Denial of Certiorari in Online Music Antitrust Case

Today, the Supreme Court denied a petition for certiorari in Sony v. Starr.  This class action against the major record labels challenged two joint ventures created to license the majors' music online: pressplay and MusicNet.  Although the two ventures long ago faded into Internet history, the denial of certiorari means that the case can proceed in the lower courts.  The petition came after the Second Circuit's decision in January 2010 that reversed the trial court's summary judgment in favor of the labels on the grounds that the complaint did not satisfy the plausibility standard set forth in Bell Atlantic v. Twombly.  As reiterated in Ashcroft v. Iqbal, “[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”  In reversing, the Second Circuit found that the allegations, taken as true, amply state a plausible claim of conspiracy to fix prices of digital music.  The denial of certiorari implicitly affirms this decision, or at least lets it stand.

The alleged facts pointing to illegal parallel conduct relied on by the Second Circuit include the unreasonably high prices charged for DRM'ed music by both of the labels' joint ventures, lack of price decrease to take into account the dramatic cost reductions related to Internet music distribution, the most-favored-nations clauses (MFN's) between each label and its joint venture, the MFN's with the joint ventures' licensees that were used to enforce and raise the wholesale price floor, and every label's refusal to do business with the #2 online retailer at the time, DRM-free eMusic.  MFN's require that parties receive no less favorable treatment than other parties.  This guaranteed that licensors would always get the highest going rate-- if one label received more money from one of the joint ventures, the MFN would kick in to give the others the same amount, and vice versa.  Similarly, the other MFN agreement required online music retailers to pay each defendant label the same amount per song, enabling the labels to enforce a price floor. 

These facts combined with the market context, labels' overall market power and unpopularity of DRM (that allegedly wouldn't be there without the conspiracy) were sufficient to state a claim.  Most of the Second Circuit case discusses Texaco Inc. v. Dagher, an antitrust case in which the Supreme Court held that price setting for retail gasoline by a joint venture formed by Texaco and Shell was not illegal per se since the pricing was ancillary to the venture's main purpose of combining the companies' respective refinery and distribution operations.  Thus, the Court found that the companies were participating as investors in a legitimate joint venture, not competitors engaging in per se illegal price fixing.

The labels argued, among other things, that since the Department of Justice had implicitly given the green light to the transaction, the class action complaint could not proceed.  The court quickly shot down this argument, stating that the labels cited no case "to support the proposition that a civil antitrust complaint must be dismissed because a criminal investigation undertaken by the Department of Justice found no evidence of conspiracy."  The Court rejected the labels' reliance on Dagher for a number of reasons, including that the joint venture there was explicitly approved under consent decrees from the FTC and a few state attorneys general. 

If the parties do proceed, the outcome of the case has the potential to affect the market for licensing of online music and other works.  On one hand, a single label's licensing of its catalog would not necessarily raise concern if an MFN is included.  For example, if my record label licenses its music to iTunes, and iTunes later starts giving better deals to other labels, the MFN could protect me by giving me the better deal too.  However, if a consortium representing a group of labels licenses a catalog containing each group member's songs, the use of an MFN can raise similar problems to those described above where a price floor is effectively set.  In the absence of collusion amongst multiple cartels/consortia, however, we would just wind up with an oligopolistic market similar to what we have now.  A showing of parallel conduct alone is not an antitrust harm.  Twombly.  The presence of statutory licenses and the Internet radio stations that rely on them further dampens market-wide anticompetitive effects since the above would only apply to retailers (downloads), further assuming that streaming and downloads are substitutes for one another.  I'll leave that one to the economists.  Still, the antitrust implications of cartel-like conduct in the online music market provide some support for the expansion of compulsory licenses to lessen the potentially harmful effects of MFN's on price levels for service providers and consumers in the networked digital environment.  

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