Court Dismisses Allegations of Digital Music Conspiracy as Implausible

Author: Jenny Kim

In re Digital Music Litigation represents an unsuccessful attempt to challenge a perceived monopoly in the digital music market. The plaintiffs – fifteen individual consumers of CDs and music downloads from nine states – alleged in the complaint that industry joint ventures MusicNet and pressplay provided a natural forum for record companies to collude. According to the complaint, the business practices growing out of the joint ventures – including high costs and use restriction – were so inconvenient and unattractive to consumers as to warrant the conclusion that the participants in these joint ventures were not competitive business operations.

The complaint further alleged that the prices for digital music were artificial and supracompetitive. The companies could not justify CD prices because production costs and demand were declining; Internet downloads were likewise overpriced, given that MusicNet and pressplay charged 70 cents per song, where the independent vendor eMusic charged 25 cents. Moreover, plaintiffs pointed out that in May 2005, the defendants each raised their download prices from 65 cents to 70 cents, contrary to the advantage that any one would have gained if it had lowered its price and widened its market share. Finally, citing Judge Richard Posner, the complaint alleged that a tacit conspiracy could be inferred from economic indicators without proof of actual agreement where, as here, (1) the market conditions were favorable to collusion, and (2) prices were in fact collusive.

The court rejected the complaint and granted the defendants’ motion to dismiss. The court found that the complaint did not allege more than a "naked assertion of conspiracy" as required under Twombly, and noted that even conscious parallelism could was insufficient to suggest conspiracy in the absence of more unambiguous evidence. Here, as in Twombly, the defendants’ parallel conduct was consistent with a unilateral response to a common economic interest. With respect to digital rights management, the court made a pointed appeal to the history of the industry’s market, where rampant piracy in the 1990s justified an antagonistic relationship with consumers. Restrictive use rules may have been unpopular, the court found, but they were necessary for protecting the defendants’ economic viability. The court strongly implied that it might have thought about this case differently if the plaintiffs had directly challenged the legality of the joint ventures instead of characterizing them as "shams" masking antitrust violations.

The court’s reasoning rested significantly on assumption that a Napster-era business model was a rational response to the market. Citing In re Napster, 191 F. Supp. 2d 1087 (N.D. Cal. 2002), the court held that anticompetitive conduct alone, without further information about motivation, was open to interpretive indeterminacy. This is arguably surprising in that Napster used nearly identical facts to draw an opposite conclusion, holding that "even a naif must realize that in forming and operating a joint venture, [record company] representatives must necessarily meet and discuss pricing and licensing, raising the specter of possible antitrust violations." Id. at 1109. The very existence of these joint ventures was sufficient to move Napster into discovery, whereas here, the plaintiffs were required to plead additional evidence to gain the same ground. Without expressly distinguishing this case from Napster, the court observed that the situation here was closer to that in Twombly, and thus was bound to a similar holding.

In re Digital Music Antitrust Litig., ___ F.Supp.2d ___, 2006 WL 2422644 (Multi. Dist. Aug. 16, 2006).