If upheld, the ruling could force the AOL Time Warner division to pay millions of dollars in damages, marketing expenses, and costs related to retrieving or altering existing copies of AOL 6.0.
At issue is software copyrights owned by PlayMedia Systems. AOL subsidiary Nullsoft holds a software license from PlayMedia for use in its Winamp MP3 player, but the court found AOL may have gone too far by including the code in a different media player bundled with AOL 6.0. According to the decision, the agreement limited Nullsoft's right to use the software "within Winamp."
"PlayMedia has established probable success in proving that AOL exceeded the grant of the license," U.S. District Judge A. Howard Matz wrote in his decision Monday.
The ruling does not affect AOL 7.0, a new version of the software released two weeks ago. AOL has been gravitating its customers to AOL 7.0 and says 2.5 million people downloaded the software in the first five days of its release.
AOL says it will fight to reclaim its right to distribute the older version of its software. According to the company, it will lose some $39 million in prepared promotional materials for AOL 6.0, including discs burned with the software for public distribution. It estimates retrieving copies already distributed would cost tens of millions of dollars more.
Lastly, AOL fears it eventually may be required to provide a "tool on demand" that would remove PlayMedia software from some 10 million copies of AOL 6.0 currently in use by its members.
"This is a preliminary ruling, and we respectfully disagree with it," said Jim Whitney, a spokesman for AOL. "We are already seeking a stay and will pursue an immediate appeal."
PlayMedia, a Los Angeles-based company that designs media and security software, filed the lawsuit against AOL in April on grounds that the Internet service was infringing on PlayMedia's AMP computer software copyright. AMP decodes digital audio files compressed in MP3 format and has been used in numerous applications, including Napster, to play digital audio files on personal computers.
PlayMedia sued Nullsoft in 1999 over unauthorized use of its software in Winamp but later agreed to license the code for $7.5 million. Shortly after the settlement, AOL purchased Nullsoft for $90 million.
AOL later incorporated AMP in AOL 6.0 Media Player, arguing the use was covered by the Nullsoft license. But PlayMedia filed suit, seeking $47 million in damages.
"If someone can use your engine in a Chevy, they're not allowed to use your engine in a Ford," said PlayMedia's trial attorney Henry Gradstein, a partner in Gradstein Luskin & Van Dalsem, a Los Angeles-based law firm. AOL "basically took our software and...put it in a use for which it wasn't licensed."
This week, PlayMedia said it is examining whether to broaden the case to include AOL Time Warner subsidiary CompuServe and other possible distributors of the AOL 6.0 software.
The injunction comes as AOL has been making moves to bolster its offerings. AOL 7.0 includes more high-speed Internet features and local content than previous versions of the software. AOL said it does not use AMP in the new software.
Owen Seitel, a partner at the law firm of Idell, Berman & Seitel who is not involved in the lawsuit, said the outcome of the case will depend on the language of the licensing agreement between PlayMedia and Nullsoft.
"If I were to flip through that agreement and look for what I would feel to be the crucial aspect of it, there's usually a statement in the agreement as to whether the agreement is assignable to another party," Seitel said. "Most licensing agreements will address that issue--at least, most good ones will."