SAN FRANCISCO -- A self-described "old hippie" and music producer has filed suit against Bertelsmann BMG's e-commerce unit, alleging it is helping to finance Napster Inc.'s online music-sharing service.

Matthew Katz, owner of record label San Francisco Sound, said Tuesday he is nearly out of business because of Napster's service, which allows millions to download and swap copyrighted music over the Internet.

"My business is practically out of business," he said. "I'm hoping this will bring attention that musicians are not getting what they should get."

Bertelsmann and Napster announced an accord in October that would allow Napster and Germany-based Bertelsmann to develop a secure membership-based music distribution system that will guarantee payments to artists on Bertelsmann's label.

Bertelsmann and other record companies are suing Napster, alleging the Internet site contributes to copyright infringement by allowing users to access copyrighted works for free online. The record giant said it would drop its suit once a payment system is put in place. Other record labels have not taken Bertelsmann's position.

The 9th U.S. Court of Appeals in San Francisco is weighing whether Napster can continue operating while the labels' suit goes forward in a San Francisco federal court.

Katz said the Bertelsmann-Napster accord includes a $50 million payment to Napster, and gives Bertelsmann a 40 percent stake in the Silicon Valley company. Those payments, Katz said in a suit filed in U.S. District Court in San Francisco, are propping up Napster so it can continue its service while the suit is pending.

Bertelsmann spokeswoman Melinda Meals declined comment on the suit and noted that financial terms of the accord have not been disclosed.

Katz said he has a financial interest in bands such as Jefferson Airplane, Moby Grape and It's a Beautiful Day.

The case is Katz vs. Bertelsmann, C004395BZ.<

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