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Did Lime Wire betray users?

Under legal pressure from the record labels, the company agreed to secretly update its software so that it would be able to shut down the LimeWire network.

NEW YORK--Last summer, Lime Wire began installing a secret upgrade to its software that enabled the company to shut down the peer-to-peer network whenever it wanted, music industry sources have confirmed.

Mark Gorton, founder of Lime Wire, is on the hot seat as the RIAA will now seek damages from his company as well as him personally. Screen shot by Greg Sandoval/CNET

The revelation was first reported Tuesday by PC Mag. According to the Web tech publication, reporters there were tipped off by a source on Monday night.

"LimeWire added the ability to send out messages to clients updating them with the location of their local peers via start-up scripts," PC Mag wrote, citing the anonymous source. "It will be these start-up scripts that will be disabled...largely isolating individual users."

And Lime Wire didn't give users much choice about whether to accept the upgrade, according to PC Mag. The company "added automatic updates, with a key stipulation; if an update is available and the user chooses to ignore it, the LimeWire client cannot be opened," the magazine reported.

Tiffany Guarnaccia, a Lime Wire spokeswoman, told CNET the story in PC Mag was "mostly accurate."

"We did everything in our power [to] preserve our user base," Guarnaccia said. "Unfortunately, another solution could not be reached."

Lime Wire, the maker of popular peer-to-peer software LimeWire, stands accused of copyright infringement in a lawsuit filed in 2007 by the Recording Industry Association of America, the trade group for the four largest record companies. Yesterday a federal court judge here issued a permanent injunction against Lime Wire that required the company to shut down its file-sharing network. While Lime Wire is out of the file-sharing business, Guarnaccia said the company continues to operate and is considering its options.

Asked about a rumor that the company had begun to lay off employees, Guarnaccia said this: "Layoffs--they are a hard decision to make. We're evaluating all possibilities."

The issuing of automatic updates that secretly undermined the abilities of the LimeWire software appears to have been done to improve Lime Wire's negotiating position with the music labels.

After U.S. District Judge Kimba Wood granted summary judgment for the record industry in May, Lime Wire and the labels began settlement talks, say multiple music industry sources. Lime Wire proposed creating a new legal music service called Spoon and told label execs that the secret software updates would give them enough control to ensure they could push users to the legal service.

The sources said that talks broke down when Lime Wire insisted that it be allowed to keep LimeWire software operational for a year while it moved people over to the legal offering. The labels balked and Wood granted an injunction against Lime Wire.

Whether LimeWire is shut down or not, Lime Wire founder Mark Gorton will likely walk away with millions. Records show that in 2006, the P2P service generated $20 million in revenue.

Gorton also said during a deposition for the RIAA's case that that he transferred 87.1 percent of Lime Group's ownership interest to his family trust, and that the primary reason he did that was to "protect the assets in the event of a legal judgment against me personally."

Update 9:43 a.m. PT: To include more quotes from Lime Wire.