The court’s revival of this antitrust complaint will likely be an important precedent used by plaintiffs in their efforts to survive future motions to dismiss.

In February 2010, in Starr v. Sony BMG Music Entertainment, et al., the U.S. Court of Appeals for the Second Circuit reversed a district court decision that had dismissed an antitrust challenge to joint-venture-related conduct involving major music companies for failure to state a claim under Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). Significantly, the court’s revival of this antitrust complaint will likely be an important precedent used by plaintiffs in their efforts to survive future motions to dismiss, especially in the context of parallel conduct by joint venture participants. The Supreme Court of the United States’ language in Twombly in 2007, together with the Supreme Court’s decision in Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), had been construed by courts and commentators to have significantly raised the pleading requirements set forth in F.R.C.P. 8(a) necessary to survive a motion to dismiss pursuant to F.R.C.P. 12(b)(6). The Sony BMG decision, however, suggests the pleading bar may not, in fact, have been raised as substantially as had previously been thought.

Background

Prior to Twombly, courts followed the lenient standard set forth by the Supreme Court in Conley v. Gibson, 35 U.S. 41, in 1957 where the Supreme Court declared “that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Under this standard, plaintiffs were only required to include minimal factual support in order for their allegations to survive a motion to dismiss.

The Supreme Court’s 2007 decision in Twombly arguably raised the requirements for plaintiffs in the context of Sherman Act Section 1 claims, now requiring plaintiffs to include “enough factual matter (taken as true) to suggest that an agreement was made.” For example, under Twombly, parallel conduct by itself is not sufficient for a valid claim; allegations of parallel conduct must have further factual or contextual enhancements to raise the suggestion of a plausible agreement and avoid dismissal.

The Supreme Court’s 2009 decision of Ashcroft v. Iqbal has extended this seemingly heightened pleading standard outside the antitrust context. 129 S. Ct. 1937. In finding that the Iqbal complaint should be dismissed, the Supreme Court again emphasized the need for sufficient factual allegations: “While legal conclusions can provide the frame work of the complaint, they must be supported by factual allegations.” Id. at 1950. The Supreme Court added, “[d]etermining whether a complaint states a plausible claim for relief will…be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. In response to these decisions, bills have been introduced in both the House of Representatives (the Open Access to Courts Act of 2009) and the Senate (the Notice Pleading Restoration Act) that seek to lower this threshold, returning it to the standard under Conley.

The Sony BMG Case

In the Sony BMG case, plaintiffs challenged the activities of two joint ventures that sold music to consumers and retailers over the internet: MusicNet, created by defendants Bertelsmann, Inc., Warner Music Group, and EMI; and Pressplay, launched by defendants Sony Corporation and Universal Music Group. Over a six-month period, plaintiffs filed 28 actions against the defendants in numerous jurisdictions alleging that the parallel conduct of the members of the joint ventures was evidence of an illegal agreement. The cases were consolidated in the Southern District of New York. The district court dismissed the claim for failure to allege sufficient facts under Twombly and denied the plaintiffs’ motion to amend the complaint as futile. The court reasoned that in a digital music landscape filled with unauthorized downloading, the actions taken by the defendants were not indicative of illegal collusive conduct, but merely rational business decisions taken to combat piracy.

The Second Circuit disagreed with the district court, and reinstated the Section 1 claim and granted the motion to amend. The court held that the amended complaint contained enough factual matter for an agreement to be plausible. The Second Circuit concluded that the complaint contained allegations of parallel conduct as well as the additional facts required under Twombly, thus making an agreement plausible. Specifically, the court cited the following conduct as evidence of an agreement to fix non-competitive prices and terms:

  • The joint ventures charged unreasonably high prices and required consumers to agree to unpopular Digital Rights Management terms. These terms placed limits on the number of songs by an artist a customer could download, banned the transfer of music from computers to digital music players and put expiration dates on songs that forced consumers to repurchase music.
  • The defendants raised the price for internet music when the costs of providing the music dramatically decreased.
  • The members of the joint ventures used Most Favored Nation (MFN) clauses to ensure that no member received terms less favorable than another member. Defendants used these MFN clauses to enforce a common wholesale price of $0.70 per song (and a common price increase to this price), which was $0.45 higher than the retail price of the second most popular internet music retailer.
  • All defendants refused to do business with eMusic, the second most popular internet music retailer.

Moreover, the Second Circuit discussed the additional factual allegations, which included the following:

  • The defendants controlled more than 80 percent of internet music sold to consumers.
  • The defendants acted contrary to their individual self-interests. Consumers did not like the high prices and restrictive terms imposed by the defendants; however, the defendants were still profitable. This disconnect between an unpopular product and high profits suggested the existence of an agreement because, in a competitive market, an unpopular product would not be profitable.
  • The current CEO of Warner Music Group was quoted as saying that the joint venture was formed to stop the “continuing devaluation of music.” The defendants tried to hide their MFN clauses with other members of the joint ventures in “side letter” agreements to avoid legal scrutiny. The defendants’ conduct is the subject of two investigations by the U.S. Department of Justice and an investigation by the New York State Attorney General.

Finally, the Second Circuit clarified that, when basing a claim on parallel conduct, a plaintiff is not required to allege facts that tend to exclude independent self-interested conduct on the part of the defendants, nor does the plaintiff have to identify the specific time, place or person involved in the conspiracy at the pleading stage. Importantly, the court went on to distinguish the failed pleading in Twombly from the successful pleadings in this case:

Under Twombly, allegations of parallel conduct that could just as well be independent action are not sufficient to state a claim. However, in this case plaintiffs have alleged behavior that would plausibly contravene each defendant’s self-interest in the absence of similar behavior by rivals. (internal citations and quotations omitted).

Significance

Sony BMG broadened and clarified the type of conduct that can constitute a sufficient, plausible factual basis for a Sherman Act Section 1 complaint, particularly in the context of parallel conduct among joint ventures with market power. Moreover, the case makes it easier for plaintiffs to amend their complaint to meet the Twombly and Iqbal pleading standards. Finally, the decision indicates that courts are continuing to interpret and develop the prescription of the Supreme Court regarding pleading requirements, and signals that Twombly and Iqbal may not have heightened these requirements as much as commentators had previously suggested.