Thursday, March 15, 2007

In Re Napster Copyright Litigation (9th Cir. - March 14, 2007)

There's a fine line between good legal advice and fraud. Very fine.

Judge Willie Fletcher writes yet another excellent opinion in this matter; comprehensive, well-organized, and direct. I liked it. It's all about (1) what showing is required to prove the crime-fraud exception to the attorney-client privilege, and (2) whether such a showing was made here. Judge Fletcher holds (1) that it's preponderance of the evidence (and requires consideration of all the evidence from both sides) -- at least if ouright disclosure, as opposed to in camera review, is sought, and (2) No.

Granted, you could easily disagree with his conclusions. Reasonable minds could differ. And I'm sure do. But his opinion goes a long way towards convincing me that he's right.

I'm absolutely certain that the defendant here, Bertelsmann, deliberately employed its lawyers to structure the transaction so that it looked like a loan rather than equity, and further did so in a deliberate effort to avoid potential copyright infringement liability that might arise from infusion of equity. And I'm not too pleased with the admitted "side deal" that the parties (with the help of their counsel) deliberately decided not to write down -- a side deal that was probably in part an effort to hide this agreement and strengthen Bertelsmann's infringement defenses. It sounds sleazy; moreover, my sense is that the subsequent deposition testimony regarding this side deal is, shall we say, a little creative.

But Judge Fletcher convinces me in the end that there was no fraud. His thoughts on this matter somewhat mirrored my own as I read though the case, and the most persuasive argument to me was when Judge Fletcher says: "The strongest evidence that appellees have that Bertelsmann
sought to purchase an equity stake in Napster is the right of Bertelsmann to convert the loan to equity once the licensed music distribution system was launched. But that right, given by the express terms of the loan documents, could hardly have been fraudulently procured, given that it was stated expressly. Nor does it tend to prove that the entire loan was a sham. The only other evidence appellees have offered in support of this theory are documents showing that Bertelsmann’s counsel and executives attempted to structure its deal with Napster to
limit its potential liability. These documents do not prove fraud. If a party could establish the crime-fraud exception simply by showing that an opponent structured a business transaction to limit its liability, the attorney-client privilege would be worth little, for under this standard many commercial disputes could be recast as fraud on the court." That seems right to me.

Still, as I began this post, this appeal really did bring home to me the fact that there is truly a fine line between fraud and good lawyering. And a dangerous line, I think, that's far too easy to cross sometimes.

P.S. - One other interesting thing about the case. One reason that Bertelsmann probably wanted an undocumented side deal that allowed Napster to use $10 million of $50 million to defend itself in the pending copyright litigation was because one of the parties that was suing Napster (BMG) was a subsidiary of Bertelsmann. So, essentially, Bertelsmann was giving Napster $10 million to defend a suit that Bertelsmann had brought. Weird, huh? I'd never previously heard of a case (though I'm sure that one probably existed) in which a party was funding both the prosecution of the lawsuit as well as its defense. Not your usual deal.