Judge Orders MP3.com to Pay at Least $117 Million

A federal judge ruled Wednesday that MP3.com Inc. willfully violated music copyrights and awarded Seagram Co.’s Universal Music Group at least $117 million in damages--believed to be the largest copyright infringement penalty in history.

The unprecedented order delivered a potentially devastating blow to MP3.com, sending its shares plummeting. The court sounded a warning shot to venture capitalists who bankroll other Internet Web sites that traffic in unauthorized intellectual property.

Experts were surprised at the size of the penalty, which is likely to influence an upcoming copyright ruling next month involving the popular but controversial Internet service known as Napster.

“This should send a message that there are consequences when a business recklessly disregards the copyright law,” said Cary Sherman, senior executive vice president of the Recording Industry Assn. of America, the trade group that represents Universal and the other four major music conglomerates.

“We trust this will encourage those who want to build a business using other people’s copyrighted works to seek permission to do so in advance,” Sherman said.

Because the violation was determined to be “willful,” legal experts say the ruling could prompt an avalanche of shareholder lawsuits against MP3.com. It also could mean that MP3.com’s insurance company may not be obligated to pay damages to Universal or any future plaintiffs.

MP3.com Chairman Michael Robertson, who testified last week in the case, did not return calls. MP3.com lawyers, who previously predicted that such a ruling would kill the company, said they would appeal the judgment.

U.S. District Judge Jed S. Rakoff ordered the San Diego-based company to pay $25,000 for every Universal CD illegally posted on its My.MP3.com service. MP3.com is believed to have posted at least 4,700 Universal titles and possibly as many as 10,000, leaving the company liable for $117 million to $250 million in damages.

The judge could have ordered MP3.com to pay as much as $150,000 per CD (around $700 million) but said he chose the lower figure because Universal had not specified how it lost money due to the infringements.

MP3.com was sued in January by Seagram, Sony Corp., EMI Group, Bertelsmann and Time Warner Inc. for copyright infringement stemming from its My.MP3.com service. The service allowed users to store music from their personal CD collections and then access it via any computer connected to the Internet. The industry’s suit said MP3.com violated copyright laws by creating a database of 80,000 unauthorized albums and should be forced to pay billions of dollars in damages.

Five months ago, Rakoff ruled that MP3.com had infringed music copyrights by transmitting hundreds of thousands of songs to computer users who subscribed to its My.MP3.com service. The ruling sent MP3 scrambling to reach out-of-court settlements with the record companies, four of which accepted payments of about $2,000 per CD or about $20 million per company, according to sources.

But Universal, the world’s largest record conglomerate, refused to settle. On Aug. 28, the case went to court in New York, featuring a week of testimony from witnesses including MP3.com Chairman Robertson and Seagram Chief Executive Edgar Bronfman Jr.

The ruling was being closely monitored by companies looking for new commercial uses for the Internet, a factor that was noted last week when Universal urged a stiff penalty. Hadrian Katz, Universal’s lawyer, had urged Rakoff to award the company up to $450 million, saying MP3.com had copied between 5,000 and 10,000 of the company’s CDs.

Michael Rhodes, MP3.com’s lawyer, pleaded with the judge not to impose a penalty “in the draconian range of $400 million, an award that could never be satisfied and would end up being the largest paper award in history.”

On Wednesday, Rakoff stunned the legal community by ordering the staggering $25,000-per-CD penalty. Another phase of the trial in November will determine the number of CDs involved and the total damages.

Rakoff said the stiff penalty was necessary to deter copyright infringement 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 for the statutory damages in this case,” the judge said.

Rakoff said some Internet companies “may have a misconception that, because their technology is somewhat novel, they are somehow immune from the ordinary applications of laws of the United States, including copyright law. They need to understand that the law’s domain knows no such limits.”

MP3 shares were down 69 cents at $7.88 on Nasdaq when trading was suspended Wednesday afternoon pending the announcement. In after-hours trading, MP3 shares plunged 27% to $5.88.

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Associated Press contributed to this report.

Recent stories on music file-sharing can be found at https://www.latimes.com/musicweb