Umg, Mp3 Court Case Hinges On 'willfulness'

NEW YORK -- While this week will certainly be a monumental one for MP3.com, which is scheduled to learn from a New York court on Wednesday (6) whether it has been judged a "willful infringer" and thus is potentially liable to Universal Music Group (UMG) for hundreds of millions of dollars in damages, the impact of the ruling on the overall online music industry is likely to be more muted.

Unlike in the other high-profile Internet-music case wending its way through the court system -- that of the major labels vs. file-swap service Napster -- or even in the less-splashy fight between the Recording Industry Assn. of America (RIAA) and search-engine site MP3Board.com, the more sweeping question at stake here has already been decided: Companies that intend to offer "digital locker services" allowing consumers to hear streamed-audio copies of their music collections must secure licenses from copyright holders if they are creating a musical database to enable that.

That fact was made clear by U.S. District Judge Jed Rakoff in his April 28 summary judgment that MP3.com had infringed the copyrights of the five major-label groups in creating the database for its My.MP3.com streaming-audio service without those licenses in hand. Rakoff at that point rejected the argument that My.MP3.com was merely "enabling" an existing right of consumers to make a copy of their CDs for personal use and thus did not need any licenses.

Some observers, in fact, note that the most significant precedent to emerge from MP3.com's now eight-month-long legal saga may have been set in the out-of-court settlements the company struck with four of the majors before trial, as part of which BMG, Warner, EMI, and Sony agreed to license their catalogs. Sources say MP3.com will pay them 1.5 cents for each of their tracks registered in a My.MP3.com locker and streaming fees of about one-third of a cent each time one is accessed.

"If MP3.com, negotiating from a position of weakness [as it tried to settle the suits], set the benchmark for what these licenses are going to [cost], which I think they have, then that's significant and unfortunate," says an executive at an online music company, who asks not to be identified, about the case's wider impact.

However they are viewed by the industry at large, the issues still on the table at the Aug. 28 opening of the bench trial against MP3.com in U.S. District Court for the Southern District of New York are certainly weighty to MP3.com: Did it know, or should it have known, that it was violating copyright law when it copied CDs to create its database—and is it necessary to impose a "significantly high" level of damages to deter future infringements from other firms?

WAS IT WILLFUL?

The answers to those questions—generally referred to as "willfulness" and "deterrence"—could mean a half-billion dollars or more to the company. If judged willful, it could be assessed as much as $150,000 per infringement; otherwise, damages would likely top out at $30,000 each.

MP3.com's defense has been severely complicated by its decision not to waive attorney-client privilege and reveal what legal advice it received before launch. Universal attorney Hadrian Katz has pressed the point that, since MP3.com says it did have legal counsel, any testimony from company executives about their "state of mind" should not be allowed in the absence of information on the legal advice they would have been weighing.

Rakoff will rule on willfulness Sept. 6 and may announce a per-infringement figure then as well. The number of CDs judged eligible for those damages will be decided at a second trial in October, following MP3.com's request for a discovery period to examine the copyright certificates presented belatedly by Universal. About 4,700 registrations have been submitted, according to a source, but MP3.com's attorneys say they intend to challenge them.

Among the various challenges MP3.com plans to bring, as outlined in a brief obtained by Billboard, is that the registrations were filed as "works made for hire," as is standard practice by labels despite the fact that, until a controversial change late last year, recordings were not included in the U.S. Copyright Act among a limited list of nine other types of works that can be considered as such. That changed in November 1999, when the RIAA had a line classifying sound recordings as works made for hire inserted into an unrelated bill.

The MP3.com brief cites testimony from leading copyright experts and artists during congressional hearings on that change in the Copyright Act—which the parties have since agreed to have rolled back to its former status—as evidence that "plaintiff's purported rights to the sound recordings at issue here as 'works for hire' are dubious at best" and that any copyright certificates issued on that basis are "invalid in that respect."

The occasionally heated Aug. 28-30 trial, which concludes with closing arguments Tuesday (5), was one that most pundits believed would never happen. Expectations right up until the opening gavel were that Universal would join its major-label brethren and settle with MP3.com before going before the judge. The other companies agreed to settle for figures put by sources at around $20 million each.

The motivations for Universal's decision to pursue the case figured in day three of the proceedings, with MP3.com attempting to argue that Universal views it as a competitor and thus would like to "put it out of business or publicly vilify it," in the words of MP3.com attorney Michael Carlinsky.

Carlinsky called Seagram president/CEO Edgar Bronfman Jr. as a hostile witness in his efforts to prove that contention. Rakoff ultimately dismissed Bronfman and threw out his testimony as irrelevant, noting that, whatever Universal's motivations in pursuing the case, it is MP3.com's motivations that are at issue.

"You think Mr. Bronfman and his company have a motive to economically damage [MP3.com]," Rakoff said to Carlinsky. "You've presented no evidence of that, but assuming you did, it's irrelevant." He added that "no one is obliged to settle a lawsuit."

Not that MP3.com isn't still trying. President Robin Richards, who testified following Bronfman, said he had been attempting to settle with Universal as late as the night before.

Katz, meanwhile, spent the final day pushing "deterrence." "Other would-be entrepreneurs will look at MP3.com and assess [whether] at the end of the day—even after damages are paid—MP3.com ends up ahead of the game," Katz said, arguing that Rakoff should consider that when he levies damages on the company.