Ruling against could cost $118 million

A federal judge finds that willfully infringed the copyrights of Seagram's Universal Music Group, opening the Net music company to enormous potential damages.

NEW YORK--A federal judge today found that willfully infringed the copyrights of Seagram's Universal Music Group, opening the company to enormous potential damages in one of the first trials to address the legal boundaries of Internet music distribution.

U.S. District Judge Jed Rakoff, who is presiding over the case, said the online music company must pay $25,000 per violation stemming from its "music locker" service.

"There is no escape from the finding that the defendant willfully infringed on the plaintiff's copyrights," Rakoff said. estimated during the trial that 4,700 compact discs covered by Universal's copyrights were stored on its database, possibly exposing the company to damages of $118 million. However, the actual number of CDs that were copied--and therefore the amount of damages--has not been determined.

"If the defendant is right that there are no more than 4,700 CDs for which plaintiffs qualify for statuatory damages, the total award will be approximately $118 million," Rakoff wrote in his order. "(B)ut, of course, it could be considerably more or less depending on the number of qualifying CDs determined at the final phase of the trial scheduled for November of this year."

Universal estimated that there were 10,000 violations, putting the potential damage award at $250 million.

Shares of closed down 69 cents to $7.88. In the past 52 weeks they have traded as high as $64.63 and as low as $6.50. CEO Michael Robertson said he was "disappointed" with the decision. "We'll definitely appeal," he said. "It is premature to speculate about any damages."

Rakoff used his harsh ruling also to criticize companies that facilitate the rampant downloading of copyrighted music that occurs on the Internet each day.

"Some of the evidence in this case strongly suggests that some companies operating in the area of the Internet 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," he wrote. "They need to understand that the law's domain knows no such limits."

Cary Sherman, senior vice president and general counsel of the Recording Industry Association of America (RIAA), said the ruling "should send a message that there are consequences when a business recklessly disregards the 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."'s legal team argued that the company should be held liable for just $500 per violation--well below the statutory floor of $750--because the service actually encouraged CD sales and did not harm Universal.

Today's ruling is a major win for Universal; it also could encourage other record labels that were not a party to the suit to file their own complaints, pushing the legal tab for even higher. In addition, it will hand a big stick to all of the record labels in their efforts to contain online copyright infringement--if the ruling holds.

"It looks more and more like copyrights will be enforced on the Internet, and business models which respect the rights of copyright owners will prevail over those that don't," said Bob Kohn, chairman of eMusic, a Web site that sells music downloads. "If there is a lesson here, it's this: anyone thinking about taking their business on the Internet would be wise to first seek good advice on copyright law and licensing." has pushed to try to create legal business models for selling music online and is known primarily for creating a place where unknown artists can showcase their music on the Web.

But the company stumbled into a legal quagmire when it created, a database of some 80,000 songs that could be accessed over the Internet by customers who could prove they had purchased the same music on a CD.

see news analysis:'s practices stir debate Unlike rival music locker services, such as, did not require customers to copy their own CDs but provided a ready-made database of songs. It also did not secure licensing deals with record companies before launching the service.

All five of the major labels--Universal, Sony Music Group, Bertelsmann's BMG Entertainment, Warner Music Group and EMI Recorded Music--filed suit when the service was launched, charging massive copyright violations.

The company has already settled its differences with the other four major record labels. The amount of the settlements were not disclosed, but in a recent securities filing the company said it had earmarked $150 million to cover its legal costs, including the deals.

Featured Video

Why do so many of us still buy cars with off-road abilities?

Cities are full of cars like the Subaru XV that can drive off-road but will never see any challenging terrain. What drives us to buy cars with these abilities when we don't really need them most of the time?

by Drew Stearne