I'm sorry but I don't have any references handy, but I'll tell you what I've read.

Firstly, they received lists of copyrighted work from the record companies, ie. names like Metallica and Madonna.

Since that didn't stop people from renaming their files to Metallika or acillateM, they also filtered out all these phonic-related or pig-latin versions of names.

As if that wasn't enough, they've now added a sonic-something filter, which doesn't care about filenames, and recognizes the music in the files and blocks them if they are copyrighted. I've only briefly read about this. Sounds very processor intensive.

Perhaps you'll find more info on the Napster homepage.
http://www.napster.com/

Martin