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May 17, 2011 11:34 AM

Did Cross Examination of Warner Music's Bronfman by Willkie's Baio Prompt Lime Wire Settlement?

Posted by Susan Beck

From The Litigation Daily

So why did the music industry suddenly settle with Lime Wire in the midst of a jury trial last Thursday?

We might never know for sure. But it's worth noting that the $105 million deal came fresh on the heels of the cross examination of Warner Music CEO Edgar Bronfman, Jr., by Willkie Farr & Gallagher partner Joseph Baio. Bronfman was forced to address some sensitive and potentially inflammatory topics about the personal fortune he'd made off of Warner. Moreover, the CEO--who would have had to continue the cross examination if the parties hadn't settled--faced the unnerving prospect that he might have to answer questions about his insider trading conviction in France last January.

As we've chronicled, the music industry sued the online music file sharing service and its founder Mark Gorton in 2006 for copyright infringement. In May 2010 the company and Gorton were found liable in a summary judgment ruling by Manhattan federal district court judge Kimba Wood. In October Judge Wood enjoined Lime Wire from distributing its software, and noted that the company would "almost certainly" be liable for statutory damages, which can reach $150,000 per violation. Willkie entered the case last September, replacing Wilson, Sonsini, Goodrich & Rosati, which replaced Fulbright & Jaworski.

The music companies initially asked for $75 trillion in damages, which Judge Wood called "absurd" this past March. When the damages trial began, the industry didn't specify exactly how much money it wanted, but it appeared to be aiming for billions. To present its damages case, the music industry called a series of executives who testified about Lime Wire's destructive impact on their business. Bronfman, however, was the only CEO to take the stand. 

Before he testified, Baio and Warner Music's lawyer, Glenn Pomerantz of Munger, Tolles & Olson, debated before Judge Wood at a sidebar whether Bronfman could be questioned about his French insider trading conviction. In January, a Paris court convicted Bronfman of insider trading when he was vice-chairman of Vivendi and fined him 5 million Euros. (He is appealing.) Judge Wood deferred a decision, saying she would "consider it further at a break," according to this transcript of Bronfman's testimony.

Under direct questioning by Pomerantz, Bronfman described how Lime Wire had hurt the recording business. Warner's revenue from recorded music had dropped from $1.4 billion when he joined the company in 2004 to $1 billion, he said, and he attributed most of the industry's problems to peer-to-peer piracy. He also claimed that Lime Wire and others like it stifled innovation, because investors shied away from investing in established music companies with the looming threat of piracy. "Those that did invest generally got hosed," he testified.

In his cross examination, Willkie's Baio latched onto the theme of the "hosed" investor. "You are not one of the people who got hosed, are you?" he asked. He proceeded to show the jury that Bronfman had, in fact, gotten very rich off Warner Music. Bronfman described how he and others  took $1.05 billion out the company nine months after they bought it in a 2004 leverage buyout. In addition, Bronfman would personally be making "billions" through the pending sale of Warner to Access Industries.

Baio: "You are making a boatload of money [from the sale], aren't you?"

Bronfman: "I am not sure what a boatload of money is, but we have made a good return on our investment with the sale."

Baio: "So you are not one of the people -- at least in that sense, that you made a good investment and a good return -- you are not one of the people who you were talking about that might get hosed, right? "

For good measure, Baio emphasized that while Bronfman was making billions from Warner, the company had laid off thousands of workers and artists. Bronfman admitted that shortly after he and the investor group bought the company in 2004, they cut the recording artists list by 40 percent, before Lime Wire was even running. And the company laid off employees nearly every year after that.

Click here to continue reading "The Lime Wire Files."

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