Hefty fines could be levied against MP3.com after a federal judge in New York ruled Friday that the Internet music company's MyMP3.com service violated copyright law.
Fines in the case could start at $750m (£481m) if the San Diego company is subject to traditional penalties.
"There will be a definitive impact on companies doing business on the Internet," said Don Pelto, managing intellectual property partner for Washington D.C.-based law firm McKenna & Cuneo LLP. "Every company like MP3 that is doing something innovative on the Internet hopes that judges will take some leading role in fashioning the law around them. To date, no one has done that."
US District Judge Jed Rakoff issued a terse order Friday holding MP3.com "liable for copyright infringement." The company lets users store music on its MyMP3.com database of more than 80,000 copyrighted albums and then access it via any computer connected to the Internet.
The lawsuit, filed by the world's largest record labels, sought to shut down the service.
The crux of the legal issue was whether MP3.com violated copyright law with the creation of the database -- even though the company claims that the service cannot work unless the user owns an original copy of the copyrighted work. Most of the other music that can be downloaded via MP3.com is from acts that are not under contract with a record label.
Bob Kohn, chairman and founder of rival Emusic.com and the author of "Kohn on Music Licensing" -- a book thought by many to be the bible for the industry -- said he believes the case is one of straightforward copyright infringement.
"It would be very legal for a consumer to make a copy at home for their non-commercial use," Kohn said. "That's a specific exemption that is not available for a billion-dollar company that uses the copied work for a commercial purpose."
The penalties for MP3.com could be immense, he added. Normally, copyright damages are calculated on a per-infringement basis. For the 80,000 albums copied by MP3.com -- with an average of 10 songs, each having two copyrights -- that could total 1.6 million incidents of infringement.
With a minimum penalty of $750 and a maximum of $150,000, the fines for MP3.com could total as "low" as $1.2bn and as high as $240bn. Meeting such fees would be impossible for a company whose stock plummeted almost 40 percent to $4.63 on Friday.
MP3.com's chairman and CEO, Michael Robertson, took a defiant stand against the ruling. "This is not a victory for the record labels -- it's a loss," he said in a statement.
"New technologies for delivering music are here to stay, and the technology trend is moving in only one direction: forward."
Robertson pointed out that record company profits increased over the past year, even as the claimed that Internet piracy hurt their business: "By standing against the My.MP3.com technology, the Recording Industry is standing against increased revenues for its members and damaging the chances of a responsible music delivery system to counter the unregulated systems like Napster and Gnutella.
"These systems do not compensate artists and rights owners," Robertson added.
David Pakman, senior vice president of business development and co-founder of an Internet music rival, MyPlay.com, said Robertson's defiance would hurt him in the penalty assessment stage of the case.
"It is funny the parallels between MP3 and Microsoft and how defiant they are," Pakman said. "They are making the statements right before damages are assessed."
While Pakman admitted that the Internet has put some kinks into copyright rules, he said slow change makes more sense than a blitzkrieg approach. "The 200-year-old copyright law needs to be respected," he said.
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