NEW YORK (CNNfn) - A coalition of U.S. states on Tuesday filed a price-fixing lawsuit against the five major recording labels and a handful of retailers, charging that they increased the price of CDs in violation of antitrust laws.|
The group, lead by New York and Florida, asserts the existence since early 1995 of a conspiracy by so-called Big Music, a $40 billion industry, and certain retailers to increase the price of popular recordings on CDs, and reduce retail competition.
"This illegal action by record companies and retailers has not been music to the ears of the public," said New York State Attorney General Eliot Spitzer. "Because of these conspiracies, tens of millions of consumers paid inflated prices to buy CDs of artists including Santana, Whitney Houston, Madonna and Eric Clapton."
The suit, filed in U.S. District Court for the Southern District of New York, seeks damages from Time Warner Inc.'s (TWX: Research, Estimates) Warner Music Group; Sony Corp.'s (SNE: Research, Estimates) Sony Music Entertainment; Seagram Co.'s (VO: Research, Estimates) Universal Music Group; BMG, the music unit of Bertelsmann AG; and EMI Group PLC. Time Warner is the parent company of CNNfn.com.
The suit also names retailers Musicland Stores Corp (MLG: Research, Estimates), Tower Records, and Trans World Entertainment Corp. (TWMC: Research, Estimates).
The states' suit is similar to an investigation recently concluded by the Federal Trade Commission in which the agency reached settlements with five major music companies to end the pricing policies that it claimed led to higher CD prices.
But unlike the FTC suit, for which the music industry admitted no wrongdoing and suffered no penalties, the states believe the industry should face the music for mistreating consumers.
"We are asking for damages," said Scott Bowen, a spokesman for New York's Spitzer, who said the FTC agreement focuses on changing future behavior. "We are also interested in that, but also we are interested in making up for past wrongs."
The FTC estimated that the recording companies' policies forced U.S. consumers to pay as much as $480 million more than they should have for CDs and other music over the last two-and-a-half years.
"That's a lot of money that the record companies have wrongly taken from consumers," Bowen said.
The states have not yet determined how much money they will ask for in damages. Any possible settlement talks would have to wait until a figure is determined, Bowen said.
Price-fixing a "blunt and effective instrument"
Central to both the FTC and the states' charges is the pricing system known as the MAP -- minimum advertising price -- program.
Under these programs, music producers pay some or all of the costs for retail music stores to advertise particular albums. In return, the record stores agreed to advertise the albums for a set price and no lower.
The states charge that the companies kept prices high by preventing retailers from lowering prices even when the retailer paid for the advertising
Several of the companies named Tuesday defended their policies and vowed to fight the suit.
"We have not been served with the complaint, but management believes that any charges in the matter against Musicland have no basis, and we intend to undertake a vigorous defense," said a spokesman for Musicland, which operates stores under the names Sam Goody and Musicland.
"We still believe that MAP was a legitimate and appropriate practice, and we are confident that the courts will reach the same conclusion," a BMG spokesman told CNNfn.com.
"Warner Music Group believes the suit lacks any merit," a spokesman for the company said. "We continue to believe that MAP served a valid business purpose and benefited consumers by substantially furthering retail competition and that it was an appropriate and lawful practice."
In the suit, the states charge the record industry felt threatened by the growing consumer popularity of low cost CD retailers, such as Best Buy and Circuit City, who could profitably sell CDs at discounted prices.
Strong MAP programs were implemented, becoming a "blunt and effective instruments for putting an end to price competition," the complaint says. As a result, the states charge, retail CD prices, which had been dropping, were stabilized and then raised industry-wide. In addition, both record companies and retailers were able to maintain high wholesale prices and margins for CDs.
"As a result of both effects, consumers have paid higher prices for CDs than they would have absent the illegal agreements," the complaint says.
At a press conference on Tuesday, Spitzer suggested that the policy increased the price of each CD by up to $2.
In addition to New York and Florida, the other states and commonwealths joining the suit are: Arizona, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Mississippi, Missouri, Nevada, New Mexico, North Carolina, the Northern Mariana Islands, Pennsylvania, Puerto Rico, Rhode Island, Texas, Utah, Washington, West Virginia, and Wisconsin.
The states are currently calculating the damages they will seek. New York's Spitzer said that any damages that New York receives could be used to fund music programs in schools and other similar programs.