Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_00-md-01369/USCOURTS-cand-3_00-md-01369-15/pdf.json

Nature of Suit Code: 820
Nature of Suit: Copyright
Cause of Action: 28:1338 Copyright Infringement

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UNITED 

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For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

IN RE NAPSTER, INC. COPYRIGHT 

LITIGATION

 

This Document Relates To:

 

UMG RECORDINGS, INC. et al., 

Plaintiffs,

v.

HUMMER WINBLAD VENTURE PARTNERS et al.,

Defendants. 

UMG RECORDINGS, INC. et al., 

Plaintiffs, 

v.

BERTELSMANN AG et. al.,

Defendants. 

JERRY LEIBER et al.,

Plaintiffs,

v.

BERTELSMANN AG et al., 

Defendants. 

No. C MDL-00-1369 MHP

No. C 04-1166 MHP

No. C 04-1351 MHP

No. C 04-1671 MHP

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CAPITOL RECORDS, INC. et al.,

Plaintiffs,

v.

BERTELSMANN AG et. al.,

Defendants. /

No. C 04-2121 MHP

MEMORANDUM & ORDER

Re: Motion to Compel Production of

Privileged Documents

The above-captioned actions arise from litigation involving alleged copyright infringement

by Napster, Inc. and its customers. Plaintiffs now seek to compel production under the crime-fraud

exception to the attorney-client privilege of documents previously withheld by defendants

Bertelsmann AG, et al. (“Bertelsmann”). Having considered the parties’ arguments and

submissions, and for the reasons set forth below, the court enters the following memorandum and

order.

BACKGROUND

The instant motion relates to four actions now pending before this court as part of the In re

Napster Copyright Litigation multidistrict litigation (“MDL”) proceedings, Case No.

C MDL-00-1369 MHP. Plaintiffs in this suit allege that by investing in Napster and assuming

control of the operation of the Napster file-sharing network, defendants contributorily and

vicariously infringed plaintiffs’ exclusive rights under the Copyright Act, 17 U.S.C. section 101 et

seq. See 17 U.S.C. § 106.

Plaintiffs seek in this motion to compel production of attorney-client communications

relating to Bertelsmann’s initial $50 million investment in Napster, which has been characterized by

the parties either as a loan (Bertelsmann’s characterization) or as an equity stake (plaintiffs’

characterization). The loan document contains a paragraph purporting to limit the manner in which

Napster could use Bertelsmann’s money: “The proceeds of this Note shall be used solely to fund the

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development of a new model for Company’s service as outlined in the Umbrella Agreement and

overhead costs associated with such development.” Pomerantz Dec., Exh. 1.

Bertelsmann has twice offered the loan document in this litigation as evidence that it did not

intend the loan proceeds to be used to support Napster’s existing file sharing system or its litigation

against the record labels. In moving to dismiss plaintiffs’ complaint, Bertelsmann offered the loan

document to establish that it did not intend to perpetuate Napster’s allegedly illegal file sharing

service. Pomerantz Dec., Exh. 2 at 17. Bertelsmann also offered the loan agreement in a discovery

dispute before the Special Master, to prove that its interests were not adverse to those of

BMG—Bertelsmann’s record label subsidiary and one of the plaintiffs in the original Napster action. 

Pomerantz Dec., Exh. 2. Finally, Bertelsmann submitted the loan document during Napster’s

bankruptcy proceedings in order to establish Bertelsmann’s priority as a secured creditor of Napster.

Plaintiffs contend that the stated limitation on use of the loan proceeds is a deliberate

falsehood, intended to protect Bertelsmann from any liability resulting from supporting Napster’s

allegedly illegal business. According to plaintiffs, Bertelsmann had a secret side agreement with

Napster whereby Napster could use up to twenty percent of the loan amount—ten million

dollars—to finance its litigation against the record labels. Plaintiffs further assert that Bertelsmann

knew the representation in the loan document to be false when it offered the loan document as

evidence in this litigation. As a result, according to plaintiffs, Bertelsmann cannot assert the

attorney-client privilege with respect to communications relating to the Napster loan and the use of

the loan document in this litigation.

Bertelsmann challenges the sufficiency of plaintiffs’ evidence in support of the alleged fraud. 

Bertelsmann also argues that the claimed misrepresentation is immaterial as a matter of law, and

cannot serve as the predicate for a claim of fraud.

LEGAL STANDARD

Federal common law recognizes an attorney-client privilege protecting “communications

between client and attorney for the purpose of obtaining legal advice, provided such

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communications were intended to be confidential.” Gomez v. Vernon, 255 F.3d 1118, 1131 (9th

Cir.), cert. denied sub nom Beauclair v. Puente Gomez, 534 U.S. 1066 (2001). The privilege is not

absolute, however. Under the so-called “crime-fraud” exception to the privilege, communications in

furtherance of an ongoing or future crime or fraud are not protected. Id. at 1131 n.7. In order to

vitiate the privilege under the crime-fraud exception, the moving party must establish “reasonable

cause to believe that the attorney’s services were utilized in furtherance of the ongoing unlawful

scheme.” In re Grand Jury Proceedings, 87 F.3d 377, 381 (9th Cir.), cert. denied sub nom

Corporation v. United States, 519 U.S. 945 (1996) (internal quotations and ellipses omitted).

DISCUSSION

I. Scope of Review

The parties disagree as to the depth of review this court must conduct in order to resolve the

instant motion. Plaintiffs argue that the court should only consider whether the moving party’s

evidence, “if believed by the jury would establish the elements of an ongoing violation.” See United

States v. Chen, 99 F.3d 1495, 1503 (9th Cir. 1996), cert. denied, 520 U.S. 1167 (1997); United

States v. Laurins, 857 F.2d 529, 541 (9th Cir. 1988), cert. denied, 492 U.S. 906 (1989). Bertelsmann

disagrees, arguing that plaintiffs must establish by a preponderance of all of the evidence, including

that submitted by Bertelsmann, that a crime or fraud was committed. See Laser Indus., LTD. v.

Reliant Techs., Inc., 167 F.R.D. 417, 438 (N.D. Cal. 1996) (Brazil, Mag. J), dismissed by 232 F.3d

910 (Fed. Cir. 2000) (holding that the “moving party could penetrate the privilege by satisfying the

less demanding ‘preponderance of the evidence’ standard.”); see also In re Omnicom Group, Inc.

Sec. Litig., 233 F.R.D. 400, 405–08 (S.D.N.Y. 2006) (reviewing and endorsing the reasoning of

Laser Industries).

Laurins and Chen represent the last published word from the Ninth Circuit on the standard of

proof for vitiating the attorney-client privilege. The Laurins court stated, without elaboration, that

the party seeking to vitiate the attorney-client privilege must present only a “prima facie case” of

fraud; i.e., that the moving party must show “evidence that if believed by the jury would establish

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the elements of an ongoing violation.” Laurins, 857 F.2d at 541. Similarly, the court in Chen held

that the moving party must submit evidence establishing reasonable cause, which is “more than

suspicion but less than a preponderance of the evidence.” Chen, 99 F.3d at 1503. On its face, the

Laurins / Chen standard is quite lenient and does not require the court to consider conflicting

evidence offered by the party seeking to uphold the privilege. The court need only consider the

evidence offered by the moving party.

Laser Industries, decided after Laurins but before Chen, adopted a far stricter standard,

requiring the moving party to prove the fraud by a preponderance of the evidence, in light of the

entire evidentiary record. Other district courts in this circuit appear to have adopted the Laser

Industries formulation. See, e.g., Medical Lab. Mgmt. Consultants v. American Broad. Cos., 30 F.

Supp. 2d 1182, 1206 (D. Ariz. 1998), aff’d, 306 F.3d 806 (9th Cir. 2002); In re Heritage Bond Litig.,

No. CV 02-1475-DT, 2004 WL 1970058, at *3 (C.D. Cal. Jul. 23, 2004). The Laser Industries court

distinguished Laurins on the grounds that Laurins was a criminal case, in which a lower standard of

proof should apply. Laser Indus., 167 F.R.D. at 427 (arguing that “reasoning about [the crime-fraud

exception] in the civil context is not fungible with reasoning about them in the context of grand jury

investigations and criminal prosecutions”).

The Laser Industries preponderance of the evidence standard is irreconcilable with Chen,

decided four months later. See Chen, 99 F.3d at 1503 (reasonable cause is “more than suspicion but

less than a preponderance of the evidence.”). Moreover, the civil / criminal distinction adopted by

the Laser Industries court is unpersuasive, as the privilege has an even greater importance in the

criminal context where individual liberty is at stake. See, e.g., In re Sealed Case, 754 F.2d 395, 403

(D.C. Cir. 1985) (Mikva, J., concurring) (arguing that “the Sixth Amendment and the underlying

policies of the common law privilege require heightened protection of confidential communications

between lawyer and client when the lawyer is defending the client against criminal charges.”). 

Finally, although the Ninth Circuit has not yet directly addressed the question of whether an

adversarial minitrial should be used to determine the exception’s applicability, other courts have

found such a weighing of conflicting evidence to be unnecessary. See, e.g., In re Grand Jury

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Proceedings (Vargas), 723 F.2d 1461, 1467 (10th Cir. 1983) (“[T]he determination of whether the

government shows a prima facie foundation . . . can be made ex parte and a ‘preliminary minitrial’ is

not necessary.”) (citation omitted) (cited with approval by In re Grand Jury Proceedings (Doe), 867

F.2d 539, 540 (9th Cir.1989)). The court also finds that vitiating the privilege upon a prima facie

showing is sensible, as the party seeking to vitiate the privilege does not have the benefit of access to

the full set of communications which might prove the existence of the crime or fraud.

The language in controlling Ninth Circuit decisions such as Laurins and Chen is sufficiently

clear. This court will therefore follow the Laurins standard, and will vitiate the privilege if plaintiffs

have presented “evidence that if believed by the jury would establish the elements of an ongoing

violation.” Laurins, 857 F.2d at 541.

II. Plaintiffs’ Showing

Plaintiffs’ argument in support of vitiation hinges on three pieces of evidence directly

supporting their contention that a side agreement existed, as well as circumstantial evidence that

Bertelsmann had a motivation to fund Napster’s legal defense and that Bertelsmann knew that the

loan proceeds were being used to do so.

The first piece of direct evidence is an email dated October 25, 2000 from Hank Barry, then

Napster’s CEO, to several Napster employees and Napster’s outside counsel. Pomerantz Dec., Exh.

4. The email, which is titled “Thunderball notes,” describes the outcome of a meeting between

Barry and Thomas Middelhoff, CEO of Bertelsmann, about the Bertelsmann loan to Napster. 

Relevant to the instant motion, the email states that 

[t]here are 2 things that we agreed that will not be in the papers. These are the

subjects of handshakes between Thomas and me, witnessed yesterday by Hummer,

Andreas, Aydin Caginalp and Andreas’ assistant Oliver. . . . [T]he papers will say

that the $50M is to be used for development and overhead and g and a related to that. 

We have an agreement that up to $10M may be used for litigation expenses. Legal

team, that’s you.

Id. (emphasis added).

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The second piece of direct evidence is a memorandum written by Carol Timm, an associate

at Wilson Sonsini—Napster’s counsel. The memorandum, written for inclusion in the Napster file,

documents a conversation between Timm and Barry. The memorandum states, in relevant part, that

[t]he Memorandum of Terms between the parties states that, “The loan proceeds will

be used to fund the development of the business model outlined above as well as

general, administrative and overhead expenses associated with such development.” 

Although not expressed in the Memorandum of Terms or the transaction documents,

Mr. Barry informed me that the parties had verbally agreed that Napster could use

up to 20% of the proceeds toward litigation expenses. This agreement and the

handshake between Hank Barry of Napster and Andreas Schmidt of Bertelsmann was

witnessed by John Hummer . . . , Aydin Caginalp . . . , and Oliver Schusser.

Pomerantz Dec., Exh. 5 (emphasis added). Bertelsmann points out that the two accounts of the

meeting differ in one respect—in the email, the handshake agreement was between Barry and

Middelhoff, while in the memorandum the agreement was between Barry and Schmidt. In all other

respects, however—the terms of the side deal and the other parties present at the meeting—the two

documents are in accord.

The third piece of direct evidence is a passage from the deposition testimony of Hank Barry,

wherein Barry describes the meeting at which he reached the handshake agreement with

Bertelsmann. According to Barry’s testimony, he announced to the Bertelsmann executives that he

understood the reference to “general and administrative expenses” in the loan document to include

litigation expenses. Pomerantz Dec., Exh. 6. He further represented that he would “endeavor to

keep the litigation expenses under $10 million.” Id. Barry testified that none of the participants in

the meeting objected to his statements.

Bertelsmann argues that Barry’s testimony establishes only that he had a different

interpretation of the agreement than Bertelsmann, and does not support an inference that

Bertelsmann intended to defraud the court. The problem with this argument is that, according to

Barry’s testimony, Barry communicated his understanding to Bertelsmann executives at the time the

loan agreement was created, and the executives did not object. Bertelsmann’s knowledge that Barry

planned to use the loan proceeds to fund the litigation—regardless of whether that understanding

was the subject of a formal side agreement—is fundamentally at odds with Bertelsmann’s

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representations as to the meaning of the loan agreement in this lawsuit. Viewed together with

Barry’s email and the Wilson Sonsini memorandum, Barry’s testimony is more than adequate to

make a prima facie showing that Bertelsmann’s characterization of the loan agreement in this

litigation is false.

Plaintiffs’ circumstantial evidence further buttresses the prima facie case. The parties do not

dispute that Napster in fact used the loan proceeds to fund its litigation. Plaintiff has also pointed to

some evidence suggesting that Bertelsmann wished to keep the existing Napster service running in

order to retain the Napster user base, and that Bertelsmann knew that Napster would be forced to

close its doors without securing additional funding. Pomerantz Reply Dec., Exh. 3, at 88–98, 109. 

In sum, plaintiffs have carried their burden of providing evidence which, if believed by the finder of

fact, would establish fraud in Bertelsmann’s representations to this court.

Even if the court were to follow Laser Industries and consider the evidence offered by

Bertelsmann to rebut plaintiff’s case, the result would be the same. Bertelsmann’s contrary evidence

falls into three categories. First, Bertelsmann argues that the Napster service was not known to be

illegal at the time of the loan agreement. Thus, according to Bertelsmann, there was no incentive for

Bertelsmann to keep its investment in Napster a secret. This argument ignores the very precarious

legal position Napster faced in late 2000, after this court had entered a preliminary injunction. The

fact that the injunction was still on appeal—thus raising some possibility that the Napster service

might be lawful—does not suggest that Bertelsmann had no reason to be concerned about its

liability.

Second, Bertelsmann presents documentary evidence and testimony from Bertelsmann and

Napster employees stating that Bertelsmann did not intend to fund the existing Napster service, and

that Bertelsmann’s sole goal was to transform Napster into a legal, profit-making venture. The fact

that Bertelsmann executives have corroborated Bertelsmann’s stated position (as reflected in the

loan agreement) is unsurprising. Indeed, much of Bertelsmann’s defense in this lawsuit is based on

the argument that Bertelsmann lacked the requisite mental state for contributory or vicarious

infringement. Although the statements of Bertelsmann and Napster employees should be given

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some weight, they are not sufficient to rebut the evidence of an alternate arrangement included in

plaintiff’s submissions.

Finally, Bertelsmann argues that there is no evidence that its lawyers were knowingly

engaged in improper conduct. However, “the lawyers’ innocence does not preserve the

attorney-client privilege against the crime-fraud exception.” Chen, 99 F.3d at 1504. This is so

because “[t]he privilege is the client’s, so it is the client’s knowledge and intentions that are of

paramount concern to the application of the crime-fraud exception.” Id. (internal quotations

omitted). Here, the handshake agreement was witnessed by Bertelsmann executives, as well as one

of Bertelsmann’s lawyers, who was also involved in drafting the loan agreement. In addition,

Bertelsmann, through its lawyers, offered the loan document as evidence on two occasions in this

litigation. The loan agreement contains the allegedly false statement about the use of the loan

proceeds. Plaintiffs’ proffer thus indicates, at a minimum, that Bertelsmann’s lawyers were active

participants in perpetuating that falsehood, whether or not they knew they were doing so at the time.

In sum, regardless of the applicable standard of review, the court finds that plaintiffs have

satisfied their burden in seeking to vitiate Bertelsmann’s privilege.

III. Materiality

Bertelsmann argues that even if the loan document contains a false statement, the statement

does not constitute actionable fraud because it is not material. Bertelsmann offers two bases for this

assertion. First, Bertelsmann argues that even if it intended and agreed to fund Napster’s previous

litigation, any such funding cannot serve as the basis for copyright infringement because funding of

litigation is constitutionally protected under the Noerr-Pennington doctrine. Second, Bertelsmann

argues that funding of litigation, without more, falls short of the level of involvement required for

vicarious or contributory liability.

Assuming without deciding that Bertelsmann’s legal arguments have merit, its use of the

loan document in proceedings before the court was nonetheless material. If the court had somehow

concluded based on the loan document that, as a matter of law, Bertelsmann had no financial stake in

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Napster’s allegedly illegal service, plaintiff’s claims may very well not have survived Bertelsmann’s

motion to dismiss. Similarly, if the Special Master had accepted Bertelsmann’s argument that it had

no stake in the outcome of Napster’s litigation against the record labels, Bertelsmann might not have

been required to produce previously withheld communications between Bertelsmann and BMG.

Bertelsmann argues that the loan document is immaterial because investment in Napster’s

litigation cannot serve as a basis for copyright liability. Bertelsmann offered the loan document,

however, to prove the converse—that absence of any investment in Napster’s service or its litigation

demonstrates an absence of liability. The loan document, which on its face indicates a lack of

investment, is unquestionably material evidence in support of Bertelsmann’s claim.

IV. Scope of Vitiation

The Ninth Circuit has not expressly considered the scope of communications that must be

produced upon a prima facie showing of crime or fraud. The Laurins court suggested, however, that

there must be “some relationship between the communications and the illegality.” Laurins, 857 F.2d

at 540; see also Loustalet v. Refco, Inc., 154 F.R.D. 243, 245 (C.D. Cal. 1993) (“it must be shown

that there is some relationship between the particular communications sought and the illegality.”).

The fraud alleged by UMG has two components. First, Bertelsmann executives and

Bertelsmann’s outside counsel allegedly cooperated in documenting the investment in Napster in a

manner contrary to the parties’ actual understanding. Second, Bertelsmann submitted the loan

document, through its lawyers, both in the bankruptcy litigation and in the litigation before this

court. Both components—the drafting of the loan document and the submission of the document in

this court—bear a relationship to the alleged fraud. Bertelsmann is therefore ordered to produce

communications related to the creation of the loan document and to the submission of that loan

document in the bankruptcy proceedings and to this court.

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CONCLUSION

For the foregoing reasons, the court hereby GRANTS plaintiffs’ motion to compel

production of Berteslmann documents and testimony previously withheld as privileged. 

IT IS SO ORDERED.

Dated: April 20, 2006 

MARILYN HALL PATEL

District Judge

United States District Court

Northern District of California

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