USCA Second Circuit, January 13, 2010
- Second Circuit holds that the plaintiff class adequately pled violations of Section 1 of the Sherman Antitrust Act against defendant producers and distributors of digital music, where the defendants’ alleged parallel conduct in selling music over the internet plausibly suggested that defendants entered into an agreement to fix prices and to restrain the availability and distribution of music over the internet.
The defendant-appellees are several music industry producers and distributors, including Sony BMG Music, Bertelsmann, Universal Music Group, Time Warner, Warner Music, EMI Music, and Capitol Records. Defendants collectively control over 80% of all CDs and other digital music sold to consumers. Plaintiffs are consumers who filed a class action complaint alleging violation of antitrust and unfair competition laws.
Defendants launched two joint ventures – MusicNet and pressplay – in order to sell music directly to consumers over the internet. According to plaintiffs, consumers who subscribed to either service were required to pay artificially high prices in order to download music. Consumers were also required to agree to certain Digital Rights Management terms (DRM), which restricted consumers’ ability to use or copy the music.
Defendants also sold digital music to consumers through third party, online distributors. Plaintiffs claimed that defendants entered into licensing agreements with the distributors, requiring the distributors to offer the same prices and restrictions on their digital music as MusicNet, pressplay, and other licensees. Some defendants included in their licensing agreements Most Favored Nation (MFN) clauses, which guaranteed that no defendant’s licenses would be less favorable to the licensor than any other defendant’s licenses. Other defendants included such MFN clauses in side agreements rather than including them in the licensing agreements themselves.
Plaintiffs sued defendants for violating Section 1 of the Sherman Act and various state unfair and deceptive trade practices statutes and for unjust enrichment. Plaintiffs alleged that defendants engaged in a conspiracy to restrain the availability of online digital music and to fix prices at an artificially high level. The district court granted defendants’ motion to dismiss, finding that plaintiffs had not adequately alleged that defendants had entered into an illegal agreement, and that plaintiffs’ allegations of parallel conduct, coupled with a bare assertion of conspiracy, were insufficient to state a claim under Section 1 of the Sherman Act.
The Second Circuit reversed, finding that the complaint contained allegations of parallel conduct in a context that plausibly suggested a preceding illegal agreement among the defendants, which was sufficient to state a Section 1 claim. Specifically, the Second Circuit held that the following allegations, taken together, placed the parallel conduct “in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.” First, defendants controlled a substantial share of the market for digital music. Second, defendants’ pricing and terms were widely unpopular. Third, Warner Music’s CEO indicated that pressplay was an effort to halt the devaluation of music. Fourth, some defendants attempted to hide their MFN clauses in side agreements to avoid antitrust scrutiny. Fifth, all defendants refused to do business with eMusic, a large online music retailer that charges substantially less per song than defendants. Sixth, the New York Attorney General and the Department of Justice were investigating defendants for price fixing. Finally, defendants all raised their prices as their costs in providing digital music fell substantially. These factual allegations, taken together, plausibly suggest that defendants entered into an illegal agreement, and were sufficient to survive defendants’ motion to dismiss. The Second Circuit further held that plaintiffs were only required to allege facts that suggest an agreement, not facts that tend to exclude the possibility that defendants acted independently of each other.