsmann engaged in a continuing scheme to defraud the courts. They
argued that the loan was really cash given in exchange for an equity stake
in the Napster, and Bertelsmann used its lawyers to create sham loan
documents to avoid liability for Napster's activities. They also argued that
through its lawyers, Bertelsmann attempted to defraud the courts by omitting
from the loan documents a side agreement that allowed Napster to channel
some money into its litigation expenses in fighting the infringement action
filed by rights holders.

In April 2006, the District Court agreed and ordered Bertelsmann to turn
over the communications. Bertelsmann appealed. Now, the Appeals Court has
sided with Bertelsmann.

In its 35-page opinion, the Appeals Court concluded that the loan terms did
not constitute a fraudulent misrepresentation. Since the labels and
publishers filed to provide enough evidence supporting their claim of fraud,
Bertelsmann's communications with its lawyers are confidential.

Universal Music Group is no longer part of the case. UMG labels settled
their claims last fall when buying Bertelsmann's BMG Music Publishing.