The San Francisco court ruling temporarily saves Napster from a damages bill that could total $100m (£69m).
Judge Patel ruled that a summary judgment to bring the long-running case to an end would be premature.
She decided that there was not enough evidence to justify a summary judgment. Judge Patel placed an injunction on Napster last year after ruling that the free swapping of copyrighted songs was illegal. The service has been idle since July.
The judge also criticised some of the record companies involved, saying that they could abuse their positions of power with their own planned download services.
Napster's lawyer said that because the major labels were working together to form MusicNet, they could set price controls and limit the market. This would mean that Napster would have to sign deals with them when it launched a fee-paying service.
The record companies believe that Napster is just playing for time. A lawyer acting for the record companies said, "The tactic Napster has taken is to throw everything up against the wall in order to stall a summary judgment."
Napster plans to launch a new, legal service before the end of the year, charging a $5 (£3.45) monthly subscription for access.
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