|NEW YORK (Reuters) - A U.S. federal court ruled on Friday that MP3.com Inc. (NasdaqNM: MPPP) violated copyright law with the creation of a database in which users can effectively store music and then access it via any computer connected to the Internet.
Judge Jed Rakoff of U.S. District Court for the Southern District of New York issued a terse order holding MP3.com "liable for copyright infringement." He said a written opinion would be available "most likely within the next two weeks."
The ruling, which sent shares of the online music-downloading company plummeting to an all-time low, stemmed from a lawsuit filed in January by the world's largest record labels, which said MP3.com's database of more than 80,000 albums infringed their copyrights.
The service, found at http://my.mp3.com, features software that lets computer users with an original copy of one of the recordings in the database to register that CD. It then allows the user to listen to that album over the Internet from any computer, without having to insert the original disc.
Shares of MP3.com, based in San Diego, closed nearly 40 percent, or 4 5/8, lower to 7 on the Nasdaq, after touching an all-time low of 6 1/2 earlier in the session. It was Nasdaq's largest percentage loser of the day. The issue had traded as high as 105 on the day of its initial public stock offering in July 1999.
The judge's ruling marks a key victory for the recording industry in its aggressive anti-piracy crusade launched partly in response to the success of MP3 technology. MP3's format allows music to be downloaded from the Internet in small amounts of data. The compression makes it easy to store and copy music on personal computers.
"We are pleased with the court's decision today," Hilary Rosen, chief executive of the Recording Industry Association of America, the trade group that represents the record companies, said in a statement. The group was not available for further comment.
The record companies suing MP3.com included Time Warner Inc.'smusic group, Sony Music Entertainment (7930.T), Seagram Co.'s Universal Music Group, and BMG, the music unit of Bertelsmann AG. (BTGGga.D).
MP3.com's chief executive Michael Robertson said in conference call with reporters, "By standing against the My.MP3.com technology, the recording industry is ... damaging the chances of a responsible music delivery system to counter the unregulated systems...(that) do not compensate artists and rights owners."
MP3.com designed software that matches a compact disc from a user's personal collection -- or a borrowed copy -- with a digital copy of that album within MP3.com's database. Once the software matches the CD, a registered user can listen to that music on any computer through the my.mp3.com site without having the actual disc.
The crux of the legal issue is whether MP3.com violated copyright law with the creation of the database, even though the my.mp3.com service cannot work unless the user has an original copy of the copyrighted work.
"The law in this matter is fairly straightforward," said Steven Hetcher, a law professor with Vanderbilt University in Nashville, Tenn.
"It doesn't really matter how many people use the service or how they use it," he said. "The moment that MP3.com made that unauthorized copy of music onto their database, they were in violation of the law."
Hetcher said there are exceptions, such as copies for personal or educational use. "But the fact that MP3.com is a commercial entity makes it virtually impossible to apply those exceptions."
Most of the other music that can be downloaded via MP3.com is from acts that are not under contract with a major record label.
Hearings will be held to determine damages sometime after the written opinion is issued, MP3.com's Robertson told reporters in a conference call. "We certainly plan to appeal," he said.
Analysts watching the case have said damages could reach as much as $6 billion.
Robertson expects the record companies to ask for an injunction "within the next day or two" that would force the company to remove from the database the music whose copyrights are held by the major labels. MP3.com will comply with the injunction, he said.
MP3.com's president, Robin Richards, acknowledged that while the ruling was a setback for the company, it would still move "full steam ahead."
"We lost round one," he said. "But we're not done fighting yet," he said. He noted that My.MP3.com does not generate any revenue for the company and that 80 percent of the company's revenues come from advertising in other parts of the site.
"This ruling will have no impact on the future revenues of the company," MP3's Robertston said.
He noted that My.MP3.com would continue to be a successful feature of the Web site, even without the music from the major labels. "My.MP3.com features music from over 4,000 labels, many of them have allowed us to make their music available this way."