(FORTUNE Magazine) – Alas, there is no morning-after pill for impulsive acts committed in a state of dot-com-bubbleheadedness.

Media giant Bertelsmann is the latest to learn this cruel lesson. Only now is it awakening to the full repercussions of its intoxicated dalliance back in late 2000 with the alluring but ill-reputed music file-sharing service Napster. Though Bertelsmann's staid board has long since tried to wash its hands of the whole embarrassing affair--and of the would-be visionary CEO, Thomas Middelhoff, who succumbed to Napster's pirated siren song--Napster is not yet done with Bertelsmann.

This past February, when the first in a string of Napster-related copyright-infringement lawsuits was filed against Bertelsmann, many people were puzzled. With Napster dead, why were record labels and music publishers still suing over it instead of coping with Napster's file-sharing descendants, which seem here to stay? The answer is brutally rational: Would you rather leave $17 billion on the table or try to collect it? That's the sum that a class of songwriters and music publishers claim Bertelsmann owes for allegedly having kept Napster's file sharing going eight months longer than it otherwise would have. The record labels Universal Music Group and EMI filed their own suits against Bertelsmann in May and June, and still more claimants seem likely.

In fact, skeptics had been predicting the suits ever since Halloween 2000, when Bertelsmann kicked off its "strategic partnership" with Napster at a press conference at the Essex House hotel on Manhattan's Central Park South. While magazines devoted cover stories to Middelhoff and digerati hailed him as the only record executive who "got it," more fuddy-duddy types scratched their heads and wondered how Bertelsmann hoped to avoid major legal headaches.

Though the details of the two companies' alliance were not then fully understood--to some extent still aren't--Bertelsmann said it planned to convert Napster over time into an industry-supported pay service. To that end, it was giving Napster a big loan ($50 million, gradually upped to close to $90 million, we now know), which, under certain circumstances, could be converted into a majority equity stake in Napster.

That was shocking news, since Bertelsmann's wholly owned music subsidiary, BMG, and the four other major record labels were then suing Napster in federal court in San Francisco for copyright infringement. Just three months earlier, in fact, their lawyer had called Napster the "most egregious case of massive copyright infringement that has ever existed"--an assessment U.S. District Judge Marilyn Patel seemed to share when, later that same day, she ordered the service shut down pending trial.

Thanks to a stay from the appeals court, Napster was still up and running in October when Bertelsmann seemingly came to its financial rescue. As a zero-revenue operation of questionable legality, Napster had always found fundraising a challenge, and Judge Patel's forceful thumbs-down had only exacerbated matters. But after Bertelsmann's cash infusions Napster kept the file sharing going till July 2, 2001. Napster then finally pulled its own plug, seeing no other way to comply with a new order Patel had issued after the appeals court largely upheld her original decision. In June 2002, Napster filed for bankruptcy protection, and a month later the Bertelsmann board ousted Middelhoff.

At its peak, in March 2001, Napster's servers were enabling users to copy more than 165 million music files per day. At least 87% of those files were copyrighted and therefore not theirs to copy, Judge Patel had found. So from the moment Middelhoff literally embraced Napster founder Shawn Fanning at the Essex House, modeled a black Napster T-shirt, and laid claim to the "coolest Internet brand of all times," as one internal Bertelsmann document put it, an obvious question hovered in the air: If Napster was facilitating copyright infringement, what was the legal status of its financial savior and "strategic partner"?

So at one level the songwriters' $17 billion suit should have surprised no one. The same cannot be said, however, for Bertelsmann's response. When a postal worker brought the envelope containing the suit into Bertelsmann's central mailroom in Gutersloh, Germany, company officials--who already knew about the suit from press accounts of the New York court filings--refused to sign for it. Refused to touch it. The postal worker laid it down in the mailroom and left.

Though the songwriters had followed the customary procedures for beginning international litigation, Bertelsmann argued to the Regional High Court of Dusseldorf 12 days later that the damages being sought by the songwriters were so "astronomical" that their suit offended the German constitution's principle of "proportionality." (The damages are identical in kind to those BMG sought from Napster from 1999 to 2002.) To force Bertelsmann to defend such a suit in a U.S. court would, therefore, threaten German "sovereignty," the company maintained. Its papers go on to outline the injustices of American class actions, jury trials, and pretrial procedures, and culminate in a warning that, "as a German defendant" in "the current political climate," Bertelsmann would face disadvantage before an American jury.

This, from a company that derives 27.5% of its revenues from its U.S. businesses, which include Random House publishing (Doubleday, Ballantine, Alfred A. Knopf, and Pantheon); the BMG recording labels and music publishers (RCA, Arista, Jive/Zomba); such Gruner & Jahr magazines as Inc., Fast Company, FamilyCircle, Parents, and YM; and the television production company for American Idol. This, from a company whose CEO reportedly liked to call himself an "American with a German passport," changed the company's official language to English, and was spending close to two weeks of every month at the company's Times Square headquarters at the time of the Napster deal. Fittingly, even Bertelsmann's German pleadings indicting the U.S. legal system were filed by a branch of its New York litigation firm, Weil Gotshal & Manges.

Though the Dusseldorf court rebuffed Bertelsmann's plea, Germany's highest court has now agreed to hear the case. Clearly, Bertelsmann is battening down its assets.

Meanwhile, stateside, Bertelsmann is marshaling defenses that even those flaky U.S. courts might consider weighty, and it has engaged a top-notch New York litigator to present them. (Bertelsmann has agreed to defend itself in the New York suit, notwithstanding its constitutional challenge in Germany. Neither side will predict what impact a Bertelsmann victory in Germany would have on the U.S. case, but it would presumably hamper collection of a judgment against the company's non-U.S. assets.)

"There are some very, very skewed factual and legal premises underlying the case," says R. Bruce Rich, Bertelsmann's lead litigator in New York. "The largest is that Bertelsmann was somehow motivated by some illicit purpose here. The purpose and intent of exploring with Napster what became a series of loan transactions was to prompt Napster to move to a fully licensed pay service. Bertelsmann had a vision that has come to be true: that peer-to-peer file sharing is a phenomenon that was here to stay. The best thing that could happen was to find an approach to licensing that would, over time, get royalty money flowing from Napster to the record labels."

Rich also maintains that in attempting to hold Bertelsmann liable, the plaintiffs are asking the courts to recognize a totally novel legal theory. He's making a crucial, if slightly technical, point. In the Napster context, the actual infringers were the individual music fans who used the service to copy each other's music files. (As a peer-to-peer network, Napster merely enabled its users to copy one another's files; it did not store or copy music files on its own servers.) For that reason, the many record companies and songwriters that sued Napster all accused it of secondary infringement--that is, they claimed Napster was facilitating its users' direct infringements. Now, claims Rich, those same plaintiffs are coming at Bertelsmann alleging tertiary infringement, for allegedly facilitating Napster's facilitation of infringement!

Such a claim is, in fact, both novel and dubious. It raises policy concerns like, Won't investors balk at funding cutting-edge startups if they have to worry about getting sued on such remote theories? "This is not the sort of liability the copyright law has ever swept in," says copyright expert William Patry, who voices skepticism about the cases against Bertelsmann.

But the plaintiffs insist that Bertelsmann's partnership with Napster was much more than a "series of loan transactions," as Rich would have it. They say Bertelsmann, as Napster's sole source of funding and owner-in-waiting, controlled key decisions Napster made. Pointing to Bertelsmann documents that surfaced during Napster's bankruptcy proceedings last summer, for instance, they claim that Napster and Bertelsmann specifically agreed to keep Napster's original, presumptively illegitimate service--code-named Thunderball--in operation while they developed a fully licensed pay service. In a Sept. 19, 2000, e-mail to CEO Middelhoff, the head of a Bertelsmann task force recommended "that in order to provide traffic and technology needed to build Newco, Thunderball must stay in operation. Otherwise the customer base will be disbursed [sic]."

If Bertelsmann controlled and stood to benefit from the old, infringing version of Napster, then the legal novelty drains from the plaintiffs' suits, and Bertelsmann finds itself in a very big jam. "It really is a unique set of facts," says Bruce Keller, a copyright expert who is not involved in the case. "The specifics of what really happened make all the difference in the world."

Just how big a jam are we talking about? Well, that $17 billion figure is not drawn from thin air. Back in April 2001 the songwriters provided Napster with a list of about 113,000 of its members' copyrighted songs that were then available through the service, according to their attorney Carey Ramos. Under the copyright laws, the statutory damages for copyright infringement range up to $150,000 per work. The rest is math: 113,000 x $150,000 = $16.95 billion. And that's just for the songwriters, even before getting to the record labels' suits. (Bertelsmann had 2002 revenue of $19.2 billion and net income of $1 billion.)

Ramos and his co-counsel Ted Wells Jr.--a star trial lawyer who lists the acquittals of two Cabinet secretaries on his resume (Secretary of Agriculture Mike Espy and Secretary of Labor Raymond Donovan)--evidently like their chances. In an unusual arrangement, their big commercial law firm is discounting its fees in exchange for a shot at sharing in a fabulous payoff.

"The notion that our activities would ever be found and held to be willful infringement," says Bertelsmann attorney Rich, "is, from our standpoint, a preposterous notion. I don't think we should go into our damages theories anymore, because I'm confident we're never going to need to get there."

Confident, yet pursuing a pioneering constitutional challenge in Germany in an effort to shield the company's non-U.S. assets--just in case.

Launched in mid-1999, Napster's spare, ingenious software introduced the nongeek public to the previously unimagined wonders of peer-to-peer network computing. It also promoted copyright infringement on a scale never before conceived, many rights holders believed.

In December 1999 the Recording Industry Association of America sued Napster. Its suit was soon followed by many others, including a class action organized by the National Music Publishers' Association and led by songwriters Jerry Leiber and Mike Stoller, who wrote "Jailhouse Rock," "Hound Dog," and "Love Potion #9," among other tunes. The lawyer for the songwriters was Ramos, who now represents the same plaintiffs against Bertelsmann.

At the time the lawsuits seemed to only further publicize Napster and intensify its swashbuckling appeal. By May 2000, Napster's free desktop software had been downloaded by close to 15 million people, and the site was drawing about three million unique visitors per day. Though it brought in no revenues, Napster was gathering "eyeballs" more rapidly than any previous online community, and the received wisdom of the era was that eyeballs could inevitably be "monetized" down the road. In May the venture capital firm Hummer Winblad invested about $13 million in the service, with its partner Hank Barry becoming CEO. An intellectual-property lawyer, Barry understood the legal challenges ahead, but he believed Napster would ultimately prevail, and his optimism was shared by many cyberlaw professors.

Mocked as greedy, litigious Luddites, the record labels sought to make peace with Napster and harness it commercially. In June and July 2000, UMG, Sony Music Entertainment, and BMG together engaged Napster in talks. The negotiations, led on the labels' side by Edgar Bronfman Jr., discussed arrangements whereby the major labels might all take equity stakes in Napster, according to Joseph Menn's recent book about the file-sharing service, All the Rave. The talks fell apart, however. Then, after Judge Patel issued her shutdown order in late July 2000--finding a "strong likelihood" that the plaintiffs would win the case--Bronfman believed that the opportunity for a negotiated peace had passed, because Napster would probably owe so much in damages to so many people.

But an appeals panel stayed Judge Patel's order, so legality was still an open question. Technically, in fact, it still is. Because Napster went bankrupt, its legal status was never finally resolved. (Roxio, a software company, bought the Napster name and logo, and plans to launch a Napster 2.0 pay service by Christmas.)

In late summer 2000, Bertelsmann's Middelhoff sent Andreas Schmidt, the head of his newly created Bertelsmann eCommerce Group, to seek a deal with Napster. By early September the two sides had reached a tentative understanding. With a deal thought to be only days away, Schmidt telephoned Strauss Zelnick, BMG's CEO, who had until then been kept in the dark. Horrified, Zelnick pulled the emergency brake. Internal Bertelsmann e-mails from that period show that Zelnick outlined at least ten reasons, both business and legal, for junking the deal, including, as Schmidt then paraphrased two of them in an e-mail: "We [are] supporting an illegal act" and "we would ... partner with [an] incriminated company." (Zelnick, who has a law degree from Harvard, is the son of the co-founder of a New York copyright law boutique.)

For days Middelhoff and other Bertelsmann executives debated Zelnick's objections, according to five participants. But Middelhoff was not averse to bold risks. His big career break had been persuading a reluctant Bertelsmann board in 1995 to invest $50 million in AOL stock and to take a 50% stake in AOL Europe--gambles that returned more than $7 billion when Bertelsmann sold at the top of the market.

During one discussion, participants recall Middelhoff's commenting that he'd known the AOL investment was going to be very big, and that he now had that same feeling about Napster. (Through a spokesperson, Middelhoff says he does not recall the conversation but "frequently predicted that Napster-style online services would have the same powerful impact on the popularity of peer-to-peer file sharing as AOL did to promote Internet use.") Allusions to AOL also appear in Bertelsmann documents from that period. One document speaks of developing the "Napster community into [a] next-generation AOL" and estimates its "potential IPO value after legal settlement" at $20 billion.

The documents leave no doubt that Bertelsmann's ultimate goal was a squeaky-clean pay service. Its loan to Napster was convertible to equity only upon the industry's "acceptance" of Napster--which was defined as the point at which at least one other major label, a major music publisher, and a large independent label all agreed to license Napster their catalogs. Numerous documents reflect that legitimizing Napster was job No. 1: "Support move of Napster to legal environment"; "Loan is intended to turn Napster legal"; "Legalize file sharing model for business use."

Yet in a Sept. 19 e-mail to Middelhoff, Schmidt writes that a task force of BMG and BeCG executives agrees that the old Napster should be kept in operation during the six to 12 months that would be needed to develop the new one. If Bertelsmann's ultimate goal was to "legalize" Napster, there is an obvious and nasty implication--what lawyers call a "negative pregnant"--about the status of the ongoing service.

"I didn't think it was right," says one participant of the prospect of keeping the original service running. "But they had to. Otherwise they'd lose the user base.... It was very difficult to shut down and make a one-year hiatus."

Bertelsmann's Rich declines to discuss Schmidt's Sept. 19 e-mail but maintains that it's irrelevant. "The fact that there probably were any number of brainstorming sessions internally over time doesn't matter," he says. "What matters is what the transaction looked like. What it called for was the extension of loans to be expended by Napster toward the development of a fully licensed pay service." The loan agreement states that the proceeds are to be used "solely to fund the development of a new model for [Napster's] service ... and overhead costs associated with such development."

"As to the expectation of whether Napster would continue to run or not run," Rich continues, "bear in mind that a conscious decision was made, as a business and legal matter, not to exercise day-to-day control over Napster. Bertelsmann could not have told Napster to shut down if it wanted to."

The potential soft spot in Rich's argument lies in the reality of Napster's predicament. At the time of the Bertelsmann loan, Napster's cash was "down to in between $1 and $2 million," and the company could have lasted "a month or two" at most, according to the later testimony of Napster's CFO. After the deal, CEO Barry continued looking for other sources of money, she testified, but with no success. To lend money to Napster at that stage, the CFO testified, one bank wanted a certificate of deposit amounting to 102% of the loan proceeds as security!

Didn't Bertelsmann know that its $50 million loan--plus an additional $10 million delivered in January 2001--would also be used to keep the old Napster running, as Napster's CFO has since acknowledged that they were? "We will dispute that," says Rich. "Bertelsmann did not control what other sources of funding Napster had access to at the time or might pursue. And it knew what its funds were earmarked for, and attempted with great difficulty, over a period of months, to obtain financial records demonstrating that the money was being used as it was intended to be."

There are many other Bertelsmann documents that could pose problems for the company if they get before a jury, but Rich thinks they never will. Because the cases against Bertelsmann are founded on the outre theory of "tertiary" copyright infringement, he maintains, they must be dismissed without further inquiry. In late July he asked U.S. District Judge Thomas Griesa of Manhattan to do just that. If Griesa sides with Rich, then Bertelsmann may have found its morning-after pill after all.

If, on the other hand, Griesa thinks Bertelsmann got chummier with its erstwhile patron than it now chooses to recall, Bertelsmann may be left grasping at every legal straw within reach--like the notion, say, that American copyright law violates the German constitution.

As long as Bertelsmann's comfortable running that last argument up the flagpole, we would humbly recommend a backup defense as well. While not yet recognized by either the U.S. or German courts, it seems to fit the facts quite snugly: Plead temporary cultural insanity.