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and management takeover came just in time. The stock market, tumbling since March, appeared headed for a long vacation from its nosebleed highs, hurting IPO prospects and slowly endangering all the less fortunate companies without deep pockets.

Getting a seasoned lawyer as interim chief executive also struck many as an excellent idea: Napster had just lost the first battle in the record industry’s lawsuit. The company had argued strenuously that it was protected under the Digital Millennium Copyright Act and that the suit should therefore be thrown out before a trial in a summary judgment. The movie, recording, and publishing industries had lobbied intensely for the DMCA, afraid that they couldn’t keep pace with hackers who broke through whatever encryption schemes the industries put in place. Congress obliged and passed the law in 1998, making it a criminal offense to help others get around encryption. In a limited concession to free-speech advocates, librarians, and others, the DMCA created “safe harbors” for some types of companies. Napster argued that it qualified for at least one, and possibly two, of those exemptions. The first was for passive “service providers” that serve as conduits for others who transmit information. The second exemption covered services that merely index or otherwise point the way to a variety of information.

The Napster case was the first to test the meaning of those exemptions. Putting off a final decision on the second safe harbor, U.S. district judge Marilyn Hall Patel spent most of her time trying to sort out the poorly worded breadth of the first harbor, which limits copyright liability for service providers “transmitting, routing or providing connections for material through a system or network controlled or operated by or for the service provider.” After much hair-splitting, Patel ruled on May 5 that Napster wasn’t covered because it wasn’t doing the transmitting: It was pointing users to one another, who then transmitted MP3s. It was a close call. But even if Napster had overcome that hurdle, it would have stumbled on another of the requirements for all the safe-harbor exemptions: that the companies have “reasonably implemented” a policy to terminate repeat copyright infringers.

Technology VP Eddie Kessler claimed that Napster had adopted such a policy in October 1999, but the company hadn’t bothered to tell its users about it until the following February, two months after it was sued.

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