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SAN FRANCISCO — Napster Inc.’s free song-swapping experiment was imperiled Monday by a federal appellate court’s decision that the company must halt what millions of Internet users have come to enjoy: the unrestricted sharing of copyright recordings. 

Though Napster vowed to fight the ruling by the 9th U.S. Circuit Court of Appeals, the company’s music free-for-all may be doomed. The ruling, affecting some 50 million Napster subscribers, is a landmark in the dawning, uncertain age of digital entertainment distribution. 

“I’m bumming,” said John Nock, 35, of Morgantown, W.Va., who said the ruling could prevent him from mixing more tapes for his June wedding. “I’ve actually coordinated the whole music program off Napster. I got all the fun dance and good-time music. The love portion, I’m going to have to do it the old-fashioned way.” 

A three-judge panel of the appeals court said it was apparent that “Napster has knowledge, both actual and constructive, of direct infringement.” 

And the panel said, in generally upholding a lower court judge’s injunction that would shut down Napster, that the recording industry “would likely prevail” in its suit against the file-swapping service. 

The heavy metal group Metallica, the first band to demand its songs be removed from Napster, said the ruling reaffirmed the right of artists not to have their music exploited. 

“We are delighted that the court has upheld the rights of all artists to protect and control their creative efforts,” the band said in a statement. “Napster was wrong in taking not only Metallica’s music, but other artists who do not want to be a part of the Napster system.” 

Napster CEO Hank Barry said the company would appeal in hopes of getting a larger panel of the Ninth Circuit to review the case. He called on Napster users to lobby Congress and said the company would do everything it could to remain alive. 

Napster can stay in business until U.S. District Judge Marilyn Hall Patel retools her injunction, which the appellate court called overbroad. No hearing date has been set. 

Minutes after the panel’s decision, thousands of Napster users were trading more than 1.5 million files on just one of the company’s more than 100 servers. And even if Napster folds, there are plenty of alternatives. 

“We’ll all find a way to get around it,” said Faisal Reza, 20, a student at the Massachusetts Institute of Technology. “People who want music will always be one step ahead of people trying to stop them.” 

In the 58-page opinion, the three-judge panel told the lower court judge to focus her injunction more narrowly on the copyright material and direct the Redwood City-based company to remove links to users trading copyright songs stored as MP3 files. 

Napster has argued it is not to blame for its subscribers’ use of copyright material, citing the Sony Betamax decision of 1984, in which the U.S. Supreme Court refused to hold VCR manufacturers and videotape retailers liable for people copying movies. 

But the appeals court said no such protection extends to Napster because the company clearly knew its users were swapping copyright songs. 

“It’s time for Napster to stand down and build their business the old-fashioned way. They must get permission first,” said Hilary Rosen, president and CEO of the Recording Industry Association of America. “The court of appeals found that the injunction is not only warranted, but required. And it ruled in our favor on every legal issue presented.” 

The appeals panel said Napster may be liable when it fails to patrol its system to preclude access to potentially infringing files. The extent of that liability could be determined at a trial. 

The panel said Patel’s injunction was overbroad because it placed the entire burden on Napster of ensuring that no “copying, downloading, uploading, transmitting or distributing” of works occur. Instead, the court said, the music industry must warn Napster that copyright work is on the site before Napster “has the duty to disable access.” 

Copyright attorney Larry Iser said the order means the industry must provide a detailed accounting of what titles it wants Napster to remove from its search index, a move that is likely to doom Napster. 

Napster attorney David Boies, in an earlier filing with the appeals court, said it was technologically impossible for the Internet site to abide by such an order. 

Major record labels hope Monday’s ruling will force millions of computer users to pay for music the online music swapping service has allowed them to get for free. 

The digital music technology Napster made popular is here to stay either way. The recording industry appears stymied by the notion of funneling music to consumers via the Internet for a price while freely available computer applications allow even the computer novice to do it for free. 

The five largest record labels – Sony, Warner, BMG, EMI and Universal – sued as soon as Redwood City-based Napster took off, saying it could rob them of billions of dollars in profits. 

In May 1999, Napster founder Shawn Fanning released software that made it easy for personal computer users to locate and trade songs they had stored as computer files in the MP3 format, which crunches digital recordings down to manageable lengths without sacrificing quality. 

The concept of “peer-to-peer” song trading quickly proved too popular to contain. As Napster users grew by the millions, other file-sharing programs also popped up, such as Gnutella and Freenet. And the labels themselves are looking to use the same technology, only with paying subscribers and secure digital formats that prevent copying. 

“What this means is that peer-to-peer distribution models may not be the best way to go,” said analyst P.J. McNealy of the Gartner research firm. “The big bullseye has now been turned on Gnutella.” 

After the appellate judges began deliberating in October, Napster made agreements with former business foes like Bertelsmann AG, the parent company of the BMG music unit. The German media giant has promised much-needed capital if Napster switches to a subscription-based service that pays artists’ royalties. 

“Today’s decision is another step in the process of accommodating the legitimate rights of copyright holders and the important interests of Napster users,” Bertelsmann said in a statement. “Bertelsmann is committed to implementing a win-win strategy, one that secures and compensates the rights of artists, copyrights holders and the music industry while also enabling Napster to provide music lovers with a first-class file-sharing system.” 

The other four major labels are holding out for Napster’s demise. 

Phil Leigh, a digital music analyst at Raymond James and Associates, said while the decision will make it hard for Napster to continue operating it also could lead to legislation setting up a licensing scheme in which Web sites pay record companies a fee for the right to offer downloads of their catalogues. 

“I wouldn’t rule out the possibility of a consumer backlash that would lead Congress to get involved and set up some mandatory licensing for the Internet,” Leigh said. “What we could see here is a replication of what happened in the broadcast radio business in the 1930s. Originally what they had to do was pay egregious license fees. And eventually what resulted was statutory licenses, mandatory licenses.” 

On the Net: 

Napster: http://www.napster.com 

Recording industry: http://www.riaa.com 

EMusic: http://www.emusic.com 

MP3: http://www.mp3.com 

Ninth Circuit: http://www.ce9.uscourts.gov