Heavy metal band Metallica discovered that a demo of their song ‘I Disappear’ had been circulating across the network, even before it was released. This eventually led to the song being played on several radio stations across America and brought to Metallica’s attention that their entire back catalogue of studio material was also available. The band responded in 2000 by filing a lawsuit against Napster. A month later, rapper and producer Dr. Dre, who shared a litigator and legal firm with Metallica, filed a similar lawsuit after Napster wouldn't remove his works from their service, even after he issued a written request. Separately, both Metallica and Dr. Dre later delivered thousands of usernames to Napster who they believed were pirating their songs. One year later, Napster settled both suits, but this came after being shut down by the Ninth Circuit Court in a separate lawsuit from several major record labels (see below).

Also in 2000, Madonna, who had previously met with Napster executives to discuss a possible partnership, per Napster's then-CEO and then-head of marketing, and who was rumored to own a percentage of the company,[according to whom?] became "irate" when her single "Music" leaked out on to the web and Napster prior to its commercial release, causing widespread media coverage.[6] Verified Napster use peaked with 26.4 million users worldwide in February 2001.[7]

In 2000, A&M Records and several other recording companies, via the RIAA, sued Napster (A&M Records, Inc. v. Napster, Inc.) for contributory and vicarious copyright infringement under the US Digital Millennium Copyright Act (DMCA).[8] The music industry made the following claims against Napster:

1. That its users were directly infringing the plaintiffs' copyrights.
2. That Napster was liable for contributory infringement of the plaintiffs' copyrights.
3. That Napster was liable for vicarious infringement of the plaintiffs' copyrights.

Napster lost the case in the District Court and appealed to the U.S. Court of Appeals for the Ninth Circuit. Although the Ninth Circuit found that Napster was capable of commercially significant non-infringing uses, it affirmed the District Court's decision. On remand, the District Court ordered Napster to monitor the activities of its network and to block access to infringing material when notified of that material's location. Napster was unable to do this, and so shut down its service in July 2001. Napster finally declared itself bankrupt in 2002 and sold its assets. It had already been offline since the previous year owing to the effect of the court rulings.[9]