On second thought, maybe the RIAA did conspire to fix prices, appeals court finds

Did the United States' major record labels, as early as 2001, conspire to establish a system for the distribution and sale of digital music that would have seen subscribers paying up to $240 per year for the right to download up to two songs per artist per month, even then at a retail price indexed at the wholesale cost of $0.70 per song, with restrictive and unwanted DRM schemes attached? That was the assertion of a group of former customers of two music services that launched in 2001. Now, a US appeals court has ruled that the dismissal of their case in 2007 was in error, and that the entire recording industry can indeed be brought to court on antitrust charges.

The original case involved two of the music industry's first "legal download" services, created just months after the founding of iTunes. One was called MusicNet, the original music publishing service from RealNetworks, years before it first started Rhapsody. MusicNet was the culmination of a joint agreement between Real and three of the nation's five major music publishers: EMI Group, Warner Music (then part of AOL Time Warner), and Bertelsmann (now Sony Music). The other was Pressplay, formed by the other two publishers: Universal Music Group (formerly MCA) and the original Sony Music Entertainment.

The plaintiffs in a class action suit against the music industry, filed in 2005, alleged that the various partners in these two services conspired to fix the prices of legally downloadable digital music, indexed on their prices when distributed on conventional CDs, and failed to pass on cost reductions to customers when the costs of indexing and serving those files plummeted. What's more, they alleged the industry created an illegal retailing scheme where digital music was only legally obtainable through their services (MusicNet and Pressplay), and any other online music outlet could only become "legal" if they purchased licenses through the publishers first -- at essentially the same prices consumers were paying.

But in the spring of 2007, that class action case was dismissed by New York District Court Judge Loretta Preska, on legal grounds whose technical term isn't some Latin phrase that requires translation into English and a page on Wikipedia. It was dismissed on grounds of futility.

In terms of antitrust, a "futile" case would be one where the alleged conspirers were shown to be engaged in parallel actions, customers were shown to be hurt, but no effort was made to demonstrate that those parallel actions were in concert with one another. Sure, wholesale costs were fixed at $0.70 per song, and certainly everyone who wanted to sell those songs had to buy them from Pressplay or MusicNet first. But that wasn't proof enough that the record labels were acting together, the district court found.

The US Second Circuit Court of Appeals this morning had its own unambiguous word for Judge Preska's conclusion: error.

Specifically, the evidence plaintiffs would need to prove their case could come, the three-judge panel found, from the source itself. In a November 8, 2001 hearing before the House Judiciary Committee, Rep. Chris Cannon (R - Utah) cited a passage, possibly from an analysts' meeting transcript, of a statement from Edgar Bronfman, Jr., then the Executive Vice Chairman of Vivendi (parent company of Universal at the time; today, Bronfman heads Warner Music). In an era when the music industry conducted itself with more of a swagger of invincibility, Bronfman not only presented Pressplay's business model as determined by the industry at large, but displayed pride in its having done so.

The three-judge panel cited a portion of Bronfman's statement cited in Rep. Cannon's testimony; we found a larger excerpt: "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, in this case, either Microsoft or Yahoo or MP3. The reason we have chosen that, frankly, is because we are concerned that the continuing devaluation of music will proceed unabated unless we do something about it. If you allow an AOL or a RealNetworks or a Microsoft or others who have very different business models to use music to promote their own business model, and simply pay the artists and the record companies the minimums, they can advantage themselves on the back of the music industry in a way which continues to devalue music. We don't want to see that happen."

The availability of public evidence of a music industry executive admitting to a motive for the creation of a business model designed to eliminate the possibility of a competitive model's coming into existence, is enough for the three-judge panel to conclude that the plaintiffs in the class action suit could make their case without futility. In fact, the judges went so far as to connect the dots for the plaintiffs, in lieu of the case they never got the chance to make for themselves.

"The complaint alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants," the judges wrote. "The complaint contains the following non-conclusory factual allegations of parallel conduct: First, defendants agreed to launch MusicNet and pressplay, both of which charged unreasonably high prices and contained similar DRMs. Second, none of the defendants dramatically reduced their prices for Internet Music (as compared to CDs), despite the fact that all defendants experienced dramatic cost reductions in producing Internet Music. Third, when defendants began to sell Internet Music through entities they did not own or control, they maintained the same unreasonably high prices and DRMs as MusicNet itself. Fourth, defendants used MFNs ["most-favored nation" trading terms] in their licenses that had the effect of guaranteeing that the licensor who signed the MFN received terms no less favorable than terms offered to other licensors. For example, both EMI and UMG used MFN clauses in their licensing agreements with MusicNet. Fifth, defendants used the MFNs to enforce a wholesale price floor of about 70 cents per song. Sixth, all defendants refuse to do business with eMusic, the #2 Internet Music retailer. Seventh, in or about May 2005, all defendants raised wholesale prices from about $0.65 per song to $0.70 per song. This price increase was enforced by MFNs. More importantly, the following allegations, taken together, place the parallel conduct [citing the US Supreme Court] 'in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.'"

In other words, there's no reason to believe that the defendants, acting on their own individual initiative, could have accomplished all of the above. In fact, one could argue the theory that no single music publisher would have wanted to attempt such a licensing scheme, were all the other publishers not acting in concert with it. Thus the antitrust action against the music industry has effectively been un-dismissed, and remanded back to District Court for further proceedings.

The Appeals Court's decision comes on the very day that Rob Glaser, the Chairman and CEO of RealNetworks and one of the originators of the MusicNow service, resigned his CEO post, though he will remain Chairman.