Trial Looms for Price-Fixing in Digital Music

MANHATTAN (CN) - Major record labels must face a consolidated class action lawsuit claiming they fixed prices on digital music, a federal judge ruled.

The defendants include Bertelsmann, Sony BMG Music Entertainment, Sony Corporation of America, Capitol Records (dba EMI Music North America), EMI Group North America, Capitol-EMI Music, Virgin Records America, Time Warner, UMG Recordings and Warner Music Group, which allegedly control 80 percent of the digital music in the United States.

Consumers claim in the proposed class action that all of the labels signed distribution agreements with two joint-venture entities called MusicNet and Pressplay, through which they allegedly conspired to fix the price, terms of sale and restrictions on digital music.

Each licensing agreement allegedly included publicly hidden Most Favored Nation clauses, guaranteeing that one licensor would receive at least equivalent licensing terms as another licensor. In effect, these agreements set wholesale price floor at 70 cents per song for Internet music, increasing prices as the cost to distribute Internet music fell to essentially zero, consumer class says.

In addition, the labels allegedly included digital-rights management, restricting how songs get transferred to portable players.

The labels allegedly hoped to make digital music an unattractive substitute for overpriced CDs.

Retailers that did not comply with the labels' agreements allegedly got shut out by the labels.

An independent competitor in the online music business, eMusic, is the second-largest online retailer and charges less than half of the labels' wholesale price at retail, but the labels refuse to do business with it, the consumer class says.

Dozens of plaintiffs filed lawsuits in multiple districts. The first consolidated class action was filed in April 2007, and then amended two months later. U.S. District Judge Loretta Preska tossed the original complaint, in a decision that was vacated and remanded back to her court on appeal.

The consumer class filed a third amended complaint on June 2, 2010.

On Monday, Judge Preska allowed the consumer class to pursue claims under the Sherman Act, the 19th century legislation that was the first federal statute to limit monopolies. An antitrust action under New York state law and certain consumer-protection and unjust-enrichment claims also survived dismissal.

Preska tossed claims related to a putative CD-purchaser class.

Multiple lawyers for both parties did not immediately respond to telephone requests for comment.

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