MP3.com pays $53.4 million to end copyright suit

The online music company agrees to pay $53.4 million to end its copyright infringement suit with Seagram's Universal Music Group minutes before a scheduled trial.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
4 min read
NEW YORK--MP3.com has agreed to pay $53.4 million to end its copyright infringement suit with Seagram's Universal Music Group, a deal that sent its shares sharply higher in Wednesday trading.

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MP3.com closes copyright suit with cash
Michael Robertson, CEO, MP3.com

In afternoon trading, shares rose $2.38, or close to 60 percent, to $6.38 on heavy volume.

Tuesday's accord means that MP3.com has mended fences with all five of the major record labels over its My.MP3.com music storage locker service. Although the company may still be required to work out claims by some smaller labels, any future payouts are expected to be minor compared with the litigation resolved to date.

Under the consent judgment, MP3.com gets a license to deliver the entire Universal Music Group catalog over its My.MP3.com service.

In addition to the cash award, MP3.com on Wednesday said it sold to Universal warrants to purchase up to 3 million shares of MP3.com common stock, giving the recording company the right to acquire the shares at a price range of $3.75 to $5 per share.

If Universal were to fully exercise the warrants, it would control less than 5 percent of MP3.com's outstanding shares, MP3.com said.

The judgment "really moves us forward and gets us out of the courtroom and back into the delivery of music," Robertson said.

He added that all of the company's payments to date related to legal problems from My.MP3.com amount to less than $170 million--the amount of cash MP3.com had set in reserve to handle copyright claims.

Universal executives said they were pleased with the outcome of the agreement.

"Universal Music pursued this case to send a strong message that copyrights will be protected and that copyright owners and artists need to be properly compensated for use of their work," Universal chief operating officer Zach Horowitz said in a statement. "Although we believe our proof at trial would have led to a greater damage award, we are satisfied with the award."

The deal lifts an enormous cloud that had been hanging over MP3.com.

The company has pushed to create legal business models for selling music online and is known primarily for creating a place where unknown artists can showcase their music on the Web. But it stumbled into a legal quagmire when it created My.MP3.com, a database of some 80,000 songs that could be tapped over the Internet by customers who proved they had purchased the same music on a CD.

Unlike rival music locker services such as Myplay.com, MP3.com did not require customers to copy their own CDs but provided a ready-made database of songs. It also did not secure licensing deals with record companies before launching the service.

All five of the major labels--Universal, Sony Music Group, Bertelsmann's BMG Entertainment, Warner Music Group and EMI Recorded Music--filed suit when the service was launched, charging massive copyright violations.

The company settled its differences with the other four major record labels for undisclosed amounts and with the National Music Publishers' Association, leaving Universal as the sole holdout.

As the case proceeded, Universal scored several key wins.

We are "pleased that this matter has finally been resolved," Recording Industry Association of America chief executive Hilary Rosen said in a statement. "This case was never about stifling the technology or putting this company out of business but rather about protecting the copyright owners' and artists' rights to be compensated for their works. We believe through this judgment that message has been sent."

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Copyright fight: What's next for MP3.com?
Whitney Broussard, attorney, Selverne, Mandelbaum & Mintz

MP3.com was first held liable for infringing Universal's copyrights and then ordered to pay $25,000 for each violation. Universal had claimed as many as 10,000 counts, potentially putting MP3.com on the hook for some $250 million. MP3.com had put the total around 4,700 CDs, leaving the company open to as much as $118 million in damages.

Some analysts praised the resolution of the suit as potentially rewarding for both sides.

Idil Cakim, an analyst at CyberDialogue, said that MP3.com's audience is twice as likely to buy music online than Web surfers who do not use the site.

"Thirteen percent of adults bought music online in the past year, compared to 23 percent of MP3.com's visitors," he said. "In moving forward, this might be an interesting opportunity" for the two companies.

Others, however, flagged the potential for new problems to arise from the deal.

Earlier agreements with the other Big Five record labels included provisions that MP3.com would match the terms of any sweeter deal that might be worked out with other litigants in the future.

Robertson was careful not to describe Tuesday's accord as a "settlement"--an outcome that would trigger those clauses--since the deal was worked out with the court. In fact, MP3.com could be in serious trouble if the record labels challenge that interpretation and seek to add tens of millions of dollars to their current settlements. The values of those deals are unknown but must fall well below $50 million on average, as Robertson says all of the agreements total less than $170 million.

Record labels that had previously settled with MP3.com could not immediately be reached for comment.

Eric Scheirer, an analyst at Forrester Research, said the deal could cause some friction with other labels that see only a technical distinction at best between a settlement and a "consent judgment" worked out belatedly with a principal competitor.

"Clearly there's some kind of semantic issue regarding whether this is exactly a settlement," he said. "I suspect other record labels will at least make a fuss and claim that this is a settlement," triggering the matching clause.