Court Finds MP3 Liable in Copyright Suit

Embattled Internet music service provider MP3.com (Nasdaq: MPPP) suffered a legal setback Friday when a U.S. federal court ruled against the company in a copyright infringement lawsuit brought by the Recording Industry Association of America (RIAA).

U.S. District Judge Jed Rakoff of the U.S. District Court for the Southern District of New York granted RIAA’s motion for a summary judgment holding MP3 liable for infringement, and will next consider such remedies as an injunction shutting down the service and monetary damages.

The RIAA has asked for damages in excess of $6 billion (US$).

Online Distribution Without Permission

The suit was filed against the San Diego, California-based MP3.com in January by the RIAA, representing such record labels as Time Warner Inc.’s music group, Sony Music Entertainment, Seagram Co.’s Universal Music Group and BMG, the music unit of Bertelsmann AG.

On the surface, MP3.com has designed technology that allows users to create digital copies of CDs they have purchased and then store the copies in the My.MP3.com database. The idea is that the MP3.com software allows the music to be compressed into small digital files and the My.MP3.com storage system provides legitimate music owners with a convenient way to listen to and manage their music collections.

However, at the heart of the controversy is the well-known fact that all registered users can access and download any of the selections in the entire My.MP3.com database of stored music.

The database consists of 45,000 CDs, many of which the RIAA says are copyrighted works. “Innovation based on blatant misappropriation is hardly innovation,” RIAA CEO Hilary Rosen wrote MP3.com founder and CEO Michael Robertson in an open letter in January.

Traditional Copyright Law Upheld

The court will issue a formal opinion in two weeks, at which time a schedule will be drawn up for completion of the case.

While it is not immediately clear how the ruling will affect MP3.com’s business practices, the court seems to have made it clear that copyright laws established for traditional business apply to Internet commerce.

In an effort to ensure its survival, MP3.com filed a counterclaim against the RIAA in February, alleging unfair business practices, intentional interference in prospective economic advantage, defamation and trade libel.

More Music Piracy Cases Afloat

While Friday’s judgment may set a precedent for future copyright issues on the Internet, it is by no means the end of the conflict.

MP3.com is the subject of multiple lawsuits, including several filed by high profile entertainers who fear their work is being pirated and resold without their permission.

Last month, former Beatle Paul McCartney’s publishing company, MPL Communications Inc., also filed a copyright infringement suit against MP3.com.

Bloodied But Not Bowed

Predictably, MP3.com’s stock took a heavy hit Friday, closing down 4 5/8 at $7 per share. With analysts calculating the company’s cash reserves at about $6 per share, the value of the stock is hovering at $1 per share.

Once damages due to the court ruling are assessed, MP3.com could be looking at payments of $100 to $100,000 per infringement, Street Advisor.com Financial Analyst Scott Greenberg said. The RIAA sued for $150,000 in damages for each “willful infringement” of its members’ copyrighted works, which could add up to as much as $67.5 billion.

Usually, such numbers indicate it is time for a company like MP3.com — which has not yet taken in any revenues from sales of its downloads — to consider declaring bankruptcy and starting over, Greenberg said, but the inherent promise of the new digital download business gives MP3.com reason to keep fighting.

Noting his firm’s recommendation that those who have MP3.com stock should hold onto it, Greenberg said, “Do not panic while the RIAA cloud lingers. The road of pioneers is overflowing with pitfalls, and we believe MP3.com has stumbled into one but will pull out itself and be a survivor.”

Indeed, Greenberg and other analysts said Friday that MP3.com executives have indicated no willingness to fold because of the ruling, but will appeal instead.

“This is not a victory for the record labels — its a loss,” MP3.com’s Robertson said in response to the decision. “New technologies for delivering music are here to stay, and the technology trend is moving in only one direction: forward.”

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