(CN) – The 2nd Circuit revived an antitrust class action accusing major music labels of fixing the prices and terms of online music sales, saying there was enough evidence of a conspiracy to allow the case to proceed.
The Manhattan-based court overturned the district court’s dismissal of the case for failure to state a claim.
With the introduction of digital music, CD sales for major record labels took a nosedive. The labels responded by launching two online music services, MusicNet and pressplay, to help control pricing, according to the class action.
MusicNet was created by Bertelsmann, Warner Music Group and EMI, and pressplay was launched by Universal Music Group and Sony Corp.
Consumers said they were forced to buy subscriptions to MusicNet and pressplay, for $240 per year, in order to listen to digital music from the major record labels. Both services were tightly regulated, users claimed, so that subscribers couldn’t copy more than two songs from any single artist onto a CD each month, and they couldn’t transfer songs to portable music players, such as iPods. The music they bought often expired until repurchased, the suit claimed.
The labels also sold their digital music through entities they didn’t own, consumers claimed, but only if those entities agreed to abide by MusicNet and pressplay’s wholesale pricing of $0.70 song, compared to eMusic’s $0.25 a song. The defendants purportedly refused to do business with eMusic, the second-biggest Internet music retailer behind iTunes.
Additionally, the labels each had side agreements with MusicNet and pressplay ensuring that all labels were getting the same deal, the plaintiffs claimed. The record companies allegedly tried to hide these deals, the ruling states, “because they knew they would attract antitrust scrutiny.”
Consumers accused the labels of conspiring to “restrain the availability and distribution of Internet music, fix and maintain 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 noted that price fixing in the digital music industry is currently the subject of three investigations: two by the Department of Justice and one by the New York Attorney General’s Office.
The 2nd Circuit reinstated the class action, saying the complaint “alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among defendants.”
The three-judge panel rejected the claim that the case required dismissal, because the allegations “are the very same claims that were thoroughly investigated and rejected by the Antitrust Division of the Department of Justice,” which closed its probe after finding no evidence of anticompetitive injury.
But the defendants cited nothing to back up this claim and ignored the fact that the DOJ has since launched two new investigations into collusion and price fixing, Judge Robert Katzmann ruled.
He also rejected the labels’ claim that their allegedly anticompetitive behavior “would be entirely consistent with independent, though parallel, action.”
“[I]t would not be in each individual defendant’s self-interest to sell Internet Music at prices … that were so unpopular as to ensure that ‘nobody in their right mind’ would want to purchase the music, unless the defendant’s rivals were doing the same,” Katzmann wrote.