Bertelsmann had agreed to pay £20m for the song-swapping music service, which developed online software allowing people to swap copyrighted songs for free.
Bertelsmann hoped to relaunch Napster as a legal service. However, the ruling by the US court has dashed such hopes.
While Napster has gone, file swapping will live on following the rise of a number of imitators including Kazaa and Morpheus.
Bertelsmann formed a strategic alliance with the controversial Napster service in 2000, having already extended the service as much as $85m (£55m) in loans in return for a stake in the company.
However, Bertelsmann's retreat from the online market with the news this week that it was selling its BOL.com service might well have put its commitment to a deal in doubt.
Bertelsmann's plans to relaunch the service received little enthusiasm among its music industry peers, which were unwilling to strike licensing agreements with the song-swapping service.
The US record industry fought a lengthy legal case against the website, whose free swapping of copyrighted songs was deemed illegal. Record companies were seeking damages of $100,000 for each work infringed. Napster offered $1bn to settle the case, based on the potential earnings of a future subscription-based service -- an offer which was rejected by the American music industry.
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