A federal judge grants the music industry's motion for a partial summary judgment finding MP3.com liable for copyright infringement.
"Plaintiff's motion for partial summary judgment holding defendant liable for copyright infringement is hereby granted," U.S. district judge Jed Rakoff wrote in a one-page decision.
The decision is a potentially crushing blow for MP3.com, as the Recording Industry Association of America (RIAA) has asked for damages that could exceed $6 billion. Damages have not yet been determined in the case.
RIAA chief executive Hilary Rosen released a short comment, saying only that she was "pleased" with the court's decision.
The lawsuit, which has been closely watched by people in the music and technology industries, will mark an important precedent in determining how far Internet companies can stretch existing copyright rules in their attempts to find new ways of distributing music online.
The case involves the company's "My.MP3.com" service, which allows customers to listen to their CDs through the company's Web site.
Unlike other similar services, which ask their customers to upload music to online "storage lockers" for later access, MP3.com copied and stored a database of close to 80,000 CDs on its own servers. Customers could tap into this database if they proved they had their own copy of the CD.
That made the service simple to use, eliminating time-consuming uploads and downloads. But from the record industry's perspective, the service crossed the line of legality.
"Simply put, it is not legal to compile a vast database of our members' sound recordings with no permission and no license," RIAA's Rosen stated in a letter to MP3.com early this year. "Obviously, you are not free to take protected works simply because you want them."
The lawsuit filed by the RIAA, along with the "Big Five" record labels--Sony Music, Warner Music, EMI Recorded Music, Universal Music and BMG Entertainment--said MP3.com should be responsible for $750 to $150,000 per CD that was illegally copied into the Internet company's database. This potentially values the damages at billions of dollars if the judge settles on the top end of that spectrum.
MP3.com, which has about $370 million in cash on hand, said it didn't expect damages to reach the billions of dollars.
"We do not believe that's even a possibility," Robin Richards, MP3.com's president, said on a conference call today. "This is a legitimate technical dispute dealing with people who have already purchased their own CDs."
That view was seconded by copyright attorneys, who said they believe the court would most likely not impose the maximum punishment for reasons of equity, or fairness. Typically, courts weigh several factors in assigning damages in copyright cases, including lost licensing fees, lost profits and statutory damages.
According to one copyright attorney who has worked with MP3.com, it could be difficult for the RIAA to demonstrate lost profits or lost licensing fees.
"The service itself was designed to stimulate record sales," this attorney said. "That's something MP3.com could conceivable charge for."
The My.MP3.com service will remain in full operation until the industry asks for an injunction against the company, which is expected in the next few days.
Even after an injunction is granted, the service will operate with albums from record labels not represented in the lawsuit, the company said.
The judge has set a trial date of Aug. 28 to determine damages and whether or not MP3.com is guilty of "willful" infringement--the legal standard that will mean the difference between minimum or maximum damages.
Meanwhile, the two sides are in settlement talks, according to Cooley Godward attorney Michael Rhodes, who is representing MP3.com. But decisions on those talks, or on tactics for the months leading up to the trial, will likely be made only after the judge releases his final decision, he added.
"The thing none of us know is how close (the decision) is," Rhodes said.
Wall Street reacted to the ruling with predictable pessimism, sending MP3.com's shares plummeting close to 40 percent by market close.
This isn't the first time that MP3.com has ruffled the record industry's feathers. Chief executive and founder Michael Robertson has had a history of railing against record industry practices from the conception of his site in 1997, even though he had music industry experience previous to this venture.
Launched as a simple directory and news service for the nascent MP3 community, Robertson's site evolved into a place where bands unsigned by major labels could distribute their music online. In numerous public appearances and online forums, Robertson criticized the pace and practices of the traditional industry and even new online companies, winning enemies in both media circles.
The My.MP3.com service was the first time that the industry was able to find a legal argument to turn against Robertson and his company. Several other parties have filed lawsuits against the company, including Paul McCartney's publishing company.
In February, MP3.com tried to strike back with its own lawsuit against the RIAA, charging that the industry group had engaged in unfair business practices in its attempts to undermine the Internet company. MP3.com said today that it had dropped that lawsuit several weeks ago.
Robertson warned that shutting his service would drive consumers to use other online tools that held even greater threat to the record companies, such as music swapping software programs Napster and Gnutella.
"When a responsible system like MP3.com, which requires consumers to buy CDs before they listen to them, is potentially halted, then there is a vacuum for other services like Napster," Robertson said.
The company said it would appeal the ruling after the judge's full decision is released. But it acknowledged that the odds have lengthened in its battle against the five largest record companies.
"We're in a heavyweight fight, and there are five heavyweights in the ring," Robertson said. "This is by no means the end of the fight."