Napster infringes on record-company copyrights through the operation of its music file-trading service, the US Court of Appeals ruled yesterday.

The ruling, however, also directed that the Napster service be allowed to continue operations until the original injunction is modified to comply with the appeals court's decision.

The court upheld the findings of a lower court almost universally. It declared that Napster's service is not protected by fair use, is guilty of two kinds of copyright infringement, has failed to police its system in an attempt to stop the spread of copyrighted works, and that its service does cause substantial harm to record companies.

Encourages infringement The court wrote: "Napster, by its conduct, knowingly encourages and assists the infringement of (record company) copyrights."

The ruling was the result of a lawsuit brought by The Recording Industry Association of America (RIAA) on behalf of the five major record labels - BMG Entertainment, Warner Brothers, EMI, Sony Music Entertainment and Universal Music.

The RIAA had asked the court to find the company guilty of both contributory and vicarious copyright infringement and to shut down the service because it was causing its member companies irreparable harm. The trading of MP3 files, it said, amounted to stealing as it allowed users who had not purchased songs to download, play and store them. The RIAA charged that Napster executives knew that infringement was taking place and were contributing to it by providing the service.

Napster defence Napster allows users to search for MP3 music files on the computers of other users online and download the tracks they want directly from those users, bypassing any central servers - a technique called peer-to-peer computing. The lack of central servers in the system was at the heart of Napster's defence. Because no copyrighted material resided on company servers, which only house directories of files, not the files themselves, Napster argued that it was not liable for any infringement being committed.

It could not be held liable, the company further argued, because in trading files its users were simply exercising their right to fair use. Fair use is a consumer right that allows private, non-commercial trading of copyrighted materials among friends and family.

Napster argued that MP3-swapping was simply an extension of fair use for the Internet age and thus should be protected. The company further argued that the RIAA's own figures showed that music sales increased in 2000 and that Napster, therefore, was not causing harm, but rather was spurring sales.

July injunction Judge Marilyn Patel disagreed and issued an injunction against the company in late July, ordering that the service be shut down immediately, pending resolution of the trial. That injunction was stayed the next day, however, by the Appeals Court.

In late October, Napster signed a surprise agreement with Bertelsmann, the parent company of BMG, in which Napster pledged to create a secure, copyright-friendly subscription service in exchange for a reported investment of $50 million and Bertelsmann dropping its suit. Since then, music companies TVT Records and edel music have also signed agreements with Napster.

None of the four remaining major labels, widely seen as being integral to the success of such a service, have yet made any moves toward signing such deals. Napster's subscription service, which will also give Bertelsmann a hefty ownership stake in the company, will become available in June or July, a Bertelsmann executive said recently.