Founder of file-sharing software maker Lime Wire transferred company's funds into a trust controlled by his family. Big music labels say the money belongs to them.
Greg SandovalFormer Staff writer
Greg Sandoval covers media and digital entertainment for CNET News. Based in New York, Sandoval is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at @sandoCNET.
Lime Wire founder Mark Gorton during the past decade made millions of dollars helping people share billions of pirated songs. Now, the big record labels claim in legal filings that Gorton has maneuvered to prevent the court from seizing his gains.
In court papers last week, the Recording Industry Association of America once again asked the court to freeze Lime Wire's and Gorton's assets. The trade group for the four largest record companies alleged in a copyright complaint filed in 2006 that Gorton had for five years placed his assets in a trust that he, his wife, and two children control in an attempt to put the money out of reach of any court.
In May, the top labels triumphed in the case when U.S. District Judge Kimba Wood granted summary judgment for the RIAA. Wood found that Gorton and LimeGroup, the parent company of Lime Wire, which makes the LimeWire software, were liable for inducing copyright infringement. Lime Wire is the largest file-sharing service and has been nearly synonymous with pirated music for many years. The RIAA noted that records show that in 2006, while music artists were paid nothing for songs acquired through Lime Wire, the P2P service generated $20 million in revenue.
Shortly after Wood granted summary judgment, the RIAA asked Wood to issue a permanent restraining order against Lime Wire and force it to cease operations. Legal analysts have said they expect Wood, who could issue a decision on the permanent injunction any day, will shut the service down. Should that happen, the next courtroom fight will be over how much Gorton, who is 43, and Lime Wire will be required to pay in damages. Experts say the sum could top $1 billion.
So, not only is the RIAA very close to knocking out one of the most popular and controversial file-sharing networks, but the victory could also serve as a cautionary tale for those who want to challenge the music or film industry in the same way. The case illustrates that big copyright owners can and will go after the assets of companies that profit from their work without compensating them. Moreover, they will go after personal assets of the officers of such companies.
In a related case, EMI, the smallest of the top four labels, has also filed a copyright complaint against MP3tunes.com and has named founder Michael Robertson as a defendant. That case is still trudging through the legal process.
In the Lime Wire suit, the RIAA's lawyers allege that Gorton first began trying to hide assets three days after the U.S. Supreme Court issued the landmark MGM v. Grokster ruling, which held that peer-to-peer sites like Grokster could be sued for inducing copyright infringement. The RIAA argues that it can prove that, despite what Gorton says now, he began transferring money to his family's trust in an effort to hide it from the music industry and the court.
Gorton transferred 87.1 percent of Lime Group's ownership interest to his family trust, the RIAA said in court filings.
In a deposition during the case, Gorton told RIAA lawyers he was "highly concerned about being sued" and that the primary reason he transferred the money was to "protect the assets in the event of a legal judgment against me personally." Two witnesses, including former Lime Wire exec Greg Bildson, testified that Gorton intended to transfer money to the trust to avoid a damages judgment.
Gorton later filed statements with the court that offered other reasons for his transferring funds. The RIAA asked the judge not to be fooled.
"Realizing the legal implications of his admission," RIAA lawyers wrote to Wood, "Gorton has since sought to obfuscate the issue by filing a declaration with self-serving, contradictory statements as to his motivations. Gorton's transparent attempt to change his testimony does nothing to undermine the substantial evidence in the record."
Lawyers working for Gorton and Lime Wire said little about Gorton's deposition statements in its opposition to the RIAA's motion to freeze his and Lime Group's assets.
Gorton's lawyers say that the freeze must be limited to Lime Wire's profits instead of an amount dictated by statutory damages. They said an asset freeze could block legitimate expenditures, such as payroll or payments to third parties.
RIAA lawyers denied that a freeze would be an undue burden but also wrote that Gorton has done irreparable harm and that the law is clear.
The RIAA wrote to Wood: "All that is required to establish irreparable harm is evidence show[ing] that a party intends to frustrate any judgment...by making it uncollectable."