Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Meet William Jimenez. A 24-year-old physical trainer in South Florida, he likes listening to classical music, jazz and rock. His 17-year-old stepchild favors the rock group Metallica. And at the Coconut Grove and Miramar Total Fitness Network gyms he co-owns, he likes to play a variety of fast-paced music to accompany fitness programs. All told, he buys five or six compact discs every month, forking out $15 to $20 for each. Well, guess what? He and millions of others have paid too much for their CDs, or so implies a recent antitrust investigation by the Federal Trade Commission against the five largest record distributors. The federal agency last month signed a consent agreement with Sony Music Entertainment Inc., Time Warner Inc., EMI Music Distribution, Universal Music & Video Distribution Corp., and BMG Entertainment to get them to end a policy the FTC alleges kept CD prices artificially high. Now, to get part of their money back, Jimenez and other consumers are suing those companies. The FTC alleged the five music distributors, who account for 85 percent of the $15 billion market, required retailers to advertise CDs at or above a minimum price set by the distributors, or else the retailers would lose out on cooperative advertising funds from the distributors. The practice was referred to as the minimum advertised price policy, or MAP. The FTC called the practice a violation of antitrust laws. What’s more, the FTC alleged that thousands of consumers like Jimenez have, in total, overpaid as much as $480 million for CDs and other recorded music, or about $5 per CD, as a result of the policy. MAP policies established the price in the marketplace, the FTC said, because no retailer wanted to be at a disadvantage in terms of cooperative advertising funds from the distributors. Since retailers couldn’t advertise a discount without repercussions, they wouldn’t offer a discount. “If I’ve been overcharged for them, I’d like to be paid back,” said Jimenez, who has become one of two name plaintiffs in a class-action lawsuit filed last month in Florida’s Miami-Dade Circuit Court against each of the five music distributors. They join a number of similar lawsuits in other states where antitrust investigators are pursuing restitution from the record labels. Similar consumer lawsuits have been filed in California, New York, Connecticut and New Mexico. The consumer lawsuits are the latest twist in the pricing of compact discs, a merchandise category whose pricing has been confusing for consumers and troublesome for the industry ever since the early 1990s, when nontraditional music retailers like Best Buy and Circuit City began adding CD sections to their stores. The strategy of those superstores was to sell CDs at a skimpy profit — or even at a loss — in order to draw customers into their stores, where presumably they would then notice the more profitable appliances and electronic equipment. By the mid-1990s, traditional music retailers were decrying the evils of price-wars, while consumers could find top-10 hits for as low as $9.99. Retail casualties began. For example, Spec’s Music, back then a publicly traded retailer based in Miami, saw its sales and earnings drop, along with its stock price, as consumers flocked to competitors. Musicland, which owns Sam Goody, Media Play and others, barely survived and was under bankruptcy protection for a brief period of time. And Camelot Music, which bought Spec’s Music in 1998, itself went through bankruptcy reorganization from 1996 through 1997. But suddenly, the price carnage seemed to stop. According to the FTC, the reason was the distributors’ intervention with the minimum advertised price policies, which began being adopted in 1995. “The MAP policies achieved their purpose and effectively stabilized retail prices with consequential effects on wholesale prices, ending the price competition that previously existed in the marketplace and the resulting pressure on the distributors’ margins,” the FTC said in its statement last month. Despite signing the consent agreement with the FTC, the music distributors admit no wrongdoing. What’s more, they defend the practice. “We believe MAP served a valid business purpose for our customers and the consumers, and is an appropriate and lawful practice. However, the FTC has made it clear to us that it disagreed,” said spokesman Will Tanous of record distributor Time-Warner, reading from a statement the company issued at the time of the consent decree. The other companies made similar statements. None would comment on the consumer litigation. But now that the FTC has gotten the companies to stop their practice, the questions remain on what will happen next to CD prices, and what chances the plaintiffs have of prevailing in their class-action lawsuits. The FTC’s consent agreement doesn’t require the distributors to pay back any money. But attorneys for the Florida plaintiffs hope to collect damages for violation of the Florida Deceptive and Unfair Trade Practices Act and the Florida Antitrust Act of 1980. The Florida lawsuits’ allegations are similar to the FTC’s complaint. However, the consent agreement between the distributors and the FTC cannot be used as evidence that the five companies collaborated with each other to enforce the pricing policy. The plaintiffs will have to prove anew that the music distributors did collaborate to enforce the policy, said Michael Hausfeld, a Washington, D.C., lawyer who litigated against the record labels in the mid-1990s, concerning a practice of cutting off retailers that sold used CDs. [The case ended in a settlement, Hausfeld said.] And the defendants are nothing if not deep-pocketed, with resources to litigate endlessly. “They’re the biggest and the baddest,” said Hausfeld, who isn’t involved in any of the class-action lawsuits. “The cases are going to be difficult, but they’re definitely provable as long as they remain focused on the major labels.” However, some observers disagree that MAP rules caused much change in the marketplace. They say competition has remained in the marketplace, despite MAP policies, with many retailers still offering competitive discounts. “The top-100 hit area’s remained very competitive, so the practice isn’t going to change that much, whether there’s a law or not,” says Tom Tashjian, an industry analyst with Banc of America Securities LLC. The attorneys representing the Florida plaintiffs believe they may prove otherwise. “We may have an economist testify what the market would’ve been if the [distributors] hadn’t tampered with it,” said Stephen Nagin, a Miami Beach lawyer who worked at the FTC until the early 1980s, and subsequently at the U.S. attorney’s office. As far as consumers proving their purchases, it will boil down to store receipts or credit card statements, Nagin said. “You have good lawyers fighting on both sides,” said Herman J. Russomanno, a Miami lawyer recently installed as president of the Florida Bar Association, and one of the attorneys representing the Florida plaintiffs. “The issue is the evidence and whether they are able to defend the antitrust claims.” So will prices begin to drop again? “That’s the fear, and quite frankly, no one knows the answer,” said Ed Christman, retail editor for Billboard Magazine, a trade publication that covers the music industry. For one thing, wholesale prices for hit CDs to retailers have already increased, from $10.75 to $11.40 over the past few years. So it’s unlikely any retailer will want to make $9.99 offers again, Christman said, because they would be taking a bigger loss than in the earlier price wars. Even Circuit City and Best Buy have become accustomed to making a profit on CDs, and may be reluctant to let go of those profit margins, he said. “Those companies have since exercised restraint,” Christman said. “They don’t seem to be beating each other over the head as they used to.” For their part, those companies aren’t making any promises other than to watch what other retailers do and price competitively. Best Buy spokeswoman Laurie Bauer said that while the appliance retailer refrained from advertising low CD prices to comply with MAP policies, it kept selling them at about $5 lower than mall-based retailers. However, it isn’t taking losses on the category. “The music category is very profitable for us,” Bauer said. Circuit City spokesman Bill Cimino added, “We based our pricing on the marketplace, and not necessarily on MAP.”

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.