Judge Jed S. Rakoff's Ruling In The MP3.com CaseBusiness News
[09-06-2000]
U.S. District Court for the Southern District of New York
September 6, 2000


"The purpose of today's session is to enable the Court to make those
rulings that are appropriate at this time as a result of the three
day trial that was conducted before the Court last week. Largely, I
will be reading from a written statement that I will try to make
available at the end of the session as an unofficial outline of my
rulings, but I may depart from it here and there in minor respects.

In addition, I will ask the Reporter to give me an expedited copy of
the transcript of these rulings, and I will review that transcript,
hopefully by tomorrow, and make any small corrections that are
necessary to conform the transcript to my determinations.

However, I do not expect that there will be any material changes from
what I am about to say here in open court. At the outset, I want to
once again thank counsel for both sides for their good offices in
guiding me through the brave new world of rip and burn and beam and
stream. I will continue to rely on their skill and professionalism in
regard to the future phase of this litigation scheduled for November.

The present phase of the trial has been devoted to all issues
relating to the award of statutory damages except the determination
of which of the copyrighted compact discs that were the subject of
defendant's infringement were covered by copyrights that were validly
registered by the remaining plaintiffs.

Defendant also reserved the right to brief a constitutional claim
that the minimum statutory damages in this case should be $500 per CD
rather than $750 per CD: but for reasons that I will get to shortly,
that issue has now become moot and need not be further pursued. Of
te issues litigated in this phase of the proceedings, the only ones
that were the subject of evidentiary dispute were "willfulness" and,
to a lesser extent, certain aspects of "deterrence."

But in my determinations I will also refer to certain other issues
that were the subject of legal argument and that are relevant to a
determination of statutory damages. In making my determinations, the
standard of proof that I have applied is that at all times it has
been plaintiffs' burden to establish each element of their claims of
statutory damages by a preponderance of the credible evidence.

Additionally, however, even though I find no persuasive support for
defendant's contention that plaintiffs should have to carry the
higher burden of proof of "clear and convincing evidence," as a kind
of independent check on my own conclusions I have gone back and
analyzed the credible evidence under that higher standard and
determined that, even under that higher standard, my findings would
be exactly the same.

Put another way, even though some of my findings are partly premised
i credibility determinations and relate to hotly disputed issues of
fact, I have a high level of confidence that they reflect the real
truth of these matters. That truth leads me to conclude that
defendant's infringement was indeed willful, but that there are
mitigating factors that substantially reduce the level of damages
that might otherwise be appropriate for such willful infringement. I
will indicate approximately what that bottom-line level of damages
should be in dollar terms, but only after I first review my findings
of fact and conclusions of law.

Finding Number 1. In September 1999, the defendant began to develop
an expanded My.MP3.Com service that was later introduced as the "Beam-
It" and "Instant Listening" services in January 2000. (Let me mention
parenthetically that I will not necessarily provide a citation here
for every single finding I make, particularly where, as in the case
of this first finding, the facts are undisputed and, indeed, are
essentially stipulated in the portion of the Pretrial Consent Order
that deals with the undisputed facts. The underlying record
supporting my findings is, of course, publicly available.)

Finding Number 2. Even before embarking on the development of the
expanded My.MP3.Com project, the defendant had expressed in no
uncertain terms its recognition of the basic prohibitions of
copyright law and the considerable potential for their violation in
the context of MP3 downloading and streaming.

Thus, for example, The Official MP3.Com Guide to MP3 issued in 1999,
which is plaintiffs' Exhibit 19 in evidence, recites at page
62: "Warning. Current U.S. and international copyright laws forbid
the unauthorized copying and distribution of music files over the
Internet. Don't be the example chosen by some record company or
recording artist to show the rest of the world that the law really
works."

Again, the same book, which was written by Michael Robertson and Ron
Simpson, states at page 93: "Warning. It is against U.S. and
international copyright law to distribute and/or sell music or any
copyright-protected intellectual property without the written
permission of the copyright holder.

This includes posting MP3 files of copyrighted music on the Internet
or making copies. Buying a music CD does not mean that you own the
content. You merely have permission (also known as a license) from
the legal owners of the material on that CD to listen to it in a
noncommercial setting." Reference may also be made to the similar
comments in the same book that were referred to yesterday in
counsel's summation.

Finding Number 3. Notwithstanding this knowledge, defendant decided
by October 1999, if not earlier, that the design of its new service --
known internally as "Da Bomb"-- would involve the unauthorized
copying by defendant for commercial purposes of the contents of tens
of thousands of copyrighted compact discs containing the contents of
hundreds of thousands of copyrighted songs.

The contents of the unauthorized commercial database thereby created
would then be made available, chiefly on a per-CD basis, to those
My.MP3.com customers who either, in the case of users of "Beam-It,"
could indicate that they already had possession of the CD in
question, or who, in the case of users of "Instant Listening," agreed
to purchase the CD for delivery shortly in the future.

Finding Number 4. From the outset, numerous employees of defendant
involved in the development of the "Da Bomb" project recognized that
this reliance on a database of CDs copied by defendant for a
commercial purpose without the permission of the copyright owners
placed the entire project in legal jeopardy.

A telling example is what happened immediately after the engineers
working on the project were told, on September 21, 1999, that the
basic design of the proposal would include, among other things, the
creation of the aforementioned database and were asked to give their
comments as to any problems they might foresee. Going well beyond
technical engineering comments, the engineers very quickly began to
question the legality of the proposed database.

Thus in an internal e-mail distributed to the defendant's engineering
team at 10:14 A.M. on September 22, 1999, which is plaintiffs'
Exhibit 20 in evidence, engineer James Moore stated that "[t]he legal
risks seem high. Are we going to pour a lot of engineering effort
into something that we're not going to be able to deploy?"

Similarly, in an e-mail sent to the same group at 2:33 P.M. that same
day, which is plaintiffs' Exhibit 44 in evidence, Mike Oliphant, who
was described here at trial as having more familiarity with legal
issues than most of the engineering staff, stated: "I'm very
concerned about the legal implications of this move. We need to have
this be well thought through by people who understand the ins and
outs of the laws governing music distribution."

Other members of the engineering staff, in e-mails sent the same
date, also expressed concerns about other copyright infringement
issues implicated by the difficulty of ensuring that the user of
these services was in fact the lawful owner of a copy of the CD whose
sounds he was seeking to have transmitted to him from defendant's
database. See, e.g., plaintiffs' Exs. 21 and 22 in evidence.

Finding Number 5. This latter issue, which the defendant's employees
referred to, somewhat euphemistically, as the "security" issue but
which they recognized to be an issue of contributory infringement,
was never fully solved, as even defendant now concedes in the
stipulated facts.

But defendant, proceeding with considerable speed and secrecy,
launched the new system anyway on or about January 10, 2000. I accept
defendant's contention that the primary motivation for speed and
secrecy was to gain competitive advantage. But a concomitant result
was that the defendant could not reasonably rely on anyone except its
own counsel, the firm of Cooley Godward, with respect to the
significant legal issues being raised, since no one else who could
even pretend to expertise in the area of copyright law had access to
the facts of the proposal.

Finding Number 6. The most glaring legal issue that was being raised
was not the so-called "security" issue, but rather the issue of what
possible legal justification there could be for the unauthorized
copying for commercial purposes of tens of thousands of copyrighted
CDs, the contents of which would then be streamed to thousands of
users.

This problem was described in the defendant's internal documents as
the "fair use" issue, reflecting defendant's awareness that its
copying would be clearly unlawful unless justified by some "fair use"
defense. That purported defense, as articulated by Mr. Robertson, was
that the expanded My.MP3.Com services were simply facilitating a
private consumer's storage of his or her privately-purchased and
privately-used CDs.

Finding Number 7. Legally, as this Court subsequently found, this
purported justification was and is without any merit and does not
meet a single one of the legal tests for "fair use." But more
importantly for present purposes, factually this purported
justification was little more than a sham. Under either the "Beam It"
service or the "Instant Listening" service users of My.MP3.Com did
not, in fact, store their own CDs or the sounds transmitted from
their own CDs with My.MP3.Com.

Finding Number 8. This factual difference between an actual storage
system and what defendant was planning was fully recognized by
defendant at all times relevant. Indeed, as indicated in both the
exhibits and the testimony, the difference between "DaBomb" and
simple storage was critical to the anticipated commercial success of
the new service, since, by contrast with competitors like MyPlay, a
user of My.MP3.com, after placing an order for future delivery of the
CD under the "Instant Listening" service or indicating certain
indicia of purported ownership of the CD under the "Beam-It" service,
could arrange for defendant to instantly stream the defendant's
unauthorized copy of the CD to the user.

Based on both the reasonable inferences to be drawn from the exhibits
and the Court's assessment of the credibility and demeanor of the
witnesses, the Court finds that the defendant and its employees
understood at all times that the "storage" analogy was strained at
best. While they camouflaged the critical differences with broad-
brush appeals to "consumer rights," they were in fact never in any
doubt that this purported justification for their otherwise obvious
copyright infringement rested on a doubtful factual premise.

Finding Number 9. The defendant also recognized at all times that no
one but its outside counsel, Cooley Godward, could provide defendant
with legal advice on its copyright infringement problems that it
could reasonably rely on.

This brings me to what counsel and I have been referring to as
the "Bilzerian" issue. While I think that plaintiffs have the better
of this issue, I find in the end that I do not need to reach it,
because even accepting into evidence all the testimony that
plaintiffs sought to exclude on the grounds of the Bilzerian case, I
find that plaintiffs have still met their burden of proving
willfulness.

Indeed, the record of this trial establishes overwhelmingly that
everyone from mid-level management up to defendant's board of
directors looked to outside counsel, Cooley Godward, as the sole
source of reliable advice on the so-called "fair use" issue.

Thus as early as October 12, 2000, if not earlier, Mr. Rhodes was
called in to address this issue, see plaintiffs' exhibit 24 at p. 7,
and, as the documents show and Ms. Kantor, among others, clearly
testified, all legal issues in this area were more or less
automatically referred to him and his colleagues at Cooley Godward.

But what was counsel's advice? We will never know, for the defendant,
as is its right, has invoked attorney-client privilege and expressly
disclaimed any defense of reliance on counsel. Adverting for a moment
the so-called "Nabisco" issue, the Court is clear that it may not
draw an adverse inference from the invocation of the privilege, that
is, the Court may not infer from the invocation that the advice that
defendant received from its outside counsel was negative, or was
premised on insufficient disclosure to counsel, or anything of the
sort.

But, in the absence of any defense of advice of counsel, defendant
has proffered no credible evidence whatever that rebuts plaintiffs'
clear and convincing proof that defendant knew at all times that its
copying of plaintiffs' CDs was presumptively unlawful, that its fair
use justification was factually and legally very doubtful, and that
no one but its outside counsel could be relied upon to advise it as
to whether there was, nonetheless, a good faith basis for proceeding.
Given defendant's decision not to defend here on the basis of any
reliance on such advice, there is virtually no escape from a finding
that defendant willfully infringed plaintiffs' copyrights. From the
foregoing findings of fact, two conclusions of law immediately follow:

First, I conclude that defendant willfully infringed plaintiffs'
copyright. As I indicated at the start of the trial, "willfulness" in
the context of statutory damages for copyright infringement means
that the infringer either had actual knowledge that it was infringing
the plaintiffs' copyrights or else acted in reckless disregard of the
high probability that it was infringing plaintiffs' copyrights.
Based on the foregoing findings of fact, I find that plaintiffs have
carried their burden of proving that the defendant had actual
knowledge that it was infringing plaintiffs' copyright.

Second, as a result of the finding of willfulness, the Court now has
the option of imposing as much as $150,000 in statutory damages per
infringed CD. Conversely, the lower end of the range is either $750
per CD or, if defendant's constitutional argument has merit, $500 per
CD. I have considered the issue of damages under both possibilities,
that is, with a possible floor of $750 per CD or a possible floor of
$500 per CD, and find that the floor level makes absolutely no
difference to my conclusion of what is the appropriate award in this
case.

Accordingly, the constitutional issue will not have to be briefed, as
I find it is entirely moot. But where within this enormous range of
$500 or $750 per CD to $150,000 per CD should the Court impose
damages? In making this determination, I must consider not only
wilfulness but also deterrence and all the other relevant factors
that counsel for the parties so eloquently argued to the Court
yesterday.

Unlike plaintiffs' counsel, however, I believe any attempt to reduce
this determination to some kind of mathematical formula or equation
is spurious. There are a great many factors to consider and the Court
must weigh them as best it can, based on the evidence and on the
Court's reasoned evaluation of all the relevant factors and their
interplay.

I will, however, single out a few of the factors that seemed to me
especially important in making this determination, without, however,
denigrating other factors that counsel brought to my attention and
that I also considered.

First, the size and scope of defendant's copyright infringement was
very large and the potential for harm was similarly large.

But on the other hand, plaintiffs have made not any attempt at this
trial to prove any actual damages they may have suffered. There are
at least two typical ways they might have done so, either by showing
the fair market value of the copyrights in question, their property
value so-to-speak, or by showing the profits, if any, that defendant
realized from the infringement, such as perhaps increased advertising
revenues reasonably attributable to the increased usage of the
enhanced My.MP3.com. Plaintiffs did not pursue either alternative,
nor any other way of showing actual damages. Of course, they are not
required to: that is why, among other reasons, Congress provided
statutory damages.

But in determining the level of statutory damages, the Court views
the absence of any proof of actual damages as a mitigating factor
favorable to the defendant.

Second, while defendant obviously continued its willful infringement
until the time of the Court's ruling on April 28, 2000, the Court
essentially agrees with defendant's counsel that defendant's conduct
since May of this year has on the whole been responsible and this is
a mitigating factor in defendant's favor.

I also credit that portion of Mr. Robertson's testimony in which he
indicated that, even from the outset, he shunned the kind of lawless
piracy seemingly characteristic of some others operating in this
area. While the defendant's willful copyright infringement was a very
serious transgression, defendant's otherwise responsible conduct is
an appropriate mitigating factor for the Court to take into account.

Third, while the defendant's size and financial assets are highly
relevant to arriving at the appropriate level of statutory damages,
the Court declines to engage in speculation as to what might be the
effect of any award on other litigations.

Fourth, while the difficult issue of general deterrence must always
be approached with caution, there is no doubt in the Court's mind
that the potential for huge profits in the rapidly expanding world of
the Internet is the lure that tempted an otherwise generally
responsible company like MP3.com to break the law and that will also
tempt others to do so if too low a level is set for the statutory
damages in this case.

Some of the evidence in this case strongly suggests that some
companies operating in the area of the Internet may have a
misconception that, because their technology is somewhat novel, they
are somehow immune from the ordinary applications of laws of the
United States, including copyright law. They need to understand that
the law's domain knows no such limits. Weighing not only the
foregoing factors but all the other relevant favors put before the
Court, the Court concludes, and hereby determines, that the
appropriate measure of damages is $25,000 per CD.

If defendant is right that there are no more that 4,700 CDs for which
plaintiffs qualify for statutory damages, the total award will be
approximately $118,000,000; but, of course, it could be considerably
more or less depending on the number of qualifying CDs determined at
the final phase of the trial scheduled for November of this year.That
concludes the rulings of the Court."