On Monday, the U.S. Supreme Court declined to hear a significant antitrust case brought against the major record labels, clearing the way for the lawsuit to proceed in federal court in New York. The class action suit alleges the labels conspired to fix prices and limit digital music distribution in the early 2000s.

Even though the case has winded its way around the court system, the labels' situation has not changed substantially since last January, when the Second Court of Appeals reversed the district court's 2008 dismissal of the case and ruled that the plaintiffs' case could move forward. Now the case goes back to the district court for discovery and a possible trial. The following article by Ben Sheffner, published in Billboard in January of last year, offers a succinct overview of the situation.

In 2003, the major labels got an early holiday gift when the U.S. Department
of Justice announced two days before Christmas that it was closing its
investigation into charges that the then-five majors had been engaging in a
price-fixing conspiracy through Pressplay and MusicNet, two joint ventures
they had set up to provide legal Internet distribution channels in the wake
of Napster.

The majors breathed an additional sigh of relief in October 2008, when U.S.
District Court Judge Loretta Preska dismissed a class action suit brought by
private individuals seeking potentially huge damages over allegations that
the labels conspired through Pressplay (Sony Music Entertainment/Universal
Music Group) and MusicNet (Warner Music, EMI Music and BMG) to set
artificially high prices on digital downloads, and that they agreed to
deploy cumbersome digital rights management restrictions, all in an effort
to keep consumers buying more profitable CDs.

But on Jan. 13 [2010], the Second Circuit Court of Appeals in New York put the cork
back in the champagne bottle, reversing Preska's decision and reviving the
case, exposing them to years of intrusive discovery and potentially tens of
millions of dollars in potential damages.

In some ways, this case is about ancient history. Pressplay and MusicNet
launched in 2002 as the labels' answer to free and illegal downloads. But
both quickly foundered, victims of high prices, poor design and meager
offerings that included music by major acts such as U2 and Counting Crows,
but not necessarily the tracks you wanted. Still, that didn't stop the
plaintiffs' lawyers, who filed 28 separate lawsuits that were eventually
consolidated into one.

The meat of the plaintiffs' allegations is that the labels all agreed to a
wholesale price floor of 70 cents, enforced through most-favored-nations
clauses in "secret side letters" that guaranteed each licensor would obtain
the same terms as the others, effectively setting a uniform price for
downloads that undermined competition. The plaintiffs also charge that the
labels collectively agreed not to do business with potential licensees‹like
indie-focused eMusic‹that wouldn't go along with their terms.

It is a violation of U.S. antitrust law for competitors to agree on the
price they will charge their customers, or to collectively refuse to deal
with third parties. But the Second Circuit's decision to reinstate the case
against Pressplay and MusicNet is still a long way from finding that the
labels did anything wrong. The appeals court didn't determine that the
plaintiffs had proved their case. Rather, it merely said that the
allegations in their complaint were sufficiently concrete and specific to
allow the case to move forward.

Allegations are not evidence, and so now the case goes back to square one,
with fights over whether the case may proceed as a class action and a
lengthy period‹possibly years‹of discovery as the two sides depose
executives and other witnesses and exchange of millions of pages of
documents. Perhaps some day the case may even go to trial.

But regardless of the eventual outcome, the case illustrates the dangers
labels face when conducting any sort of business activity in conjunction
with one another. While joint ventures, if done right, are perfectly legal,
collective action by the dominant players in any industry will set off red
flags for both government antitrust enforcers and private plaintiffs seeking
damages. (Joint litigation activity, like the labels' collective lawsuits
against Napster, Grokster, Aimster and individual peer-to-peer users, is
protected under the First Amendment and a legal immunity known as the
Noerr-Pennington doctrine.)

This case should also give pause to those observers, including most
prominently author Steve Knopper in his book "Appetite for
Self-Destruction: The Spectacular Crash of the Record Industry in the
Digital Age," who claim that the labels could have avoided the meltdown of
the past decade if they had only struck a licensing deal with Napster in
2000 instead of shut it down through a lawsuit.

A grand deal involving the labels and Napster may sound like a perfect
Kumbaya solution, but, as the Pressplay and MusicNet experiences
demonstrate, any such collective agreement would have been fraught with
antitrust peril.

Ben Sheffner is a copyright attorney who has represented movie studios, TV
networks and record labels. Sheffner currently works as an attorney in the
NBC Universal Television Group, which is 20% owned by Vivendi, the parent of
Universal Music Group. He is the author of the Copyrights & Campaigns blog.

Questions? Comments? Let us know: @billboardbiz

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