COURT TO MP3.COM: PAY UP!

Just when they thought they might be out of the woods after inking agreements with four of the major music congloms, MP3.com was hit with a $118 million ticket when a federal judge ruled the service willfully violated record company copyrights.

U.S. District Court Judge Jed Rakoff said in his ruling in a New York courtroom that MP3.com must pay $25,000 per violation in damages to Universal, the last remaining company involved in the RIAA's original lawsuit. MP3.com claims the damages should be on approximately 4,700 CDs. Rakoff said the decision was necessary "to send a message to the Internet community to deter copyright infringement," and that he could have awarded as much as $150k per CD, but chose a lesser amount because MP3.com acted "more responsibly" than most Net startups.

Despite severe traffic problems resulting from the Millennium Summit at the UN on Manhattan's East Side, the courtroom on Pearl St. was packed. On hand were hordes of traditional and online media types, as well as attorneys from other members of the Big Five. MP3.com chief michael robertson',390,400);">michael robertson',390,400);">Michael Robertson appeared anxious as he awaited the decision.

Those in the courtroom were not surprised by the outcome; the only question was whether the amount of Rakoff's judgment would instantly put the netco out of business.

Universal lawyer Hadrian Katz had requested severe punitive measures in the groundbreaking case, which will have far-reaching implications for the media industry. "The next infringement...may be video or it may be film or it may be books or it may be something very different," he said.

UMG had asked for as much as $450 million in damages from MP3.com for copying 5,000-10,000 of the company's CDs. The decision could cost MP3.com up to $3.6 billion if the company is forced to pay all the other entities, including publishers, whose copyrights it violated when it created an online catalog of 80,000 CDs for its My.MP3.com service, which allowed customers to hear CDs from anywhere once they proved ownership by inserting a disc into a computer.

The company had a stash of $150 million set aside for settlements with the industry. Universal was the lone plaintiff at the trial, but the decision could spur another wave of suits from music publishers.

MP3.com lawyer Michael Rhodes pleaded with the judge not to impose a penalty in the $400 million range, terming it "Draconian" and a payment that "would end up being the largest paper award in history." He added there was not a single shred of evidence that Universal lost "a penny" from MP3.com's actions and that his company immediately suspended the illegal aspects of the service and sought a settlement after a judge ruled against them. He had asked the judge not to penalize the company more than $500 each for the estimated 4,700 CDs in the Universal collection subject to the court order, claiming the company's very survival would be thrown into question with a larger judgment.

RIAA Sr. Exec. VP and General Counsel Cary Sherman stopped popping champagne corks long enough to say: "This should send a message that there are consequences when a business recklessly disregards copyright law. 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. That's the best and quickest way to create a vibrant marketplace for music on the Internet. Now please excuse me while I download that new Joe Lieberman track from Napster."

Said Robertson in MP3.com's post-verdict press release: "We believe that everyone should have the right to listen to the music they purchase, 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."

UMG declined comment, citing pending litigation over the exact number of copyright infringements.

The payout to UMG won't be the last monetary blow, either. Now that the rate has been set, expect the indie labels to line up at the $25k-per-CD trough for their pieces of the action.

Trading of MP3.com stock was halted before the decision. At that point, the Nasdaq price was $7.88 per share, down 68.8 cents.

With the stock in peril and this sizable hit—which could conceivably double, based on the number of infringements—the survival of MP3.com is now very much in question.