August 8, 2000 11:50 AM PDT

States target record labels with price-fixing suit

A coalition of 28 states filed suit against the major record labels today, alleging that they and several U.S. retailers have illegally conspired to prop up the prices of compact discs.

The states' attorneys general charge that the labels and retailers have violated state and federal antitrust laws since 1995, potentially costing consumers hundreds of millions of dollars.

"Our nation's business economy has been built on the notion of a fair and free competition," New York Attorney General Eliot Spitzer, one of the lawsuit's leaders, said in a statement today. "When there is illegal activity to fix prices--as was the case here--the consumer is always the loser."

The suit, which is filed in U.S. District Court in Manhattan, follows an investigation by the Federal Trade Commission into a similar accusation of CD price fixing. That issue was settled in May when the record labels agreed to drop their controversial pricing agreements with retailers. The record labels did not admit wrongdoing.

The new lawsuit underlines the increasing disputes over the way the Napster special report record companies have used their market domination in recent years. Music-swapping service Napster, which is being sued by the record industry for copyright infringement, has contended that the big labels have abused their copyright power and have thus lost the ability to defend those rights in court.

A federal judge, however, virtually ignored that argument in court last month, largely siding with the record industry against Napster.

Defendants in today's suit include Capital Records, Sony Music Group, Bertelsmann's BMG Entertainment, Seagram's Universal Music Group and Time Warner's Warner Music Group, along with retailers Musicland, Transworld and Tower Records.

The lawsuit is based on what the attorneys general say is a long-standing conspiracy to prop up price of CDs.

The suit notes that discount retailers such as Wal-Mart, Circuit City, Best Buy and Kmart began offering CDs for low prices in the early 1990s, driving the price of a recording down from $15 to about $10.

In response, the suit alleges, other music retailers pressured the record companies to impose a minimum retail price for CDs. The labels added teeth to the policy by levying financial penalties on discount retailers that undercut this minimum price.

The record companies have defended the practice of minimum pricing, saying that it helped support small record stores against heavy-handed competition by giant chains such as Kmart or Target. The chain stores were still free to sell CDs below the price floor, the record companies contend, but they would not receive the sometimes-substantial retail marketing subsidies traditionally given by the record labels.

"Warner Music Group believes the suit lacks any merit," Warner Music spokesman Will Tanous said in a statement. "We continue to believe that (the minimum price policy) served a valid business purpose and benefited consumers by substantially furthering retail competition, and that it was an appropriate and lawful practice."

Several other defendants in the suit, including Tower Records and Sony Music, declined comment.

The FTC has estimated that the potential harm to consumers as a result of the pricing agreements could reach $480 million. The states have not yet set a price tag on their suit, however.

The major labels have already agreed to drop the minimum pricing agreements with retailers for at least seven years, as a result of their settlement with the FTC.

 

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