Court’s U turn rocks MP3 coffers

Netco 'willfully' violated copyright, could owe $250 mil

NEW YORK — In a decision intended to send a stern warning to Netcos that flout intellectual property laws, a federal judge has ruled that must pay Universal Music Group $25,000 for every Universal CD uploaded onto’s servers as part of its defunct service.

The number of CDs that were copied is still in dispute but even by the defense’s lowball estimate, New York District Judge Jed S. Rakoff’s ruling could end up costing at least $118 million — a punishment that could severely damage the embattled online music portal.

And if the number of infringed CDs is closer to Universal’s estimate of 10,000, the damages could reach $250 million. The exact number will be determined in a separate proceeding, tentatively scheduled to start Nov. 13.

The purpose of the trial, which began last week, was solely to determine whether’s infringement of Universal copyrights was willful, and whether the damages awarded should be large enough to serve as a deterrent to future would-be infringers.

Rakoff ruled in the affirmative on both points, opening the door to a damage award that could have reached as high as $150,000 per work infringed.

Michael Robertson,’s founder and chief executive, said the company will definitely appeal the decision, noting that it is continuing to look for ways to reach a compromise with Universal.

“The law needs to accommodate users who want to listen to their own CD collections online,” he maintained. “And the music industry needs to reconcile themselves with this technology.”

Aware of problems

On the issue of willfulness, the Rakoff said that execs and employees knew since the company began work on early versions of last fall that they were operating on the wrong side of copyright law.

“From the outset, numerous employees … recognized that this reliance on a database of CDs copied by the defendant for a commercial purpose without the permission of the copyright owners placed the entire project in legal jeopardy,” he said.

Rakoff also concluded that the damages should act as a deterrent, since the revolutionary changes that the Internet has brought to the music business may cause some otherwise responsible Netcos to think they’re out of reach of traditional copyright law.

“They need to understand that the law’s domain knows no such limits,” Rakoff warned.

However, the judge pulled back from the imposition of the maximum damages allowed by law against, in part because of the potentially lethal effect the punishment could have on its operations.

The company has already taken a $150 million charge against its second-quarter earnings in June to cover estimated lawsuit costs. has also settled with the other four major record labels for $20 million each.

That means has only budgeted another $70 million to cover the Universal settlement. As it stands now, the damages will exceed that amount by anywhere from $50 million to $180 million.

However, had the judge gone for the full $150,000 per work, damages could have reached as high as $1.5 billion.

‘Mitigating factor’

Rakoff also noted that the conduct of since it was ordered to shut down in May “has on the whole been responsible, and this is a mitigating factor in the defendant’s favor.”

In closing arguments Tuesday, Universal counsel Hadrian Katz asked the court to award damages of $450 million, or $45,000 for each of the 10,000 of its CDs that U claimed were copied.

Defense attorney Michael Rhodes countered that should pay only the statutory minimum of $750 per CD and requested that the court consider an even more lenient statutory minimum of $500 each.

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