States Sue Record Labels over Price Fixing

BOSTON (08/09/2000) - As the controversy over online music continues to boil, 28 states and two U.S. commonwealths initiated a lawsuit Tuesday against the five major record labels, as well as three music retailers, charging that they had conspired to artificially inflate and fix CD prices.

The suit, led by New York and Florida, was filed Tuesday in federal court in New York and charges Capitol Records Inc.; Sony Music Entertainment Inc.; BMG Music, a unit of Bertelsmann AG; Warner Music, a unit of Time Warner Inc.; and the Universal Music Group, a unit of Seagram Company Ltd.; as well as retail companies Tower Records; Musicland, which owns Sam Goody; and Transworld, which operates, among others, Camelot and Record Town, with working in concert since the early 1990s to raise the average CD price to US$15.

Allegations of price fixing have put pressure on the major labels to strike licensing deals with online music distributors, said Eric Scheirer, a media and entertainment industry analyst with Forrester Research Inc. in Cambridge, Massachusetts.

Recently, a number of labels have announced online music distribution trials and licensing pacts. For example, Universal Music Group last week announced it had agreed with EMusic.com Inc. and a number of other companies operating Web sites to distribute a selection of Universal songs via download.

However, the labels have hesitated to make their whole catalogs available online due to fears of piracy. Even Universal's new plan only includes a few hundred albums, a fraction of their entire library. Piracy fears backed the major label's suit against music file-sharing service Napster Inc. last month for copyright infringement. But this latest suit may change the speed with which they make their music available online.

The possibility of losing control over retail outlets makes the prospect of Internet distribution deals more attractive for the labels, Scheirer said.

This suit comes almost a month after executives from both record and Internet music companies testified before the U.S. Congress in a feisty hearing on Internet music and distribution. At that hearing, Vermont Senator Patrick Leahy urged all parties to work on finding a settlement, warning that if they did not, Congress would impose one upon them.

"Frankly, I'm not sure anyone is going to be happy if we do that," Leahy said.

The suit filed Tuesday charges that price fixing was instituted as a response to the average CD price falling to about US$10 in the early 1990s as large discount stores, such as Wal-Mart Stores Inc. and Best Buy Co. Inc., cut prices in a battle for sales.

Though the states have not yet decided what amount they will seek in damages, a similar, though unrelated, federal antitrust investigation of the industry estimated that price fixing had cost consumers US$480 million.

That investigation ended in May with the record companies agreeing to a series of federal consent decrees. The consent decrees - legal agreements in which a defendant agrees to alter behavior instead of facing damages - required record companies to end the use of minimum advertised prices (MAP). MAP is a uniform price, dictated to stores by record companies, under which no CD could be advertised for sale.

Along with New York, the other states to join the lawsuit are Florida, Arizona, Arkansas, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Mississippi, Missouri, Nevada, New Mexico, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Vermont, Washington, West Virginia and Wisconsin. Two commonwealths, the Northern Mariana Islands and Puerto Rico, are also members of the suit. More states are expected to join the suit, though none have done so yet, said Scott Brown, a spokesman for the New York State Attorney General's Office.

Record companies declined comment for this story.

Additional information is available from the New York State Attorney General's Office at +1-518-474-7330 or http://www.oag.state.ny.us/.

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