Starr v. Sony Bmg Music Entertainment

• Citation: 592 F.3d 314
• Decision Date: 13 January 2010
• Docket Number: Docket No. 08-5637-cv.
• Parties: Kevin STARR, Matt Putman, Cindy Seley, on behalf of herself and all others similarly situated, David Paschkett, on behalf of all others similarly situated, Christopher Michaud, on behalf of himself and all others similarly situated, Lisa Owens, Richard Benham, on behalf of himself and all others similarly situated, Keaton Landry, individually and on behalf of all others similarly situated, Sheri Clark, Rachael Hall and Mitchell Horton, Plaintiffs-Appellants, v. SONY BMG MUSIC ENTERTAINMENT, Sony Corporation of America, Bertelsmann, Inc., Universal Music Group, Time Warner Inc., formerly known as AOL Time Warner Cable, Inc., Warner Music Group Corp., EMI Music North America, Capitol Records Inc., doing business as EMI Music North America, John Does 1-100, Bertelsmann Music Group, Inc., BMG Music, BMG Music Publishing, doing business as the RCA Record Label, Capitol-EMI Music, Inc. and Virgin Records America, Inc., Defendants-Appellees.<SMALL><SUP>*</SUP></SMALL>
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

592 F.3d 314

Kevin STARR, Matt Putman, Cindy Seley, on behalf of herself and all others similarly situated, David Paschkett, on behalf of all others similarly situated, Christopher Michaud, on behalf of himself and all others similarly situated, Lisa Owens, Richard Benham, on behalf of himself and all others similarly situated, Keaton Landry, individually and on behalf of all others similarly situated, Sheri Clark, Rachael Hall and Mitchell Horton, Plaintiffs-Appellants, v. SONY BMG MUSIC ENTERTAINMENT, Sony Corporation of America, Bertelsmann, Inc., Universal Music Group, Time Warner Inc., formerly known as AOL Time Warner Cable, Inc., Warner Music Group Corp., EMI Music North America, Capitol Records Inc., doing business as EMI Music North America, John Does 1-100, Bertelsmann Music Group, Inc., BMG Music, BMG Music Publishing, doing business as the RCA Record Label, Capitol-EMI Music, Inc. and Virgin Records America, Inc., Defendants-Appellees.^*

Docket No. 08-5637-cv.

United States Court of Appeals, Second Circuit.

Argued: September 21, 2009.

Decided: January 13, 2010.

Gary S. Jacobson (Christopher Lovell, Imtiaz A. Siddiqui, of counsel), Lovell Stewart Halebian LLP, New York, NY; John Stoia and Bonny Sweeney, of counsel, Coughlin Stoia Geller Rudman & Robbins LLP, San Diego, CA, for Plaintiffs-Appellants.

Kenneth R. Logan (Helena Almeida, of counsel), Simpson Thacher & Bartlett LLP, New York, NY; Alan M. Wiseman, Mark C. Schechter, and Thomas A. Isaacson, of counsel, Howrey LLP, Washington, DC; Peter T. Barbur and Rachel G. Skaistis, of counsel, Cravath, Swaine & Moore LLP, New York, NY, for Defendants-Appellees.

Before: NEWMAN, WALKER, and KATZMANN, Circuit Judges.

KATZMANN, Circuit Judge:

This case calls upon us to determine whether an antitrust complaint alleging a conspiracy by major record labels to fix the prices and terms under which their music would be sold over the Internet states a claim for violation of Section 1 of the Sherman Act under Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). We hold that Plaintiffs-Appellants' Second Consolidated Amended Complaint ("SCAC") contains "enough factual matter (taken as true) to suggest that an agreement was made," id. at 555, 127 S.Ct. 1955, and therefore states a claim. We vacate the judgment of the district court and remand for further proceedings consistent with this opinion.

BACKGROUND

The SCAC contains the following non-conclusory factual allegations, which we must accept as true.¹

Defendants produce, license and distribute music sold as digital files ("Digital Music") online via the Internet ("Internet Music") and on compact discs ("CDs"). Together, defendants EMI, Sony BMG Music Entertainment ("Sony BMG"), Universal Music Group Recordings, Inc. ("UMG"), and Warner Music Group Corp. ("WMG"), control over 80% of Digital Music sold to end purchasers in the United States.

Initially, defendants Bertelsmann, Inc. ("Bertelsmann"), WMG, and EMI agreed to launch a service called MusicNet. Defendants UMG and Sony Corporation ("Sony") agreed to launch a service called Duet, later renamed pressplay. All defendants signed distribution agreements with MusicNet or pressplay and sold music directly to consumers over the Internet through these ventures (the "joint ventures"). Both the joint ventures and the Recording Industry Association of America ("RIAA") provided a forum and means through which defendants could communicate about pricing, terms, and use restrictions.

To obtain Internet Music from all major record labels, a consumer initially would have had to subscribe to both MusicNet and pressplay, at a cost of approximately $240 per year. Both services required consumers to agree to unpopular Digital Rights Management terms ("DRMs"). For example, pressplay prohibited consumers from copying more than two songs from any particular artist onto a CD each month. Music purchased from MusicNet and pressplay would often "expire" unless repurchased: A MusicNet consumer would need to repurchase music each year and a pressplay consumer who unsubscribed would immediately lose access to all of the music he or she had purchased. MusicNet and pressplay also did not allow consumers to transfer songs from their computers to portable digital music players like the iPod. One industry commentator observed that MusicNet and pressplay did not offer reasonable prices, and one prominent computer industry magazine concluded that "nobody in their right mind will want to use" these services. SCAC ¶ 77.

Moreover, the pricing of CDs accounted for costs such as copying the compact discs; producing the CD case, labels and anti-shoplifting packaging; shipping, both to the distributor and then to record stores; labor, such as shelving CDs and staffing cash registers; and damaged and unsold inventory. All of these costs were eliminated with Internet Music. SCAC ¶ 71. However, these dramatic cost reductions were not accompanied by dramatic price reductions for Internet Music, as would be expected in a competitive market.

Eventually, defendants and the joint ventures began to sell Internet Music to consumers through entities they did not own or control. However, the entities could only sell defendants' music if they contracted with MusicNet to provide Internet Music for the same prices and with the same restrictions as MusicNet itself or other MusicNet licensees. If the licensee attempted to license music from another company, defendants forced them to pay penalties or terminated their licenses. In addition, each defendant was paid shares of the total revenue generated by a joint venture licensee, rather than on a per song basis, linking each defendant's financial interest in the joint venture to the total sales of all labels rather than to its own market share.

Defendants also used Most Favored Nation clauses ("MFNs") in their licenses that had the effect of guaranteeing that the licensor who signed the clause received terms no less favorable than the terms offered to other licensors. Defendants attempted to hide the MFNs because they knew they would attract antitrust scrutiny. For example, EMI and MusicNet had a "side letter" agreement which assured that EMI's core terms would be no less favorable than Bertelsmann's and WMG's. "EMI CEO Rob Glaser decided to put the MFN in a secret side letter because `there are legal/antitrust reasons why it would be bad idea to have MFN clauses in any, or certainly all, of these agreements.'" SCAC ¶ 95. UMG also used MFN clauses in its license agreements. A January 12, 2006 article in the Wall Street Journal confirmed that defendants used MFNs, and, according to Jonathan Potter, the executive director of the Digital Music Association, "seller-side MFNs are inherently price-increasing and anticompetitive." SCAC ¶ 97.

Edgar Bronfman, Jr., the current CEO of WMG, explained pressplay's pricing scheme as follows:

Pressplay has what we call an affiliate model where we determine the price, and we offer a percentage of that price to the retailing partner.... The reason we've chosen that, frankly, is because we are concerned that the continuing devaluation of music will proceed unabated unless we do something about it.

SCAC ¶ 86.

After services other than defendants' joint ventures began to distribute defendants' Internet Music, defendants "agreed"² to a wholesale price floor of about 70 cents per song, which they enforced in part through MFN agreements. The MFN agreements, signed by Internet Music retailers and defendants, specified that the retailers had to pay each defendant the same amount per song. Whereas eMusic, the most popular online music service selling Internet Music owned by independent labels, currently charges $0.25 per song and places no restrictions on how purchasers can upload their music to digital music players (like the iPod) or burn to CDs, defendants' wholesale price is more than double, about $0.70 per song. Moreover, all defendants refuse to do business with eMusic, the # 2 Internet Music retailer behind only the iTunes Store.

Finally, the SCAC alleges that defendants' price fixing is currently the subject of: 1) a pending investigation by the Office of the New York State Attorney General regarding wholesale prices charged for Internet Music; 2) a Department of Justice ("DOJ") investigation into collusion and price fixing begun in March 2006; and 3) a DOJ investigation into whether defendants misled DOJ about the formation and operation of MusicNet and pressplay.

Based on all of these factual allegations, plaintiffs allege that defendants engaged in a continuing conspiracy to "restrain the availability and distribution of Internet Music, fix and maintain at artificially high and non-competitive levels the prices at which they sold Internet Music and impose unreasonably restrictive terms in the purchase and use of Internet Music." SCAC ¶ 126. They also allege that they were injured by paying more for Internet Music and CDs than they would have in the absence of an illegal agreement.

From December 29, 2005 through July 2006, plaintiffs filed actions in various state and federal courts, alleging defendants had agreed to fix the price of Digital Music. The Judicial Panel on Multidistrict Litigation transferred and centralized twenty-eight actions to the Southern District of New York, before Judge Loretta Preska. In April 2007, plaintiffs filed a First Consolidated Amended Complaint. Pursuant to the district court's orders, defendants then provided plaintiffs with a letter summarizing the grounds on which they intended to move to dismiss the First Consolidated Amended Complaint. Plaintiffs filed a Second Consolidated Amended Complaint ("SCAC") in June 2007. The SCAC brought claims under Section 1 of the Sherman Act and state antitrust and unfair and deceptive trade practices statutes. It also brought state common law claims for unjust enrichment. On July 30, 2007 defendants moved to...