Can Record Labels Really Quantify The Damage From Limewire Downloads?

The record labels’ lawsuit against the Limewire file-sharing service is nearing its final stage-a January trial has been set to calculate the damages. But as the lawyers prepare for that trial, the lawsuit has taken a surprising turn, with the judge asking the record labels for some new information. It isn’t a good omen for the labels, which have said they may ask for over $1 billion from Limewire and its founder Mark Gorton. Ultimately, the size of the punishment against Limewire will have a significant impact on how large a hammer record labels have to wield against the alleged copyright scofflaws of the future.

Limewire is essentially shuttered, and has stopped distributing its software, after a judge ruled last month that it had illegally encouraged copyright infringement. The company has even begun to sell off the still-legal elements of its business, such as its online music store.

The record labels may want a billion dollars, but that’s a lot of money to squeeze from a service that reportedly earned revenue of $20 million in 2006, a year when it was near the height of its popularity. They’re hoping to get some of that cash from founder Mark Gorton, who has moved on to other ventures. Gorton’s hedge fund, Tower Research Capital, was said to have had $117 million in assets in 2007.

We reached out to lawyers for the Recording Industry Association of America, which represents the labels, to ask them about their strategy for showing damages, and will update the story if and when we hear back.

To collect such a sum, the labels will need to use the provisions of copyright law that allow for large statutory damages-up to $150,000 per song in the case of willful copyright infringement. But the judge overseeing discovery in the damages case has already made an unusual ruling, asking the labels to prove how much actual damage they have suffered from piracy. It’s a surprising move, since copyright owners are usually exempt from showing they were actually hurt by illegal copying. Indeed, part of the idea behind statutory damages is to make it easy on plaintiffs who might have a hard time precisely measuring their harm.

The judge overseeing discovery ruled last week that Limewire’s lawyers should be given a chance to argue “that the statutory damages being sought by [the record labels] would be disproportionate to any actual damages.” How are they going to do that? They’re going to look at the actual royalty information for 300 copyrighted works-80 songs and 20 albums selected by Limewire’s lawyers, 80 songs and 20 albums picked by the record labels’ attorneys, and a similar number selected randomly.

It’s an early skirmish in this damages battle, but the focus on proving real harm in the nebulous area of internet piracy doesn’t bode well for the music-industry plaintiffs in this case.