NEW YORK (CNNfn) - A federal judge on Wednesday ordered MP3.com Inc. to pay as much as $250 million in damages to Universal Music Group for copyright infringement.
Saying that the online music outfit willfully violated Universal's copyrights when it made Universal titles available electronically to users over the Internet, U.S. District Judge Jed S. Rakoff in New York ordered MP3.com to pay Universal $25,000 for each Universal CD it had copied to its database.
Under the law, Rakoff could have imposed damages of as much as $150,000 per CD. An MP3.com attorney on Tuesday said that a penalty amounting to any more than $500 per CD would amount to a virtual "death sentence" for the company.
Shares of MP3.com (MPPP: Research, Estimates) were down 69 cents at $7.88 when trading was halted on Nasdaq Wednesday afternoon following the ruling. When trading resumed after-hours, shares fell another $2.50, or 31.75 percent, to a 12-month low of $5.38. The stock is down more than 90 percent from a 12-month high of $64.62.
Universal, the world's largest record company, had asked for a $450 million award, or $45,000 for each of the 10,000 Universal CDs it says are in MP3.com's database. MP3.com says the number of Universal CDs for which it may be liable is 4,700 and it plans to challenge Universal's claim on many of those albums on technical grounds. Another phase of the trial in November will determine the number of CDs involved and the total damages.
MP3, which is short for MPEG Audio Layer 3, is an audio compression technology used to convert music on CDs into a format that can be played using computer software. The technology has made it feasible to transfer quality audio over the Internet very quickly.
In April, Rakoff ruled that MP3.com broke copyright law by creating a database of over 80,000 albums for its My.MP3.com service. When combined with MP3.com's software, the service enables users, via the Internet, to listen to music that that they have already purchased.
Rakoff said Wednesday that it was necessary to send a message to the Internet community to deter copyright infringement in the future, saying that some Internet companies "may have a misconception that, because their technology is somewhat novel, they are somehow immune from the ordinary applications of laws ..."
Executives at MP3.com in San Diego have vowed to appeal Wednesday's ruling, claiming its users should have a right to listen to the music they have purchased, even if it's on the Internet.
"While we respect the court, we disagree with the court's decision and we look forward to taking our case to the Court of Appeals," said Michael Robinson, MP3.com's chairman and chief executive
MP3.com's battle with Universal, which is a unit of Seagram Co. (VO: Research, Estimates), was the latest in an ongoing fight with the recording industry. Universal claimed that the company did not seek permission from the artists and their record labels to offer the My.MP3.com service, thereby violating copyright law.
So far, the company has settled copyright suits with four companies: BMG, which is the music unit of Bertelsmann AG; EMI Group PLC; Warner Music Group; and Sony Music Entertainment. Warner Music, like CNNfn.com, is a unit of Time Warner (TWX: Research, Estimates). Under the terms of the settlements, each of those record companies have allowed their music to be used in MP3.com's database.
The settlement amounts were not publicly disclosed, but industry sources have said that MP3.com agreed to pay the four labels roughly $20 million each. The company recorded a $150 million charge against its second-quarter earnings to cover its legal costs, including the settlement deals.
Ruling more damaging than expected
Wednesday's ruling was the second victory for the record industry as it fights to take back control of its distribution system.
The Recording Industry Association of America in December sued Napster, which provides an MP3 music sharing system, for copyright infringement. Earlier this summer, a federal judge in San Francisco said that Napster's product allowed for "wholesale infringing" of the record industry's copyrights and ordered it to shut down.
Napster was granted a stay of that order pending the outcome of a trial, which is set to begin later this year.
Curt Karnow, an attorney who specializes in Internet and copyright law, told CNNfn.com Wednesday that the latest ruling casts a pall over the future of any companies that are hoping to cash in on the rising popularity of the MP3 music format. [218K WAV or 218K AIFF]
"We have two judges on different coasts coming down fairly emphatically against it," Karnow said.
Other industry observers said Rakoff's ruling was especially severe and puts the embattled company in a much tougher spot than it had been.
"The ruling was much harsher than I anticipated, as it puts the company literally on the brink," said Nitsan Hargil, an analyst at Kaufman Brothers in New York.
"If we assume the higher sum of money here, it would put MP3.com out of business. It's very unlikely that they would receive financing to pay these damages," Hargil added.
Leonard Rubin, a Chicago attorney who specializes in copyright, trademark and entertainment law, said the decision was not a surprise given the judge's previous rulings.
"But I would not have expected the severity of the award. It's very heavy," he said. "The judge is really trying to say, 'Listen all you MP3 types out there on the Internet, you better make your hay because the sun is setting. The courts are not going to tolerate this kind of wholesale copying of protected works."
-- from staff and wire reports.