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The roller-coaster fortunes of MP3.com took a downturn April 28, when US district judge Jed S. Rakoff found in favor of the Recording Industry Association of America in its copyright-violation suit against Internet music site MP3.com. Investors in the once–high-flying startup immediately began unloading shares of the company's stock, which had dropped 40% by the end of the trading day.

Damages against MP3.com are still to be assessed, but could run as high as $150,000 for each instance of "willful infringement" of RIAA members' copyrighted works. The total could reach into the billions, because each CD contains several copyrighted song titles. A high settlement could put MP3.com out of business, but a lengthy appeal could prevent that from happening immediately. The site promotes new music directly to fans, bypassing the traditional distribution-and-promotion deals musicians must establish with record labels. MP3.com recently announced a $1-million-per-month budget for its "Payback for Playback" program to compensate musicians for recordings downloaded from the site.

MP3.com also provides its subscribers with music archiving and retrieval, known as Instant Listening Service and Beam-it, enabling them to upload music to MP3.com's servers and tap into them from any Internet-connected computer. This service is the cause of complaints brought against the Internet company by the RIAA, Paul McCartney's MPL Communications, and others. MP3.com claims that its members have paid for the music they choose to upload, but does not require proof of purchase. The recording industry has objected to the service because permission to use the music was never obtained from its legal owners.

By the end of April MP3.com had archived more than 80,000 recordings, according to chairman and CEO Michael Robertson. MP3.com does not generate revenue when consumers use the service to listen to copyrighted music, but does make money from advertising that appears on its site. The record companies litigating against MP3.com—including BMG Entertainment, Sony Entertainment, Warner Bros. Records, Elektra Entertainment Group, Thorn EMI PLC's Capitol Records, and BMG's Arista Records—said they would pursue an injunction to prevent the site from including copyrighted music in its database. Such an injunction could have a serious effect on the company's ability to sell advertising.

Katherine Forrest, an attorney for Warner Bros., hailed Judge Rakoff's ruling and described MP3.com's practices as "a straightforward case of copyright infringement."

In a prepared statement, Michael Robertson said the decision is "is not a victory for the record labels—it's a loss." Robertson claimed that his site has taken MP3 audio technology from the fringes into the mainstream of music distribution. "New technologies for delivering music are here to stay, and the technology trend is moving in only one direction: forward," Robertson said. "The labels made the decision to challenge a technology that will protect their intellectual property interests and grow their business. They will be left with copyright chaos, as we're witnessing today."

Participants in the case have not announced their next moves because Judge Rakoff has yet to issue a detailed ruling, which is expected in the next two weeks. MP3.com's attorney Michael Carlinsky swore to fight on, describing the current struggle as "round one."