Saturday 14 May 2011

LimeWire settles with record labels for $105 million

LimeWire, the now defunct file sharing platform, and its founder, Mark Gorton, have reached a settlement with the 13 record labels that brought an action against them in the Manhatten federal court, agreeing to pay $105 million in damages. The defendants has already been found liable for copyright infringement last year by Judge Kimba Wood and the trial that has been settled was to award damages – the Jury could have potentially awarded up to $1.4 billion in statutory damages. LimeWire had already settled an action brought by 30 music publishers in March 2011.

Glenn Pomerantz, the lawyer representing 13 record labels in their legal action in the Manhatten federal court against Lime Wire LLC and founder Mark Gorton, said at the start of the action that the defendants should pay the highest range of damages for harming the recording industry by allowing people to download songs for free saying “The harm that Lime Wire has caused is truly staggering,”

The record companies also accused Gorton of the fraudulent transfer of assets into family limited partnerships where they would be shielded from liability. Gorton, who was CEO of Limewire from 2000 to 2006, was found by the court to have been intimately involved with the management of the company and until 2005, Gorton owned at least 87% of the company, according to court records. Pomerantz told the jurors Gorton made the transfer three days after the U.S. Supreme Court ruled in 2005 that file-sharing service Grokster could be held liable for copyright infringement in the MGM v Grokster case. In a pre-trial ruling Judge Kimba Wood said that Gorton and all his business entities (such as Lime Group and Lime Wire FLP) could be liable for copyright infringement, so that he himself and any other companies he set up will also be liable to pay any damages awarded to the rights owners.

The record labels evidence all pointed to LimeWire’s role is facilitating illegal downloading and the resultant destruction of the recorded music market. In opening remarks Pomerantz told the jury the record industry’s revenue declined 52% from 2000 (the year Lime Wire was founded) to 2010. Gorton and LimeWire’s lawyers have, unsurprisingly, a slightly different take on this, arguing that many other factors were responsible for the drop in music industry revenue besides peer-to-peer file sharing, with the defendant’s attorney Joseph Baio saying “The record companies know and have known that their problems started well before Lime Wire” in his opening remarks. Baio cited the record companies’ own past comments to show that other factors were more to blame for the decrease in revenue than file-sharing. These included counterfeit and copied CDs, the economic recession, bankruptcies of music wholesalers and retailers, the maturation of the CD market, competition from other forms of entertainment such as video games, and the industry’s own inability to exploit the new technologies.

The defendants were hampered by another of Judge Wood’s rulings when she said that one of their key witnesses, a damages expert called George Strong, would not be allowed to deliver his entire testimony. Strong planned to tell the court that the link between file-sharing and slumping record sales in the last ten years was not proven, and that there is evidence that file-sharing can lead to an increase in record sales, ie the 'file-sharing is basically a preview service' argument. However Wood ruled that Strong was not an expert on either the music or technology industries, and that as he hadn't undertaken any of his own research regarding file-sharing, he would not be allowed to make such sweeping statements in court with Judge Wood saying ”He can’t argue that file sharing may have stimulated additional music purchases, because he didn’t do any analysis in that area”. Judge Wood has also indicated that she wouldn't allow evidence from recording artistes who would say that illegal file swapping has not harmed their careers – and in some cases may have (in their opinion) helped their careers. Judge Wood was happier with the record companies’ experts and Dr. Richard Waterman of the University of Pennsylvania, who ran a study which concluded that 98.8% of the files requested by Limewire users were copyright protected, would have been allowed to give evidence.

As the trial progressed the defence did produce a number of statements in court from various record label executives to explain the rise of filesharing and point towards the label’s own failures to contain piracy. One internal memorandum produced to the court by the defence from Warner Music Group chief Edgar Bronfman Jr, saying “"[W]e inadvertently went to war with consumers ... [and] consumers won," Doug Morris, former head of Universal Music wrote in a note presented as evidence "The real problem is that there is no technology coming from the record companies" with current Universal Music CEO Zach Horowitz also quoted: It seems when told by Victory Records CEO Tony Brummel, "You can't compete with free," Horowitz replied "We can. We have to. It's just that we have to be creative and add value" although I am not quite sure why the defence felt this helped their case. LimeWire also produced a memo from Recording Industry Association of America (RIAA) chairman Mitch Bainwol, entitled, "Burning and Ripping are Becoming a Greater Threat Than P2P" – again I am not quite sure why this helped the defence - its all piracy and all damaging! LimeWire's attorney concluded his opening statement in the case by pointing out that anytime a file-sharing network has been shuttered, users have migrated to another service. CNET reports Baio concluded by saying "Music that is free is here to stay".

Next it was LimeWire founder Mark Gorton’s turn to give evidence. Noting last year's court ruling on his company's operations, Gorton told the court "I was wrong. I didn't think our behaviour was inducing [copyright infringement] but I understand that a court has found otherwise". The RIAA clearly have a different opinion and said that Gorton ploughed ahead (despite a cease and desist letter sent after Grokster) because of the potential profits he could make - even more so once most of his US competitors shut down post Grokster. Indeed Pomerantz highlighted a pre-Grokster interview Gorton gave to the New York Times in which he said: "If the Supreme Court says it is illegal to produce this software, LimeWire will cease to exist" and also noted that LimeWire staff divided up their users into four categories: “hardcore pirates” (25%), “morally persuadable” (25%), those “sampling music” (30%) and “legally unaware” (20%). Pomerantz also said that Gorton had banned his staff from responding to user queries regarding the service's legality. Gorton told the court that he took the cease and desist letter as a request by the labels that he find a way of persuading his users to pay for music, and that he forbade staff discussing LimeWire’s legality as hadn't wanted to be placed in a position of giving legal advice to internet users.

And then it was time for the first of the record industry heavyweights – with Warner Music Group Chief Executive Officer Edgar Bronfman telling the federal jury that Lime Wire’s effect on Warner’s business was “devastating.” Bronfman, 54, testified that the drop in revenue caused by peer-to-peer music sharing services such as Lime Wire forced Warner to fire employees and release fewer recordings. He said he had hoped the services would shut down voluntarily after the Supreme Court Grokster decision held that music-sharing programmes could be held liable for infringement. “When Lime Wire kept operating it frustrated me greatly,” adding “It was devastating, frankly.” And that was the last of the heavyweights too as .... and the case was suddenly announced as settled, with the first report I saw in the Wall Street Journal, based on a defence statement to the press.

With a week of the trial still scheduled, and with no public indication from the record labels about how much they were seeking, media reports were still speculating that it would be maximum statutory damages (under federal copyright law) for 9,561 sound recordings released since 1972. If the jury awarded maximum statutory damages of $150,000 for each recording, that would result in an award of $1.4 billion. Other damages on pre-1972 recordings were also being sought. In my own opinion the record labels had made a good case – and of course had already won the argument about whether or not LimeWire was liable for infringement - but clearly LimeWire alone was not the reason for the decline in the sale of recorded music – there are many reasons – piracy and P2P file swapping being key factors of course – but the record labels failure to adapt to the digital age is as much to blame in my mind (and yes, I still remember the awful Pressplay and Music Net the labels launched which is another story altogether). That said, much of the defence was, at best, irrelevant and some seemingly self defeating. Baio had said the labels deserved far less and seemingly said that Gorton made ‘only’ about $6 million from the songs the record companies have listed as infringed. What did become clear was that as the case developed, ongoing settlement talks had run parallel with case with the Wall Street Journal again reporting that lawyers for the labels and LimeWire representatives have met on at least three occasions in the hope of replacing the jury decision. And then on May 12th the WSJ reported that a settlement HAD been reached with LimeWire LLC and its founder, Mark Gorton, agreeing to pay the (major record labels) plantiffs and their trade group the Record Industry Association of America $105 million to settle the copyright infringement lawsuit, according to a statement issued by the defendants' lawyer with LimeWire and Mr. Gorton saying that they were "pleased that this case has concluded” and quite possibly very pleased that LimeWire group companies - and indeed Mr Gorton personally - were facing having to pay over less than 10% of what COULD have been awarded, and certainly a lot less than the record labels had been suggesting was the real economic damage to the recorded music market by LimeWire. That said the labels will probably be pleased that they are not reliant on an unpredictable jury, that a significant (if not ground breaking) sum of money had been recovered and another important precedent publicly set, without too much collateral damage, in a public arena.

Update: I have just found the post settlement comments from chairman and CEO of the RIAA Mitch Bainwol who told reporters: "We are pleased to have reached a large monetary settlement following the court's finding that both LimeWire and its founder Mark Gorton were personally liable for copyright infringement. LimeWire wreaked enormous damage on the music community, helping contribute to thousands of lost jobs and fewer opportunities for aspiring artists". He added: "The significant settlement underscores the Supreme Court's unanimous ruling in the Grokster case: designing and operating services to profit from the theft of the world's greatest music comes with a stiff price".

What remains is one now defunct internet business and a declining recorded music business.

Arista Records LLC v. Lime Wire LLC, [2011] 06-05936, U.S. District Court, Southern District of New York (Manhattan).

EMI April Music Inc et al v. Lime Wire LLC, [2011] U.S. District Court, Southern District of New York, No. 10-04695. (CMU Daily, 5th May 2011)

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