In re Digital Music Antitrust Litigation

• Decision Date: 09 October 2008
• Docket Number: No. 06 MDL No. 1780 (LAP).,06 MDL No. 1780 (LAP).
• Citation: 592 F.Supp.2d 435
• Parties: In Re: DIGITAL MUSIC ANTITRUST LITIGATION. This Document Relates to: All Actions.
• Court: U.S. District Court — Southern District of New York

592 F.Supp.2d 435

In Re: DIGITAL MUSIC ANTITRUST LITIGATION This Document Relates to: All Actions.

No. 06 MDL No. 1780 (LAP).

United States District Court, S.D. New York.

October 9, 2008.

OPINION

LORETTA A. PRESKA, J.

This multidistrict litigation involves allegations that Bertelsmann, Inc., SONY BMG Music Entertainment, Sony Corporation of America, Capitol Records, Inc. dba EMI Music North America, EMI Group North America, Inc., Capitol-EMI Music, Inc., Virgin Records America, Inc., Time Warner Inc., UMG Recordings, Inc., and Warner Music Group Corp. (collectively, "Defendants") conspired to fix or maintain artificially the prices of Digital Music. Plaintiffs are fifteen individuals (collectively, "Plaintiffs") from nine states who seek to represent a putative nation-wide class of purchasers of Digital Music. Defendants move [dkt. no. 75] to dismiss the Second Consolidated Amended Complaint ("SCAC") under Rule 12(b)(6) of the Federal Rules of Civil Procedure and, in the alternative, to strike certain portions of the SCAC pursuant to Rule 12(f).¹ Plaintiffs move [dkt. no. 104] to amend one paragraph of the SCAC to add certain allegations.² For the reasons that follow Defendants' motion is GRANTED, and Plaintiffs' motion is DENIED.

I. BACKGROUND

According to the SCAC, Digital Music is music that is manufactured as a digital file. (See SCAC ¶ 2, In re Digital Music, 06 MDL. 1780 (filed June 13, 2007) (hereinafter "SCAC").) It is delivered in two allegedly interchangeable formats: on compact discs ("CDs") and through the internet ("Internet Music"). (See id. ¶ 41.) The SCAC defines the relevant market in this action as the market for sales of all Digital Music (both CDs and Internet Music) in the United States; Defendants, described as the four largest record companies in the United States, allegedly control in excess of 80% of that market. (See id. ¶ 40.)

In general, the SCAC alleges that Defendants conspired to inflate and maintain at supracompetitive levels the price of Digital Music. (See id. ¶ 126.) They achieved this by fixing a high price for and restraining the availability of Internet Music (id. ¶ 66), which, in turn, buoyed the price of CDs "despite declining costs of production associated with the introduction of new technologies" (id. ¶ 126; see also id. ¶ 105). Explains the SCAC: "[a]cting alone, no defendant could sustain the supracompetitive prices for CDs prevailing in the market. This inability to charge high CD prices, as market factors made consumer demand for CDs more elastic over time at the prices charged by Defendants during the conspiracy, gave Defendants motive to conspire." (Id. ¶ 83.)

Defendants' manipulation of the market for Internet Music is described in two phases of conduct. The first phase centers on two joint ventures — "MusicNet" and "pressplay" — created by Defendants to distribute their Internet Music. (Id. ¶ 67.)³ The second phase alleges manipulation through Defendants' business dealings with third-party licensees. (Id. ¶ 99.)

A. The First Phase: The Joint Ventures

The SCAC appears to include principally two allegations concerning the joint ventures. First, it alleges that the joint ventures directly restricted the wide-spread distribution and use of Internet Music by charging supracompetitive prices and imposing unpopular digital rights management ("DRM") rules on the Internet Music they sold to consumers. (Id. ¶¶ 75-78; see id. ¶ 81 ("Defendants collectively refused to utilize or license a system that was convenient, not burdened with use restrictions and competitively priced.").)⁴ According to the SCAC, Defendants enforced those price and use restrictions through their use of most-favored nations clauses ("MFNs") and "side agreements," whereunder each Defendant would license its songs to the joint ventures at a price not lower than the price secured by any other Defendant. (Id. ¶¶ 92-94, 96-97.)⁵ Thus "Defendants' collusion in setting high prices for Internet Music, as well as their collusion in imposing unfair and one-sided terms on its use, made Internet Music less attractive to consumers, allowing Defendants to sell CDs at supracompetitive prices." (Id. ¶ 82.)

Second, the SCAC alleges that the joint ventures were shams that were designed solely to "provide[ ] Defendants with opportunities and forums to meet and further conspire to cooperate to maintain the prices and terms for Internet Music." (Id. ¶ 87.) This follows, alleges the SCAC, from the fact that certain aspects of the joint ventures' business model were contrary to the economic self-interests of each individual Defendant. Thus, "[a]ny one of the Defendants might have removed these unpopular DRM and gained additional market share and profits and most or all would have but for the conspiracy, just as independent labels not party to the conspiracy sell DRM-free Internet Music." (Id. ¶ 76; see also id. ¶ 78 ("[R]ather than pursue their individual interests by competing with each other, the new method of distribution was used as a pretext for Defendants to meet and conspire.").) Plaintiffs allege that the same was true of the way Defendants structured their compensation from the joint ventures: because Defendants were not paid on a per-song basis, their "economic incentives were to charge monopoly prices for Internet Music rather than compete with one another on price." (Id. ¶ 89.) Thus, instead of legitimate business entities, the joint ventures were merely "vehicles through which the Defendants effectively exchanged price information, policed their cartel and imposed restrictive licensing arrangements that retarded the growth of Internet Music." (Id. ¶ 98.)⁶

The SCAC further alleges that Defendants attempted to conceal many of the joint ventures' allegedly anticompetitive practices. (Id. ¶ 113.) For instance, Defendants — through the joint ventures — allegedly "conspired to mask their anticompetitive conduct by pretextually establishing rules to prevent antitrust violations, ignoring them, and then using these sham rules to convince the United States Department of Justice [("DOJ")] to drop the investigation it launched in 2001." (Id. ¶¶ 90, 91.) Defendants also allegedly attempted to conceal the use of MFNs in their agreements with the joint ventures because "they knew they would attract antitrust scrutiny by DOJ and others" (id. ¶ 93); one such MFN — between EMI and MusicNet — was allegedly memorialized as a "side-letter" agreement "because `there are legal/antitrust reasons why it would be a bad idea to have MFN clauses in any, or certainly all, of these agreements'" (id. ¶¶ 94-95).

B. The Second Phase: Third-Party Licensees

According to the SCAC, Defendants also manipulated the market for Internet Music through their direct dealings with third-party licensees. (Id. ¶ 99.) Defendants allegedly set a "wholesale price floor at 70 cents per song [and] placed restrictions on the use of Internet Music that unreasonably limit its utility and attractiveness to purchasers." (Id. ¶ 100). Agreement as to the price floor is demonstrated, argue Plaintiffs, by the fact that, in May 2005, Defendants each raised their price for Internet Music from approximately 65 cents to 70 cents. (See Pls.' ¶ 99 Mem. Ex. A (Proposed Third Amended Complaint).) As was the case with the joint ventures, Defendants allegedly enforced this price floor by requiring third-party licensees to sign MFNs specifying that each licensee must pay each Defendant no less than it pays other Defendants. (SCAC ¶ 99.)

The SCAC describes the experience of eMusic, allegedly the "most popular online music service that sells Internet Music owned by independent labels" (id. ¶ 103), which sells Internet Music for only $0.25 per song without any DRM restrictions (id. ¶ 103). According to the SCAC, Defendants refused to do business with eMusic, despite the fact that it is "the # 2 Internet Music retailer" (id. ¶ 104) because eMusic refused to impose the same Internet Music price and use restrictions as Defendants (id.). According to the SCAC, such uniform behavior is consistent only with prior agreement: "[a]bsent an agreement not to compete with each other, Defendants would try to gain advantages over each other by selling Internet Music with fewer unpopular restrictions; hence the lack of such competition on price or quality shows continuing collusion." (Id. ¶ 102.)

In addition to this conduct, the SCAC also notes that Defendants either are or were under investigation for certain conduct by various governmental agencies. For instance, Defendants' price fixing is the subject of an investigation by the Office of the New York State Attorney General (id. ¶ 106), and, in 2006, the DOJ "opened an investigation into collusion and price fixing of Internet Music by the Defendants" (id. ¶¶ 107-08). Defendants were also allegedly "subject to a number of government investigations and lawsuits concerning the pricing of CDs" (id. ¶ 110) and settled claims by the New York Attorney General and the FCC concerning Defendants' purported "schemes of paying radio stations for playing certain songs" (id. ¶ 111).

II. DISCUSSION

The SCAC includes three counts for relief. Count One alleges violations of § 1 of the Sherman Antitrust Act. See 15 U.S.C. § 1 (2000); see also SCAC ¶¶ 123-34. Count Two alleges violations of various state antitrust and consumer protection laws (SCAC ¶ 136(a)-(u)), and Count Three alleges unjust enrichment also under the laws of various states (id. ¶¶ 138-45). In their motion, Defendants argue principally that the SCAC fails to state a § 1 claim under the Supreme Court's recent decision in Bell Atlantic v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1969, 167 L.Ed.2d 929 (2007); see also Defs.' Mem. 7. They argue that the state antitrust claims must also be dismissed for that reason (see Defs.' Mem. 24 n. 14) and that the consumer protection and unjust enrichment claims fail for various reasons (see id. at 24-28, 30-32, 34-38). Because so...