Record label Sony BMG is to reimburse consumers up to $150 (£76) for damage to computers caused by CDs with hidden anti-piracy software.
Alicia Keys was one of the artists affected by the CD debacle
The settlement was announced by the Federal Trade Commission (FTC).
The US regulator said the anti-piracy software wrongly limited the devices on which music could be played to those made by Sony or Microsoft.
It also monitored listening habits so targeted marketing messages could be sent to consumers.
The FTC said the software "exposed consumers to significant security risks and was unreasonably difficult to uninstall".
Under the settlement, Sony BMG must allow consumers to exchange affected CDs bought before 31 December 2006, and reimburse them up to $150 (£76) to repair damage to their computers.
Sony BMG, which agreed to the settlement figure, did not admit a law violation and the FTC will decide whether to make the settlement final after a 30-day public consultation.
In 2005, the company shipped more than 12 million CDs, each loaded with one of two anti-piracy programs.
About seven million of the CDs were sold and the Digital Rights Management software installed itself on consumers' computers without their knowledge or consent.
CDs by artists such as The Coral, Alicia Keys, Dido, the Foo Fighters and the Backstreet Boys were among the affected discs.
No-one from New York-based Sony BMG was available for comment.
In December, the company settled similar cases with more than 40 states, agreeing to pay more than $4m (£2.03m) to reimburse customers.