A representative of the Recording Industry Association of America, comprised of major labels such as Vivendi Universal's Universal Music Group, Warner Music Group, EMI Group and Sony BMG, said the suit was filed on Tuesday in New York federal court.
The suit accuses XM Satellite of "massive wholesale infringement" and seeks $150,000 in damages for every song copied by XM customers using the devices, which went on sale earlier this month. XM, with more than 6.5 million subscribers, said it plays 160,000 different songs every month.
"Because XM makes available vast catalogues of music in every genre, XM subscribers will have little need ever again to buy legitimate copies of plaintiffs' sound recordings," the lawsuit says, referring to the handheld "Inno" device.
The suit says XM has touted its service's advantages over Apple Computer's iPod and cites XM's advertising literature, which says, "It's not a pod. It's the mothership."
XM said the Inno, which is manufactured by Pioneer, is a legal device that, just as the law has allowed for decades.
While the labels are asserting that the device has transformed radio broadcasts into a download service, XM said the device does not allow consumers to transfer recorded content. XM also saidlike XM's is not on demand, in contrast to the content people buy from online music stores like .
XM said it will vigorously defend this lawsuit on behalf of consumers and also called the lawsuit a bargaining tactic.
The company's shares, which rose 4 percent to close at $17.63 on the Nasdaq, were down 1.3 percent at $17.40 in after-hours trading.
The labels are currently in talks with XM and rival Sirius Satellite Radio to renegotiate digital royalty contracts for broadcasts.
XM and the labels had also been in talks about the licensing of content for the digital portable player but failed to reach an agreement, according to sources familiar with the matter. The labels had pressed for licenses similar to those required for services like iTunes, the sources said.
Sirius earlier this spring came to an agreement with music labels over the ability to save songs to its S50 portable satellite receivers, which double as MP3 players.
"XM Radio is the largest single payer of digital music broadcast royalties, and royalties paid by XM go to the music industry and benefit artists directly," the satellite radio company said.
"The music labels are trying to stifle innovation, limit consumer choice and roll back consumers' rights to record content for their personal use," XM added.
"It's a question of economic impact. Will these devices substitute for the purchase of a record? Everything is changing, and the industry is petrified," said Jay Cooper, an entertainment lawyer.