New York federal Judge John S. Martin Jr. found that Universal Music Group's Farmclub.com online music service streamed songs without obtaining licenses from music publishers. Universal had asked that the case be dismissed on the grounds that Farmclub's service was covered by licenses its parent previously secured in the context of recording songs for sale on albums.
"This decision means record companies aren't in total control of how music will be exploited on the Net," said Whitney Broussard, a music lawyer at Selverne Mandelbaum & Mintz. "They are going to be on the same footing as other Webcasters, and they will have to negotiate publishing rights as well."
It was unclear what damages Universal could face as a result of Wednesday's ruling.
The ruling comes a day after controversial Net music service Napster settled a lawsuit brought on by the National Music Publishers Association (NMPA). Napster agreed to pay the publishers a $26 million settlement fee and $10 million up front for future licenses for its planned subscription service.
Major record labels, including Universal, also are preparing to unveil online music-subscription services, which will sell a wide range of their copyrighted works through streams and downloads. Like Napster's service, the labels' offerings must win publishers' go-ahead if they are to avoid legal disputes.
Wednesday's 25-page ruling sided with the publishers' claim that Universal, a division of Vivendi Universal, was holding out on licensing payments for songs offered via Farmclub's Web site. It added that relying solely on its recording license was not enough.
Universal's "choice is to obtain a license for that purpose and pay the fee or cease their infringing activity," the ruling read.
Universal spokesman Bob Bernstein said the company "disagrees with the court's opinion, and we intend to appeal."
Wednesday's ruling is ironic, given Universal's past litigation record. The label, along with the Recording Industry Association of America and the NMPA, last year successfully sued online music service MP3.com for copyright violation. Universal took it one step further by pursuing a consent order by a federal judge that required MP3.com to pay it $53.4 million and equity in the start-up.
During the trial, MP3.com attorneys attempted to turn the tables on Universal when it alleged the recording giant was intentionally trying to replicate MP3.com's business by launching Farmclub.
Universal's parent acquired MP3.com earlier this summer for $372 million in cash and stock.
Edward Murphy, president of the NMPA, said Farmclub "emulated exactly what MP3.com did" by letting its people listen to copyrighted songs at will without obtaining a license from publishers.
Companies that wish to sell songs via the Internet must obtain licenses from record labels and music publishers. Labels have banded around two competing services: MusicNet, run by Warner Music Group, BMG Entertainment, EMI Recorded Music and RealNetworks; and Pressplay, supported by Universal and Sony Music Entertainment.
Murphy said the ruling would not derail ongoing negotiations between the NMPA and the labels' planned subscription services.
MusicNet is expected to launch imminently, but it has not obtained publishing licenses, according to people close to the discussions. MusicNet will likely ship software to its distribution partners RealNetworks and America Online by the end of the month.
Pressplay announced this week that it would delay its planned September launch until the beginning of the fourth fiscal quarter. Vivendi Universal CEO Jean-Marie Messier blamed the delay on the events surrounding the terrorist attacks on the World Trade Center and the Pentagon.