The legal scrap is over receivers / recorders that XM is marketing as XM + MP3 players. Many of the receivers XM is selling offer up to 50 hours of recording time that can be set in advance. Plus, many of the players have the capability of recording an entire song, even though the user presses the “record” button after the song begins playing.

The recording industry says these features violate copyright because they allow users to compile and organize a library of music without actually purchasing the songs.

So far, XM has claimed that its receivers operate well within the fair use rights granted by the Audio Home Recording Act of 1992. It is under that claim that XM asked the judge to dismiss the lawsuit, claiming the case was “without merit.”

But U.S. District Judge Deborah A. Batts disagreed, saying that the labels’ agreement with XM was to provide music for a satellite broadcast system.

The judge went on to say that XM operates like an interactive system, and that the satellite service, by making it possible to select which songs to store, is operating as both a broadcaster and a distributor, yet is only paying to be a broadcaster.

“The record companies sufficiently allege that serving as a music distributor to XM + MP3 users gives XM added commercial benefit as a satellite radio broadcaster,” said Judge Batts.

The judge then went on to comment on XM’s claims that its XM + MP3 receivers weren’t any different than the cassette recorders used to record songs off of traditional radio broadcasts.

“It is manifestly apparent that the use of a radio-cassette player to record songs played over free radio does not threaten the market for copyrighted works as does the use of a recorder which stores songs from private radio broadcasts on a subscription fee basis,” Batts said.

As you can guess, the folks at the RIAA liked the judge’s ruling.

“We’re pleased that the court has rejected XM’s attempt to misuse the Audio Home Recording Act as a legal loophole for distributing sound recordings to its subscribers,” RIAA Executive Vice President and General Counsel Steven Marks said. “The AHRA was never intended to allow a service offering distributions of music to duck paying creators what they are due.”

Meanwhile, XM was quick to spin the decision its way.

“At this stage of the proceeding, the court’s ruling is required to be based on the false characterizations set forth in the plaintiff’s complaint,” said an XM spokesman. “The real facts strongly support our view that the lawsuit is barred by the Audio Home Recording Act. We look forward to making our case in court.”