MP3.com Loses Big to Big Music. CEO Robertson Vows Appeal.

By Robert Menta
09/07/00

MP3.com willfully violated the copyrights of music companies. That is the ruling of U.S. District Judge Jed S. Rakoff, a ruling that will cost MP3.com a penalty of about $25,000 per CD. Depending on how many CD's the court decides are subject to fine, the final amount will run between $118 to $250 million dollars.

That's a death sentence should MP3.com actually be forced to pay it.


The 20GB Rio Riot Jukebox can be ordered from Amazon

Shares of MP3.com plummeted 27 percent to $5.77. That included a decision by the Nasdaq Stock Market to halt trading of the stock just prior to the decision for 2 1/2 hours.

Judge Rakoff said it was necessary to send a message of deterrence to the Internet community to prevent future copyright infringements. "They need to understand that the law's domain knows no such limits," said Rakoff. With those words, he made MP3.com an example.

Hadrian Katz, Universal's lawyer, urged the court to hand down a stiffer penalty of $450 million. Rakoff agreed he could have handed down an award of $150,000 per CD but chose the lesser number because MP3.com had acted more responsibly than other Internet startups and there were no actual damages alleged from the infringement.

Of course, with an award approaching a quarter of a million dollars it hardly leaves incentive for other companies to "act more responsibly". Especially since it opens it up for other companies not named in this suit to claim damages against MP3.com. Rhodes said such a penalty would cost MP3.com as much as $3.6 billion, money it simply doesn't have.

One can even argue that the court has really sent an opposite message. If you are going to do something, do it big because it doesn't matter. Even a win is too expensive, especially since few Internet startups have the $300 million dollar cash reserves of MP3.com.

The danger of such an attitude is that it can manifest itself to exploit a fundamental power of the Internet. That power is a company is not bound to US shores to reach its inhabitants. If you can't afford to protect yourself to expensive litigation, then set up your company on some atoll in the Pacific out of reach from US copyright laws but fully accessible to your audience.

It doesn't matter where you hook up to the Internet and as more countries vie for New Economy technology profits the lure for a company to expatriate can hold significant advantages. This doesn't mean Napster is heading for Afganistan, but it does possibly offer a new competitive advantage for overseas competition.

Of course this trial does not end here, it's only beginning. MP3.com has said it will appeal and now have tremendous incentive to spend their $250 million not on the large judgment but to continue a lengthy legal process.

"We believe that everyone should have the right to listen to the music they purchase, even if it's on the Internet," said Michael Robertson, chairman and chief executive officer of MP3.com. "While we respect the court, we disagree with the court's decision and we look forward to taking our case to the Court of Appeals."

This process should reach the federal courts and quite possibly the Supreme Court and when all is done, there will be little money left for payment to Universal. Of course there will be little money for MP3.com to keep solvent.

This case will probably take years to resolve. Rakoff won't even rule on the final award amount for this case for another two months.

In the end, by refusing to negotiate with MP3.com like the other four major record companies, Universal may have derailed a steady cash source of copyright payments that all of Big Music could have enjoyed for years.

Universal may also drive even more people to the person-to-person (P2P) software packages like Gnutella and Freenet who, unlike MP3.com, do not have a central company with whom to negotiate with. These programs will only get to enjoy further adoption by the populous if Universal and MP3.com get locked up in the courts for 3 or 4 years.

This is chapter one and it's only just starting to get bloody.

Copyright 2000 MP3 Newswire. All rights reserved.

Back to