Second Circuit Reinstates Antitrust Claim Against Online Music Providers

A federal appeals court has reinstated an antitrust suit alleging price fixing by Sony BMG Music Entertainment and other producers, licensors and distributors of music on the Internet.

The Second U.S. Circuit Court of Appeals last month said the pleadings of music purchasers were sufficient for plaintiffs to pursue their Sherman Act claim against companies who control more than 80% of music sold as digital files.

The decision in Starr v. Sony BMG Music Entertainment, 08-5637-cv, was made by Judges Jon O. Newman, John M. Walker Jr. and Robert N. Katzmann. Katzmann wrote the opinion.

Price Fixing

The amended complaint before Southern District of New York Judge Loretta Preska, who had received 28 actions from the Judicial Panel on Multidistrict Litigation, charged that the defendants “restrain the availability and distribution of Internet Music, fix and maintain at artificially high and non-competitive levels the prices at which they sold Internet Music and impose unreasonably restrictive terms in the purchase and use of Internet Music.”

The plaintiffs cited investigations into price fixing by the New York attorney general and the U.S. Department of Justice into whether the defendants misled the department when they formed and operated two joint ventures: MusicNet ' a joint venture of Bertelsmann Inc., Warner Music Group Corp. and EMI ' and Duet, a joint venture of Universal Music Group and Sony Corp., later named pressplay.

Preska granted the defendants' motion to dismiss on Oct. 9, 2008, finding the plaintiffs had not challenged the existence or the creation of the joint ventures, so there could be no inference of an illegal agreement to fix prices and the terms and conditions of purchase.

Thus, the judge concluded that the complaint did not state a claim under the tightened pleading standards adopted by the U.S. Supreme Court in Bell Atlantic v. Twombly , 550 U.S. 544 (2007). That case held that a complaint must offer “enough facts to state a claim to relief that is plausible on its face.”

Contrary to the lower court, the Second Circuit held that the plaintiffs had met that standard here.

“The present complaint succeeds where Twombly's failed because the complaint alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among defendants,” Katzmann said.

The defendants “agreed to launch MusicNet and pressplay, both of which charged unreasonably high prices and contained similar DRMs (Digital Rights Management terms),” Katzmann said, and the entities did not “dramatically” drop “their prices for Internet Music (as compared to CDs), despite the fact that all defendants experienced dramatic cost reductions in producing Internet Music.”

When the defendants started selling Internet music through entities they did not own or control, he said, they kept the same terms and the “same unreasonably high prices” as MusicNet, the judge wrote.

The defendants also used, and had some licensors sign, “Most Favored Nation” clauses that guaranteed that the licensors would receive terms no less favorable than those offered to other licensors. Those agreements specified that retailers had to pay each defendant the same amount per song ' 70 cents.

Further, Katzmann said the music purchasers alleged that all the defendant companies refused to do business with the number two Internet music retailer, eMusic, which charged 25 cents a song.

Suggestion of Agreement

Katzmann said that several allegations, when “taken together,” placed the parallel conduct, in the words of Twombly, “in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.”

For example, he quoted Edgar Bronfman, the chief executive officer of Warner Music Group, as saying that pressplay was formed “because we are concerned that the continuing devaluation of music will proceed unabated unless we do something about it.”

He noted that the record companies “attempted to hide their Most Favored Nation clauses because they knew they would attract antitrust scrutiny.”

Katzmann rejected arguments by the defendants that Twombly required both that a Sherman Act claim allege facts that tend “to exclude independent self-interested conduct as an explanation for defendants' parallel behavior” and that plaintiff “identify the specific time, place or person related to each conspiracy allegation.”

Gary S. Jacobson of Lovell Stewart Halebian argued for the plaintiffs.

Jacobson said that, before Twombly, “alleging conscious parallel conduct used to go a long way toward pleading an inference of an illegal agreement to restrain trade.”

But since the tougher pleading standard was announced in that case, Jacobson said, “there's been a great deal of uncertainty over what else you have to plead in addition. This is helpful because it clarifies the law.”

Kenneth R. Logan of Simpson Thacher & Bartlett argued for the defendants.