has lost its first court battle against the five major record labels.

New York District Court Judge Jed Rakoff granted a partial summary judgment in favour of the Recording Industry Association of America (RIAA), in the organization's suit against for copyright infringement.

The suit was in response to's service, which allows consumers to get into's database instantly and encode MP3 copies of CDs they own, without the hassle of encoding the CDs themselves. could owe up to $120 billion in damages if the judge finds in favour of the RIAA.

Unwanted has been controversial from the moment it was released on January 12. Similar to the way Hotmail works, the service allows consumers to log onto their account from any computer and access their music collections. But the most interesting – and controversial – feature of the service was called Beam. By downloading a piece of software, Beam users could pop a CD into their computer and, in a matter of seconds, have a digital MP3 copy of that CD appear in their account. The feature saved consumers time by using a software ripper to encode the CD.

"It's insta-magic," Robertson said as the product was launched.

The 400,000 users who have subscribed to the service agreed, but the major labels hardly shared their enthusiasm. Ten days after the product was released, the RIAA filed a suit against, claiming the Web company, based in San Diego, was violating copyright law by giving away music from its database. argued that because the consumers already owned the hard copy of the CD, no copyright laws were violated by merely giving them a digital copy for free.

Not right Rakoff disagreed, issuing a one-page statement granting the plaintiff's motion, holding the defendant liable for copyright violations. The ruling sent's stock plummeting by 30 per cent. The details of the judge's ruling are expected in the next two weeks.

The major record labels are expected to file an injunction against immediately, which would require the company to take the record labels music off the service. CEO Michael Robertson said: "We think it's a loss. When new responsible technologies for delivering music like are attacked and shut down, it leaves a vacuum for technologies that are not responsible, like Napster and Gnutella, to come in."

Damages from the suit could be devastating for The RIAA is seeking $150,000 for each major label-owned musical track in's database, which contains some 80,000 CDs. In the worst-case scenario for, the company could owe up to $120 billion dollars.

Unsure "I'm not sure the estimates are correct about that," Robertson said when asked about the damages. He also said was "absolutely not" considering filing for bankruptcy to pay back the record labels, and he added that " is fortunate to be one of the best-financed Internet companies".

Robertson also alluded to possible attempts to settle the case. He said: "We've always been optimistic that a business resolution is the best solution here."

The RIAA was unavailable for comment.