239 F.3d 1004 (9th Cir. 2001)

Facts
The defendant, Napster, was a company started in 1999 by Shawn Fanning, then an 18-year old freshman computer-science student at Boston's Northeastern University. It provided a platform for users to upload and download music files in a compressed digital format. The plaintiffs were major record companies who saw the potential for this technology to impact their sales, and quickly filed suit against Napster as a "contributory and vicarious copyright infringer." The United States District Court found that Napster had contributed to the infringement of copyrights owned by the plaintiffs, and issued an injunction, from which Napster appealed.

In order for Napster to be liable for contributory infringement, the users of the service had to be infringing directly. Napster asserted that this was not the case, but that a substantial number of its users were in fact engaged in three kinds of fair use:
1.sampling, where users make temporary copies of a work before purchasing;
2.space-shifting, where users access a sound recording through the Napster system that they already own in audio CD format; and
3.permissive distribution of recordings by both new and established artists

Issue
The issue presented to the Ninth Circuit was whether the asserted uses were in fact "fair use." The court was also confronted with the question of a solution for the alleged infringement, to which Napster had proposed a compulsory license.

Result
The Ninth Circuit found that "Napster users infringe at least two of the copyright holders' exclusive rights: the rights of reproduction, § 106(1); and distribution, § 106(3)." With respect to the fair use arguments, the court sharply distinguished the facts presented from "the Betamax case", Sony Corp. of America v. Universal City Studios, Inc. 464 U.S. 417 (1984), where the manufacturers of VCRs had no control over how people used them after they were purchased. By contrast, the court found that the owners of Napster could control the infringing behavior of users, and therefore had a duty to do so. Sampling was deemed to not be a fair use, because the "samples" were in fact permanent and complete copies of the desired media. Furthermore, the space-shifting argument did not avail the defendant, because the shift to a digital format was not a personal storage use, but was accompanied by sharing the file with the rest of the world.

The court also rejected Napster’s proposed compulsory royalty, calling that an "easy out" for Napster, and contending that the imposition of such a device would destroy the plaintiffs' ability to control their intellectual property.

Chilling effect
This "Napster Ruling" has henceforth frequently been cited as legal precedent imposing threat of liability (chilling effect) against website authors for merely hyperlinking to copyrighted content. As the Copyright Act of 1976 automatically copyrights all works "set in a tangible medium" (e.g. an HTML file), any online work not specifically licensed otherwise (e.g. Creative Commons, GFDL) becomes copyrighted by its author(s). Thus, the very nature of the World Wide Web and the Internet protocol suite necessitate contributory copyright infringement. Whether linking to any particular copyrighted work constitutes contributory infringement or fair use continues to be judged in court on a case-by-case basis.