MP3.com Violates Music Copyrights, Judge Finds

In a victory for giant music conglomerates, a federal judge ruled Friday that a controversial online music service invented by MP3.com violates U.S. copyright law.

The ruling is a serious blow to the San Diego-based company and other Internet entrepreneurs that had hoped to capitalize on new digital technologies that make it easy to copy music owned by the world’s five largest record companies. It will do nothing, however, to stop the technologies themselves, which are readily available to millions of young music fans who continue to steal thousands of songs daily on the Web.

Stock in MP3.com plunged 40% on the news, dropping $4.63 a share to $7, a record low, in Nasdaq Stock Market trading on Friday.

Once the hottest music site on the Web, MP3.com will be forced to shut down its most popular service and cough up more than $50 million in damages to the record industry, legal sources said.

“This decision sends a clear signal to the technology community that there are more productive ways to work with the creative community,” said Hilary Rosen, head of the Recording Industry Assn. of America. “It’s a good decision.”

Friday’s ruling stems from a summary judgment motion in a lawsuit filed five months ago by the RIAA, the trade group that represents Seagram’s Universal Music Group, Time Warner, EMI Group, Sony and Bertelsmann.

U.S. District Judge Jed S. Rakoff is expected to issue a written ruling in two weeks demanding that MP3.com pull the plug on the service. Hearings are expected follow sometime later in May to resolve the issue of damages in the case.

MP3.com chief Michael Robertson characterized the ruling as a “loss for record labels” and chided the RIAA for filing the lawsuit in the first place.

“The record companies are at a crossroads and are required to make a decision about the technology that they choose to embrace,” Robertson said in a statement.

“The labels made the decision to challenge a technology that will protect their intellectual property interests and grow their business,” he said. “They will be left with copyright chaos.”

Representatives of MP3.com were not so strident earlier this week as they struggled furiously to negotiate a settlement with the record labels, sources said.

The two sides were still far apart late Thursday night, sources said, but they could come to terms soon on payments for past damages and future licensing fees that could allow the service to be resurrected in the future.

In recent months, the RIAA has struck licensing deals with a number of Internet radio sites for use of copyrighted recordings. If such an arrangement can be worked out with MP3.com, it would be the first time the industry has openly embraced the MP3 technology as a digital distribution method.

MP3.com does not own the MP3 technology, a format that allows music to be downloaded quickly from the Internet through a new digital compression method. The RIAA, however, said MP3.com violated copyright laws by creating a database of 80,000 unauthorized albums, which allows users to store music from their personal CD collections and then access it via any computer connected to the Internet.

The trade group argued that it was illegal for MP3.com to post the albums in its data bank without obtaining permission from the record labels or the artists who own the copyrighted recordings. The judge agreed, and said MP3.com is liable for damages.

On Friday, Robertson lashed out at the record industry, contending that there are worse threats on the horizon than his database system.

“By standing against [MP3.com’s] technology, the RIAA is standing against increased revenues for its members and damaging the chances of a responsible music-delivery system to counter the unregulated systems . . . ,” Robertson said.

“When pioneering new technologies designed to grow their businesses are attacked, it leaves a vacuum which will be filled with technologies unfriendly to artists and their existing revenue streams,” he said.

Indeed, the Internet is teeming with pirated music in a variety of threatening new digital formats. Although the RIAA has shut down a number of Web sites trafficking in stolen music, it has done little to stop the flow of pilfered product, which has resulted in the loss of millions of dollars to artists and record labels.

The RIAA recently filed a copyright infringement suit against San Mateo, Calif.-based Napster Inc., a popular song-swapping software company.

Napster has a Web site that allows people to log on and use its search engine to connect with individual computer hard drives anywhere in the world and share music--most of which is stolen.

A court ruling is expected on the Napster case within weeks.