MP3.Com's Online Music Service Challenged

Music site MP3.com suffered two blows Tuesday when a judge ruled that the online music company infringes on a record label's copyrights and when MP3.com's insurance company sued to avoid covering losses from copyright-infringement claims.

In a case filed in the southern district of New York, U.S. District Judge Jed S. Rakoff agreed with plaintiff TVT Records, the nation's largest independent record label, that MP3.com willfully infringed on the record label's copyrights.

The judge ruled TVT, which handles popular musicians including XTC and Guided by Voices, can request statutory damages from MP3.com. MP3.com has already paid an estimated $133 million to end similar disputes with the five major record labels.

Meanwhile, in a Manhattan federal court, Westport Insurance sought to avoid covering costs the online music site has incurred through copyright-infringement claims. The company says MP3.com demanded coverage up to policy limits for some losses.

Westport says it denied the coverage because MP3.com allegedly misrepresented its business, broke copyright law, and entered into settlements without the insurer's consent.

MP3.com officials could not be reached to comment.

MP3.com's double whammy is just the latest jockeying in the online music field. The New York court actions came the same day a federal judge in California gave music-swapping company Napster three days to remove unauthorized music from its system if record companies provide Napster with song titles, artist names, and file names.

Coincidentally, TVT was the first label to abandon a lawsuit against Napster, which plans to move to a paid-subscription model by July that will give record labels a cut of the revenues.

"Napster took the diametrically opposite point of view from MP3.com," says TVT founder and president Steve Gottlieb. "They've maintained not only are we going to compensate major labels and independent labels, but even if you're not represented by any label, we're going to create a mechanism to make sure you're compensated for the use of copyrights on our system."

The message from MP3.com, he says, has been "we're not going to pay you unless you sue us."

Despite the judge's ruling, MP3.com and TVT are scheduled to go to trial March 26 to resolve the factual and legal validity of the plaintiff's copyright certificates.

Wire services contributed to this report.