Warner Music, Sony Reach $105 Million Deal With Lime Wire

Warner Music Group Corp. (WMG) and Sony Corp. (6758), along with other owners of music labels, agreed during a trial to settle their copyright lawsuit against Lime Wire LLC and its founder, Mark Gorton, for $105 million.

“The case has just settled,” U.S. District Judge Kimba Wood told jurors yesterday. The suit was filed in 2006.

Lawyers for both sides met throughout the day at the Manhattan courthouse to forge the agreement. The defendants will pay a total of $105 million, according to statements from the Recording Industry Association of America and Willkie Farr & Gallagher LLP, the law firm representing Gorton and Lime Wire.

During the trial, the music-label owners, which also included Vivendi SA (VIV)’s Universal Music Group and Citigroup Inc. (C)’s EMI Group, sought more than $1 billion. The labels claimed Lime Wire and Gorton induced the infringement of copyrights on thousands of songs through peer-to-peer file-sharing software on the Internet. Wood ordered Lime Wire to shut down its music service last year. A jury was determining damages in the case.

Glenn Pomerantz, a lawyer for the music companies, told the jury of eight women and one man in opening statements on May 3 that the record industry’s revenue fell 52 percent from 2000, the year Lime Wire was founded, to 2010.

“We are pleased to have reached a large monetary settlement,” the recording association said in its statement. “Designing and operating services to profit from the theft of the world’s greatest music comes with a stiff price.”

Revenue Decline

Gorton’s lawyers were trying to convince the jury that other factors were responsible for the decline in industry revenue besides peer-to-peer, or P2P, file-sharing.

Joseph Baio, a lawyer representing Lime Wire and Gorton, said in his opening statement to the jury that these factors included the counterfeiting and copying of CDs, the economic recession, bankruptcies of music wholesalers and retailers, the maturation of the CD market, competition from other forms of entertainment and the industry’s own inability to exploit the new technologies.

The record labels sought statutory damages under federal copyright law for 9,561 recordings released since 1972, according to court papers. Maximum statutory damages of $150,000 for each recording would have resulted in a $1.4 billion award. Other damages on pre-1972 recordings were also being sought, the companies said in court filings.

Baio said Gorton made only about $6 million from the songs the record companies had listed as being infringed. Lime Wire, which provided free software for file sharing, made money by selling a faster, premium version of the program.

Transfers Challenged

The music companies also accused Gorton of making a fraudulent transfer of assets into family limited partnerships to shield the funds from liability. Pomerantz told jurors that Gorton transferred the money three days after the U.S. Supreme Court ruled in 2005 that Grokster, another music-sharing program, could be held liable for infringement.

Before the settlement was announced yesterday, Gorton was scheduled to take the witness stand a second time. The labels’ lawyers planned to question him about the alleged hiding of his assets.

Gorton, 44, declined to comment about the settlement. Besides founding Lime Wire, he operates a New York-based hedge fund, Tower Research Capital LLC.

Estate Planning

Gorton’s lawyers said that his transfer of assets was part of estate planning and that the closing date was set before the high court’s decision.

Besides the assets in the family partnerships, Gorton has $100 million in Individual Retirement Accounts, Pomerantz told the jurors.

The last witness to testify was Warner Music Chief Executive Officer Edgar Bronfman. He told the jury he had hoped the peer-to-peer services would shut down voluntarily after the Grokster ruling.

“When Lime Wire kept operating it frustrated me greatly,” Bronfman said in court. “It was devastating, frankly.”

Bronfman, 54, testified that the drop in revenue caused by peer-to-peer music sharing services such as Lime Wire forced New York-based Warner Music to fire employees and release fewer recordings.

Warner Music on May 6 said it agreed to sell itself to former director Len Blavatnik’s Access Industries Holdings LLC for about $1.3 billion in cash, or $8.25 a share, plus the assumption of about $2 billion in debt.

“You’re making a boatload of money,” Baio said to Bronfman in his cross-examination on May 11.

Warner Music was sued yesterday by a shareholder claiming the acquisition by Access undervalues the company. Warner Music directors abandoned their duty to shareholders when they agreed to a deal that benefits Access to the “detriment” of minority investors, Barbara A. Varipapa said in a complaint filed in Delaware Chancery Court in Wilmington.

Warner Music was unchanged at $8.19 at 9:57 a.m. in New York Stock Exchange composite trading. The shares had risen 45 percent this year before today.

The case is Arista Records LLC v. Lime Wire LLC, 06-05936, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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