The record company was embroiled in controversy when 12.6 million of its CDs were sold containing software designed to restrict users' use of the music in order to protect the songs from being distributed online.
Users who put the CDs into their computers said that the software damaged their computers and potentially opened the door to hackers to break into their computers.
Some CDs included software known as XCP which installed a so-called rootkit on the user's computer. This is a technique more often used by virus writers hoping to conceal the existence of their software: files are hidden deep in the architecture of a computer's operating system, making them difficult to find and remove.
California and Los Angeles sued Sony BMG for not disclosing any information about the software or about the limit it placed on the numbers of copies consumers could make of the music contained on the CD. The suit also accused the company of false advertising, unfair competition and unlawful computer intrusion.
The settlement promises up to $175 to consumers in California who can provide documentation relating to the damage they say was done to their computers. On top of that the company will pay $750,000 to the attorneys general in fines and to pay legal fees.
The Californian suit was settled almost as soon as it was filed, said newswire AP, and some states, including Texas, still have outstanding suits against the company, though some cases are almost settled, said reports.
A key part of the case was the fact that consumers were not told that the CD they were buying would automatically install software on their PC. Sony BMG has agreed to warn users in future if it ever uses digital rights management technology again.
"They're requiring disclosures to consumers before sale on the CD packaging," Corynne McSherry, a staff attorney with the Electronic Frontier Foundation, told AP. "I think that's really crucial. Part of the whole background of the rootkit fiasco was that consumers just didn't know what they were getting into."
One of the recommendations of the review just conducted in the UK by former Financial Times editor Andrew Gowers was that any CD sold in the UK with digital rights management software on it carry a label clearly outlining that fact.
