Bertelsmann Settles One Part Of Napster Suit; Sets Bad Precedent

from the not-good-for-VCs dept

While the fact that Bertelsmann has agreed to pay out $50,000 to a small record label to settle charges that it contributed to copyright infringement by funding the original Napster may not seem like a big deal, investors everywhere should take note. This is just a small part of a series of lawsuits from record labels, including Universal and EMI. However, the problem is that it's blaming the investors for the "crimes" of the company. The argument is that Napster could never have done what it did if it didn't have that investment money from Bertelsmann. While the settlement doesn't involve anyone recognizing any guilt on any side, it does set a bad precedent. Any time a company is caught doing something illegal, what's to stop those impacted from suing the investors instead of the company itself? Imagine the citizens of California, who were defrauded by Enron creating a class action suit, not against Enron and its executives, but all investors in Enron (in which case, you'd have to imagine that some people would be on both sides of the lawsuit). This should be especially worrisome for bigger investors, such as venture capitalists. If any company they fund does something illegal, even if they have no control over day-to-day operations, should the investors get sued? It opens up a very dangerous slippery slope that could scare off many investors -- especially in early stage or emerging markets where the legal issues may not be initially clear.