A federal lawsuit alleging collusion among the major music labels over digital download pricing can proceed, a three judge Appeals Court panel ruled today.

As lawsuits go, this one's a humdinger, charging that the labels engaged in a price-fixing conspiracy to ensure that they each made about 70 cents per track sold online, and that no one received a better deal than anyone else. The case had earlier been tossed for a "failure to state a claim," but the Second Circuit Court of Appeals has reinstated it and ordered the trial judge to proceed with the case.

Most Favored Nations



The case in question, Starr V. Sony BMG, actually began life as a host of cases filed by various plaintiffs in various state and federal courts in 2005 and 2006. The cases were eventually consolidated into a single one to be heard in a New York federal court, and that case covers behavior that goes all the way back to those dark post-Napster days when the labels attempted to foist MusicNet and pressplay onto an unsuspecting public.

Those early services were at first the only way that the labels would allow their music to be sold over the Internet, and the control exercised was extreme: they were actually label-controlled ventures, neither store had a complete selection of music, and the DRM was flat-out ridiculous. Here's how the complaint sketches the scene:

To obtain Internet Music from all major record labels, a consumer initially would have had to subscribe to both MusicNet and pressplay, at a cost of approximately $240 per year. Both services required consumers to agree to unpopular Digital Rights Management terms ("DRMs"). For example, pressplay prohibited consumers from copying more than two songs from any particular artist onto a CD each month. Music purchased from MusicNet and pressplay would often "expire" unless repurchased: A MusicNet consumer would need to repurchase music each year and a pressplay consumer who unsubscribed would immediately lose access to all of the music he or she had purchased. MusicNet and pressplay also did not allow consumers to transfer songs from their computers to portable digital music players like the iPod. One industry commentator observed that MusicNet and pressplay did not offer reasonable prices, and one prominent computer industry magazine concluded that “nobody in their right mind will want to use” these services.

Truly execrable stuff, but the complaint argues that the DRM wasn't the worst of it. Rather, the secret side deals relating to price were where the real sleaze was hidden. One of the common arrangements alleged by the complaint was "Most Favored Nation" clauses, under which no one label could be offered a worse deal than any other label.

"Defendants attempted to hide the MFNs because they knew they would attract antitrust scrutiny," said the court, summarizing the complaint. "For example, EMI and MusicNet had a 'side letter' agreement which assured that EMI's core terms would be no less favorable than Bertelsmann's [Song BMG] and [Warner Music Group]." The complaint quotes EMI CEO Rob Glaser as saying that the letter was secret because "there are legal/antitrust reasons why it would be a bad idea to have MFN clauses in any, or certainly all, of these agreements."

It's just a coincidence!

When pressplay and MusicNet fell apart, though, the complaint charges that the labels agreed to an internal price floor of 70 cents per track in order to keep revenues higher for everyone. The plaintiffs also complain that the labels actually raised this level from 65 cents back in 2005, even though costs (CD stamping, packaging, shipping, etc.) had fallen off dramatically in the shift to digital downloads. (The price increase was then allegedly granted to every label by virtue of the MFN clauses.)

But here's the rub: the complainants don't appear to have any evidence of direct collusion. That is, they can't point to a specific meeting or name which specific people got together from different companies and agreed to illegal price controls. Instead, the plaintiffs claim that such an arrangement can logically be deduced from the behavior of the industry.

The defendants say that their pricing can just as easily be explained as a rational business response to the market, and that no collusion should be implied.

Judges from the Appeals Court agreed that in this case "the complaint alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants." (This key principle is important to prevent the courts from supporting mere "fishing expeditions.")

The case returns to the trial court, where it has been stalled since October 2008.