Universal Music wants MP3 to pay up

Universal Music told a federal judge that MP3.com should pay as much as $450 million in damages for violating the label's copyrights.

NEW YORK -- Seagram Co.'s Universal Music Group told a federal judge Tuesday that MP3.com Inc. should pay as much as $450 million in damages for violating the label's copyrights.

"An award should sting," said Hadrian Katz, an attorney representing Universal. "It should not be something that can be tossed off as a minor footnote."

The remarks were made during closing statements of the first phase of online music provider MP3.com's (mppp) copyright trial, which opened last week in front of U.S. District Judge Jed S. Rakoff in Manhattan.

The judge has already found MP3.com guilty of copyright infringement. On Wednesday, he is expected to make a key decision regarding damages, ruling one way or the other on whether MP3.com willfully infringed Universal's copyrights when it created My.MP3.com, an online database of 80,000 compact discs.

If the judge finds MP3.com willfully violated Universal's copyrights, he could set the damage award as high as $150,000 for each violation. Or, if he accepts MP3.com's argument that the violation wasn't willful, damages could fall in the range of $750 to $30,000 per violation.

As many as 10,000 works are in contention, although the judge won't determine how many works were infringed until the second phase of the trial, expected to start later this fall.

The judge has said he will issue a ruling on willfulness Wednesday, but he hasn't indicated whether he will quantify the actual damage award at that time.

If it loses on every issue, MP3.com could ultimately be forced to pay a crippling amount in damages to Universal. The company has already settled similar copyright disputes with four other labels, taking a charge in the second quarter of $150 million to cover legal costs.

MP3.com attorney Michael Rhodes asked the judge to set damages at the minimum statutory amount, saying the company had launched what it believed to be a responsible service. He also said MP3.com has complied with orders of the court to disable the My.MP3.com service until the dispute is resolved.

"This case is widely watched," Rhodes said. "It's important to send the right message."

During closing arguments, Katz asked the judge to set the damage award at $45,000 per CD. He suggested, based on that amount, that MP3.com would owe $3.6 billion in damages to not just Universal but also others that are suing the firm, including numerous music publishers.

Rhodes called that award a "Draconian" figure that would send MP3.com into bankruptcy. He also said it would be the "largest paper award in history."

Rhodes told the judge that the firm is limited in what it can afford to pay in damages. A recent 10Q filing with the Securities and Exchange Commission listed the company's cash and equivalents at $300 million, which includes the $150 million reserve for legal costs, he said.

He added that the $150 million reserve doesn't cover continuing royalty payments that MP3.com will have to pay four of the major labels under recently brokered licensing deals.

If MP3.com is forced to pay a sizable damage award to Universal, the licensing deals with those labels would be placed in jeopardy, he said.

"If you do anything that's over the statutory minimum, it's over," he said.

Universal's legal team, headed by Katz, told Judge Rakoff that MP3.com would only have to pay $7.5 million in damages to Universal if the court uses the statutory minimum award of $750 and applies it to a maximum of 10,000 works.

"The lesson the world would draw (based on the minimum amount) would be 'go forth and infringe,' " Katz said.

Rhodes said the damage award doesn't need to include an amount that would act as a deterrent to other infringers. He noted in particular the drop in the company's stock price, due largely to its legal problems with the recording industry. "What other deterrent do you need?" he said.

MP3.com's stock traded at a 52-week high of $64.63 last November, but fell to a low of $6.50 shortly after the judge's finding against the company in April. The stock closed Tuesday at $8.56, up 6 cents, on the Nasdaq Stock Market.

Judge Rakoff indicated he would issue a ruling on whether MP3.com willfully infringed Universal's copyrights at a 2 p.m. EDT hearing Wednesday.