Second Circuit Revives Consumers’ Price Fixing Claims Against Major Music Labels

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Consumers who claimed they were overcharged for Internet music can proceed with an antitrust action against the country’s largest music recording companies for conspiring to fix prices and terms of use for music sold over the Internet, the U.S. Court of Appeals in New York City has decided.

Judgment in favor of the defending music recording companies was vacated, and the matter was remanded to the district court for further proceedings.

The federal district court in New York City in October 2008 dismissed the action (2008-2 Trade Cases ¶76,338), holding that the complaint did not state a claim under the U.S. Supreme Court’s decision in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶75,709).

The district court concluded that the alleged facts, considered alone and collectively, did not place the defendants' conduct “in a context that raise[d] a suggestion of a preceding agreement,” as Twombly required.

Parallel Conduct

According to the appellate court, the complaint alleged parallel conduct. The consumers alleged that the defendants formed joint ventures to sell music online—MusicNet and pressplay—in an effort to control the price and terms of distribution for Internet music.

When the defendants eventually began to sell Internet music through entities they did not own or control, they allegedly agreed to a wholesale price floor for songs, and enforced these price floors through most favored nation clauses (MFNs) in their license agreements. The MFN agreements specified that the retailers had to pay each defendant the same amount per song, according to the plaintiffs.

Suggestion of a Preceding Agreement

These allegations of parallel conduct were placed in a context that raised a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action, the appellate court held.

The court pointed to the plaintiffs’ contention that the defendants—EMI, Sony BMG Music Entertainment, Universal Music Group Recordings, Inc., and Warner Music Group Corp.—together controlled over 80 percent of digital music sold to end purchasers in the United States. In addition, the plaintiffs alleged behavior that would plausibly contravene each defendant’s self-interest “in the absence of similar behavior by rivals.”

The court noted that the defendants would have acted contrary to their interests if they sold Internet music at high prices and with unpopular, restrictive terms through their joint ventures. A prominent computer industry magazine had suggested that “nobody in their right mind will want to use” the joint ventures’ services. Moreover, the alleged price fixing was the subject of state and federal investigations.

The appellate court rejected the defendants' arguments that the claims had to be dismissed because the plaintiffs failed to allege facts that tended to exclude independent self-interested conduct as an explanation for the defendants’ parallel behavior and failed to identify the specific time, place, or person related to each conspiracy allegation. Such standards were not imposed on the plaintiffs, according to the appellate court.

Application of Dagher

The appellate court also found that the U.S. Supreme Court’s decision in Texaco Inc. v. Dagher (2006-1 Trade Cases ¶75,143) did not support dismissal in this case. Dagher’s holding that a lawful joint venture’s pricing policy was not a per se illegal price fixing agreement between competitors was inapplicable.

The plaintiffs challenged the MusicNet and pressplay joint ventures as shams. Even if the joint ventures were presumed lawful, the plaintiffs were still free to challenge their activities pursuant to the rule of reason.

The text of the January 13, 2010, decision in Starr v. Sony BMG Music Entertainment, No. 08-5637-cv, will appear at 2010-1 Trade Cases ¶76,866.