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MP3.com Faces Heavy Damages for `Willful' Violations
New York, Sept. 6 (Bloomberg) -- MP3.com willfully violated copyrights on CDs sold by Universal Music Group, a federal judge ruled today in a decision that may be financially devastating to the online music distributor.
U.S. District Judge Jed Rakoff said MP3.com must pay $25,000 in damages to Universal, the world's No. 1 record label, for each CD the Internet firm infringed. Universal says MP3.com violated copyrights on as many as 10,000 compact discs, a figure which MP3.com disputes. Rakoff said he would decide that issue in November.
Whatever figure the judge settles on, his ruling that the infringement was ``willful'' is still a clear victory for Universal, a unit of Montreal-based Seagram Co. Ltd. Universal had asked Rakoff to order the online music company to pay $45,000 for each infringement -- or as much as $450 million.
``If defendant is right that there are no more than 4,700 CDs for which plaintiffs (Universal) qualify for statutory damages, the total award will be approximately $118 million,'' Rakoff said in his decision this afternoon. ``But, of course, it could be considerably more, or less, depending on the number of qualifying CDs.''
Rakoff's ruling is the third in six weeks to uphold the intellectual property rights of record labels and film studios fearful that their products would be disseminated for free on the Internet.
In July, a federal judge ordered Napster Inc., a music- sharing Web site, to stop helping computer users duplicate copyrighted music over the Internet -- a ruling now stayed pending appeal. Last month, a U.S. judge in New York barred a Web site from posting a computer code that would help online film pirates distribute bootleg movies.
In his ruling today, Rakoff said he sought to deter other potential copyright offenders on the Internet.
``The potential for huge profits in the rapidly expanding world of the Internet is the lure that tempted an otherwise generally responsible company like MP3.com to break the law and that will also tempt others to do so if too low a level is set,'' he ruled.
Appeal Promised
Following the ruling, MP3.com Chief Executive Michael Robertson said it was too soon to speculate on the impact of the ruling. He promised an appeal.
``We built technology to let consumers listen to the music that they purchased,'' Robertson said. ``The music industry needs to reconcile itself with whether it will embrace this technology or continue to fight it in court.''
Rakoff's ruling follows a trial last week in which he heard evidence that focused on the question of whether San Diego-based MP3.com's infringement was willful. In April, Rakoff concluded that MP3.com had infringed copyrights owned by Universal and four other major labels. The others have settled their claims, reportedly for $20 million each.
Trading in shares of MP3.com was halted this afternoon at 7.88, just before the 2 p.m. hearing where Rakoff's decision was announced.
Threat of Bankruptcy
During closing arguments Tuesday, MP3.com said its infringement of Universal's CDs was not willful, that it should be liable for no more than $750 for each CD, and that the company may be forced to declare bankruptcy if Rakoff orders substantially greater damages.
MP3.com has taken a $150 million charge to cover costs arising from this and other pending copyright actions against it.
An MP3.com lawyer told Rakoff yesterday that a judgment greater than $750 per CD could bankrupt the company because plaintiffs in other actions, including several independent record labels, will seek comparable damages.
``If you do anything here other than the statutory minimum, it's over, it's over,'' lawyer Michael Rhodes told Rakoff during a court hearing. He said a judgment approaching $400 million ``is an award that can never possibly be satisfied.''
A. Sasha Zorovic, an analyst with Robertson Stephens in San Francisco, said the ruling was potentially devastating. ``It looks grim,'' he said. The ruling ``could put it out of business, but honestly it's too early to count on it. We need to know more -- the exact number of CDs.''
The law permitted Rakoff to impose a penalty of up to $150,000 per willful infringement.
Through a service known as My.MP3.com, the online music company provided digital access to about 80,000 compact discs for subscribers who wanted to listen to music from their personal collections when they were away from home.
Users could play any CD in the company's database -- but only after verifying that they owned a copy of the disc, which they did by putting the CD into a computer for scanning by MP3.com. The company discontinued part of its service after Rakoff's ruling in April.
Willfully Infringed
In his decision, Rakoff found ``there is virtually no escape from a finding that defendant willfully infringed plaintiff's copyrights.''
Rakoff found that the size and scope of MP3.com's copyright infringement was ``very large and the potential for harm was similarly large.''
He cautioned that other Internet firms with ``somewhat novel'' technology may believe they are immune from copyright law. ``They need to understand that the law's domain knows no such limits,'' the judge said.
Sep/06/2000 16:20 ET |
