In re Digital Music Antitrust Litig.

• Decision Date: 18 July 2011
• Docket Number: No. 06 MD 1780(LAP).,06 MD 1780(LAP).
• Citation: 2011 Trade Cases P 77536,812 F.Supp.2d 390
• Parties: In re DIGITAL MUSIC ANTITRUST LITIGATION.This Document Relates to: All Actions.
• Court: U.S. District Court — Southern District of New York

2011-1 Trade Cases P 77,536

812 F.Supp.2d 390

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

No. 06 MD 1780(LAP).

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

July 18, 2011.

Opinion & Order

LORETTA A. PRESKA, Chief Judge:

Before the Court is a joint motion to dismiss a class-action complaint alleging federal and state antitrust violations by major record labels in the distribution of music over the Internet. Defendants include Bertelsmann, Inc.; Sony BMG Music Entertainment; Sony Corporation of America; Capitol Records, Inc. d/b/a 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.¹ Several individual plaintiffs seek to represent a putative nationwide class of digital music purchasers. The operative complaint before the Court is the Third Consolidated Amended Complaint (“TCAC”), filed June 2, 2010. The Court's previous judgment dismissing the Second Consolidated Amended Complaint was vacated, and the case returned on remand from the Court of Appeals. Starr v. Sony BMG Music Entm't, 592 F.3d 314, 327 (2d Cir.2010), cert. denied, ––– U.S. ––––, 131 S.Ct. 901, 178 L.Ed.2d 803 (2011).

I. BACKGROUND

Because the allegations in the TCAC are, with certain exceptions, the same as those previously considered in published opinions both here and in the Court of Appeals,² the Court assumes familiarity with the factual allegations in the TCAC. Starr, 592 F.3d at 317–22; In re Digital Music Antitrust Litig., 592 F.Supp.2d 435, 437–39 (S.D.N.Y.2008). To situate this discussion, a summary of the alleged facts follows. The Court assumes that all nonconclusory facts alleged are true for present purposes. Starr, 592 F.3d at 317 & n. 1.

Defendants produce, license, and distribute music sold online (“Internet Music”) and on compact discs (“CDs”). They control eighty percent of the market for digital music in the United States. Defendants Bertlesmann, Inc., Warner Music Group Corp., and EMI launched an online service called MusicNet, a joint venture entity owned and controlled by various Defendants. (TCAC ¶ 67.) Defendants UMG and Sony Corporation of America launched a similar online music service called Duet, later renamed pressplay. (TCAC ¶ 67.) It too was a joint venture. All Defendants signed distribution agreements with MusicNet and pressplay. (TCAC ¶ 67.) These joint ventures, along with the Recording Industry Association of America, provided a forum for Defendants to exchange pricing information, terms of sale, and use restrictions. (TCAC ¶¶ 34, 67–68, 87–88.)

Plaintiffs allege that Defendants conspired to fix the price, terms of sale, and restrictions on the use of Internet Music through these joint ventures. (TCAC ¶¶ 72, 98.) Defendants used these joint ventures as a forum to discuss their desire to engage in the alleged conduct, to share licensing terms and pricing information, and to police the alleged agreements, among other things. (TCAC ¶¶ 67–68, 98.) Through the use of Most Favored Nation (“MFN”) clauses in Defendants' licensing agreements, a licensor would receive at least equivalent licensing terms as another licensor. (TCAC ¶¶ 92, 99.) The alleged effect of the MFN agreements was to set a wholesale price floor for Internet Music of seventy cents per song. (TCAC ¶¶ 99–100.) Plaintiffs allege that despite the fact that the price of distributing Internet Music fell to essentially zero, the wholesale price of Internet Music increased uniformly. (TCAC ¶¶ 99–100.) This was due in material part to Defendants' enforcement of the MFN clauses, which Defendants attempted to hide. (TCAC ¶¶ 93, 99–100.) In addition, Defendants included digital rights management (“DRM”), which restricted transfer of songs to portable players, among other things. (TCAC ¶ 76.) Plaintiffs allege that but for the conspiracy, a defendant may have removed DRM to gain market share. (TCAC ¶ 76.) Allegedly, both the wholesale price and DRM included with Defendants' music was fixed among Defendants because of Defendants' collusion, even when they sold to unaffiliated retailers. (TCAC ¶ 69.)

The core allegation is that Defendants' behavior sustained high prices for Internet Music, which made it less attractive to consumers and hampered the growth of Internet Music services generally. (TCAC ¶¶ 81–82.) Plaintiffs point to eMusic, an independent competitor in the online music business, as an example of competitive pricing. It is the second-largest online retailer and charges—at retail—less than half of Defendants' wholesale price, and Defendants refuse to do business with it. (TCAC ¶¶ 103–104.) Plaintiffs allege that Defendants' motive to conspire was to support their ability to charge supracompetitive prices for CDs; they could do so because Internet Music was priced, through the alleged conspiracy, so as to be an unattractive or economically uncompetitive substitute. (TCAC ¶ 83.)

The procedural history of this case is also well-described in the earlier opinions in this case. E.g., Starr, 592 F.3d at 320–21. The Court of Appeals remanded for further proceedings consistent with its opinion, and Defendants have again moved to dismiss the action, relying mainly on arguments made but not addressed in their original motion to dismiss.

II. DISCUSSION

In evaluating this motion, the Court first will discuss the Sherman Act claims, beginning with a brief discussion of the Twombly analysis by the Court of Appeals. Then the Court will turn to the arguments made regarding the Sherman Act claims but not addressed in the original motion to dismiss and renewed in the motion to dismiss sub judice. Next, the Court will analyze Defendants' arguments relating to the state claims, aside from the Twombly-related argument, made in the original motion to dismiss but not addressed previously. The Court will also discuss new arguments raised in relation to newly added claims under the Illinois and New York antitrust laws. Following the state-law discussion, the Court will analyze Defendants' motion to dismiss claims against the Parent Companies. Finally, the Court will discuss the associated motion to strike portions of the TCAC. Before delving into these matters, the Court sets out the applicable legal standard.

A. Legal Standard for Motions to Dismiss

In assessing a motion to dismiss, the Court must accept all non-conclusory factual allegations as true and draw all reasonable inferences in the plaintiff's favor. Goldstein v. Pataki, 516 F.3d 50, 56 (2d Cir.2008) (internal quotation marks omitted). To survive such a motion, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). A complaint that offers “labels and conclusions” or “a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955. The complaint must allege “enough facts to state a claim to relief that is plausible on its face.” Id. “Where a complaint pleads facts that are ‘merely consistent with’ a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.’ ” Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955) (internal quotation marks omitted). In other words, “where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct,” dismissal is appropriate. Id. at 1950. “Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (citations omitted).

In analyzing a motion to dismiss a claim under section 1 of the Sherman Act, the Court is mindful that a plaintiff needs to allege only “enough factual matter ... to suggest that an agreement was made,” id. at 556, 127 S.Ct. 1955, but he need not, unlike in the summary judgment context, “rule out the possibility that the defendants were acting independently,” id. at 554, 127 S.Ct. 1955. “Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of an illegal agreement.” Id. at 556, 127 S.Ct. 1955. “Thus, an allegation of parallel conduct coupled with only a bare assertion of conspiracy is not sufficient to state a Section 1 claim.” Starr, 592 F.3d at 322. “Instead, allegations of parallel conduct ‘must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.’ ” Id. (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955).

B. Pleading of Sherman Act Claims

In its opinion vacating the judgment entered in this case, the Court of Appeals concluded that the Second Consolidated Amended Complaint “alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants.” Id. at 323. The TCAC being the same in material part, Defendants do not argue their motion to dismiss on Twombly grounds. In light of the Court of Appeals clarification of the importance of context in claims under section 1 of the Sherman Act and its conclusion that the allegations above suffice, Plaintiffs' section 1 claims may proceed because the TCAC meets Twombly's pleading standards. Id. at 323–24.

C. Other Sherman Act Arguments

In their original motion to dismiss, Defendants made two arguments with respect to the federal claims that were not addressed. First, Defendants argue that Plaintiffs' claims through February 1, 2005, were settled...