Updated from 3:44 p.m. EDT

A federal judge in New York ruled Wednesday that online music seller

MP3.com

(MPPP)

willfully violated copyright law when it offered music from

Universal Music Group's

compact discs on its Web site and ordered it to pay $25,000 per CD in damages.

The damage award could reach as high as $250 million.

"It is a pretty big negative for MP3.com, and could potentially bankrupt the company," said David Bench, an analyst at

Arnhold & S. Bleichroeder

. Bench has a buy rating on MP3.com, and his firm has done no underwriting for the company.

Michael Robertson, the chief executive of MP3.com, told reporters that he was "disappointed" and that his company would "definitely appeal this."

Representatives of Universal, which is owned by

Seagram

(VO) - Get Report

, left the courthouse without talking to reporters.

MP3.com's battles with the recording industry have been viewed as a test case for how copyright law is applied to the Internet and particularly for how music is distributed online. The San Diego-based company was sued by the recording industry after it made computerized copies of more than 40,000 compact discs without permission, and a federal court in San Diego found the company liable for copyright infringement in April.

All five major record labels sued the company, but Universal was the only label to insist on a trial. The four others --

EMI

,

TheStreet Recommends

Time Warner's

(TWX)

Warner Music Group

,

Sony's

(SNE) - Get Report

Sony Music Entertainment

and

Bertelsmann's BMG Entertainment

--

settled with MP3.com.

Because the judge ordered MP3.com to pay $25,000 in damages for each compact disc that violated copyright, the big issue now is how many CDs qualify under the judgment, which will be decided in November. MP3.com is arguing that 4,700 CDs should qualify, which would result in a damage award of $118 million. But the ruling could potentially apply to 10,000 CDs, leading to $250 million in damages.

Settlement talks will continue between MP3.com and Universal, Robertson said. MP3.com has about $300 million in cash on its balance sheet.

MP3.com shares were halted Wednesday before the ruling was announced, and they last traded at $7.88, down 69 cents. Seagram's shares closed down $1.44, or 2%, at $58.69.

Universal lawyers had asked the judge to impose $45,000 in damages per CD, which could have resulted in $450 million in damages.

Judge Jed Rakoff made clear that he had other Internet companies in mind when making his ruling, and that he was well aware that the damages he imposed could deter others from copyright infringement.

"There is no doubt in the court's mind that the potential for huge profits in the rapidly expanding world of the Internet is the lure that tempted an otherwise generally responsible company like MP3.com to break the law and that will also tempt others to do so if too low a level is set for the statutory damages in this case," Rakoff said.

"Some of the evidence in this case strongly suggests that some companies operating in the area of the Internet may have a misconception that, because their technology is somewhat novel, they are somehow immune from the ordinary applications of laws of the United States, including copyright law," Rakoff said. "They need to understand that the law's domain knows no limits."

The strong words Rakoff had for Web companies that infringe on copyright protections aren't much of a surprise. In his rulings in the case leading up to Wednesday's judgment, he "had made clear he didn't approve of this kind of behavior and he made clear that he intended to send a message," said Nitsan Hargil, analyst with

Kaufman Bros.

Hargil rates MP3.com a hold. His firm hasn't done any underwriting for the company.