NEW YORK (CNNfn) - A federal judge ruled Friday in favor of a recording industry group that claimed MP3.com was providing access to copyrighted material, a ruling that could strike a serious blow to the upstart online-music company.|
Judge Jed Rakoff, of the U.S. District Court for the Southern District of New York, issued an order Friday morning holding MP3.com (MPPP: Research, Estimates) "liable for copyright infringement."
In January, the Recording Industry Association of America (RIAA), a music industry trade group representing the five largest music conglomerates, filed the suit, which sought to shut down the company's Web site My.MP3.com. A member of RIAA, Warner Bros., is owned by Time Warner, the parent company of CNNfn.com.
"We are pleased with the court's decision today," Hilary Rosen, president and CEO of RIAA, said in a brief statement.
MP3.com said it will likely appeal the decision.
A written form of the judge's opinion was not immediately available, but the company said it expects to receive a more detailed explanation of the decision during the next two weeks.
Site remains active
In the meantime, the site remains up and MP3.com's chief executive, Michael Robertson, said the service would remain active even if they were prohibited from playing the music of major labels. Enthusiasts would still be able to hear the music of several thousand musicians, mostly unsigned and unknown, but not the music of the major labels, which feature the artists who top the charts.
Shares of MP3.com, which had scratched up thin gains before the ruling was made public, plummeted more than 40 percent this afternoon and closed at 7, after touching an all-time low of 6-1/2.
The RIAA filed the suit after San Diego-based MP3.com in January launched My.MP3.com, and its Instant Listening and Beam-it services, which allows MP3.com visitors to listen on a computer anywhere to a CD they already purchased and had at home.
In order to support the service, MP3.com stockpiled more than 80,000 music disks, and stored them digitally for playback to its customers. RIAA charged that MP3.com did not receive permission from the artists and their record labels in order to offer such a service, thereby violating copyright law.
Market experts said the potential damages theoretically range from inconsequential to fatal, with the final decision based in part on whether or not the court finds that My.Mp3.com was established to willfully defraud the copyright holders.
Numerous individual artists and music industry concerns, including MPL Communications Inc., the publishing company owned by former Beatle Paul McCartney, have also filed similar suits against MP3.com, in the months since RIAA's action.
In February, MP3.com fired back, filing a suit charging the RIAA with defamation, trade libel, intentional interference in prospective economic advantage and unfair business practices.
But in a conference call with the media, MP3.com's Robertson said the company dropped the suit about six weeks ago. When asked why the suit was dropped, MP3.com's president Robin Richards joked, "because we are nice guys."
Damages could go to $1 billion
My.MP3.com is a free service and generates no revenue for the company, which last week posted a smaller-than-expected first-quarter loss of $8.4 million, or 13 cents a share, on sales of $17.5 million.
Credit Suisse First Boston analyst Lise Buyer said she would not change her outlook on the company's financial performance, in light of the fact that the Web site has little financial impact on the company.
"If the company were forced, as we expect, to remove the music of the major labels from the service, our current estimates would remain intact," she said.
Other experts said the decision only delays the inevitable. All the major music labels are rapidly working on plans to distribute music digitally, though they have been slowed by it attempts to ensure against piracy.
In the meantime, controversial computer programs, such as Napster and Gnutella, have made music available for free on the Web. RIAA is also suing the makers of the Napster system.
If they could get over their differences, the company and the industry could eventually work together.
"I think that the most important effect of this legal setback for (MP3.com) is that they might have to capitulate and play ball in a way that they haven't been willing to in the past," said Jupiter Communications analyst Aram Sinnreich.
Michael Harrington, a Belmont University professor and expert in copyright infringement issues, suggested that as the so-called "digital age" dawns, organizations such as the RIAA will have to let go of an old-school strategy of fighting new technology with litigation.
"The record labels do have something to fear, but they will have to change and get more diversified," he told CNNfn.com from Nashville. "And I think that if they start shutting out technologies left and right, pretty soon there are going to be too many lawsuits."
During the media call, Robertson defended the My.MP3.com service, which has about 400,000 users, saying the RIAA was hurting itself by attacking a system that by its nature would benefit the music business.
"My.MP3.Com requires the purchase of CDs in order to function, as opposed to other services like Napster," that does require such a purchase, he said. "The labels made the decision to challenge our technology that protects their intellectual property rights and grow their business."
"What they will be left with is copyright chaos," he said, noting that such an environment could "leave a vacuum that will be filled by other technologies, unfriendly to artists and record labels."
The hearings to determine damages will be scheduled in the coming weeks. Industry watchers suggested that the penalties could range from a nominal sum to more than $1 billion.
"We are going into the damages phase and we feel very confident," Robertson said.