CNet: Lime Wire’s day of reckoning is here

by Greg Sandoval

In a New York federal court this week, the four largest record companies will try to prove that it was Gorton’s own greed that drove him to continue operating Lime Wire, the company behind the highly popular file-sharing service LimeWire, though they warned him years ago to stop and fellow peer-to-peer operators advised him to cut a deal. Gorton continued to defy the top labels even after their trade group, the Recording Industry Association of America (RIAA), filed a copyright suit against him in 2006 and after the courts had issued unfavorable rulings against operations like his.

Starting this week, a jury will be asked to decide the amount Gorton and Lime Wire must pay in damages to the four major labels. Jury members can choose any amount between $750 and $150,000 for each infringing work. That’s the range for copyright damages set by Congress. In this case, the RIAA seeks damages for 9,715 albums. That means Gorton doesn’t walk out of the courtroom for less than $7.2 million. If the jury finds him liable for the maximum, he will owe about $1.4 billion.

Gorton could not immediately be reached for comment.

The RIAA won its copyright case a year ago, when U.S. District Judge Kimba Wood found that Gorton and Lime Wire were liable for “willful” infringement. In October, she ordered the company to shut down operations. After that the only question left to answer was how much Gorton would be required to pay and whether the RIAA can collect.

Based on the way these things typically go, expect the music industry to win a judgment that will likely exceed Gorton’s personal net worth. He could then attempt to file for bankruptcy and discharge the judgment that way. The music labels would dispute his bankruptcy claim, noting that he was found liable of willful copyright infringement and then try to prove his actions were malicious. Typically those found liable of willful and malicious copyright infringement aren’t allowed to shed judgments because of a bankruptcy claim.

If I’m correct, then following all that, the labels will need to find Gorton’s assets. Some of them won’t require too much searching. Records show that Gorton owns a $4 million home on Manhattan’s Upper West Side.

For the music industry though, the case isn’t just about dollars and cents. The LimeWire software was downloaded more than 150 million times and was one of the top file-sharing services. More than 90 percent of the service’s file-sharing traffic was pirated material and the cost to the music sector was in the billions, the RIAA has alleged.

Lime Wire was the last of its kind. There aren’t any more mainstream U.S.-based companies accused of employing music piracy as a business strategy. With Lime Wire’s demise, the RIAA can now boast that they’ve driven file-sharing services underground or overseas. In addition, by taking down the company and possibly hefting huge debt onto Gorton’s shoulders, the music industry has turned LimeWire and Gorton into a powerful cautionary tale.

In discussions with several copyright hardliners from the music sector, I’ve seen that for them Lime Wire’s legal undoing is a story about justice and retribution.

To his music industry critics, Gorton, who is 44 and also operates a hedge fund as well as a software business, is little more than a digital-music carpetbagger. He swooped in after Napster exposed the industry’s vulnerability to file sharing and before the courts had yet to rule on the legality of operations like his.

RIAA lawyers will likely tell the jury that even after the U.S. Supreme Court ruled in the 2005 landmark case of MGM Studios v. Grokster that peer-to-peer services could be sued for inducing copyright violations Gorton refused to clean up his act.

His competitors–Grokster, Kazaa, BearShare, WinMX, and eDonkey–either went legitimate or closed down. That left Lime Wire in charge of file sharing during the 2000s. The service went from a file-sharing market share of 3 percent in 2004 to nearly 80 percent by 2007, according to research firm NPD Group.

During the same period, Lime Wire’s annual revenue grew from $6 million in 2004 to $20 million two years later.

The only changes Gorton appeared to make were moving personal assets into trusts controlled by his family.

According to testimony from Lime Wire’s former CEO as well as from Gorton’s own deposition with RIAA lawyers, he transferred his money to “protect the assets in the event of a legal judgment against me personally.”

Gorton suggested in an interview last year with The New York Times that he was “naïve” about the legal issues involved. Some who used to work with Gorton say that isn’t true.

Ted Cohen, a long-time music industry exec who now is a consultant for digital-music services, was hired in 2006 by Gorton and Lime Wire to “take them legal” Cohen wrote in a blog post last December. According to Cohen, after he wrote an opinion piece in Billboard magazine that the labels should license Lime Wire in “its then-current state” and after he began to set up meetings with the record companies, the plan was scrapped unexpectedly by Gorton.

“LimeWire’s owner, called me to express his displeasure with my editorial position,” Cohen wrote. “He said he had no intention of paying a dime to artists, labels or publishers and I should not be stating anything to the contrary. When I reminded him that he’d hired me to get LimeWire agreements with the rights holders, he said all he wanted me to do was to get them to leave him alone. I told him that wasn’t going to happen…I knew it was not going to be a happy ending.”

Posted by Ted • Tuesday, May 3, 2011 .