Class Action Defense Cases–Starr v. Sony BMG: Second Circuit Reverses Dismissal Of Antitrust Class Action Holding Class Action Complaint’s Allegations Satisfied Twombly

Jan 26, 2010 | By: Michael J. Hassen

District Court Erred in Dismissing Antitrust Class Action because Allegations in Class Action Complaint were Sufficient to “Plausibly Suggest” an Agreement Among Defendants in Violation of Sherman Act Second Circuit Holds

Several class actions were filed in various state and federal courts against numerous defendants, including Sony BMG Music Entertainment, EMI, Universal Music Group Recordings, Warner Music Group and others, alleging violations of Section 1 of the Sherman Act; specifically, the class action complaint alleged “a conspiracy by major record labels to fix the prices and terms under which [Digital Music] would be sold over the Internet.” Starr v. Sony BMG Music Entertainment, ___ F.3d ___ (2d Cir. January 13, 2010) [Slip Opn., at 2-3.] Ultimately, the Judicial Panel on Multidistrict Litigation centralized 28 class actions in the Southern District of New York, and plaintiffs eventually filed a Second Consolidated Amended Complaint that “brought claims under Section 1 of the Sherman Act and state antitrust and unfair and deceptive trade practices statutes. It also brought state common law claims for unjust enrichment.” Id., at 6-7. According to the allegations underlying the class action complaint, “Defendants produce, license and distribute music sold as digital files (‘Digital Music’) online via the Internet (‘Internet Music’) and on compact discs (‘CDs’),” and they together “control over 80% of Digital Music sold to end purchasers in the United States.” Id., at 3. Certain named defendants launched a service called “MusicNet”; others launched a service called “Duet” that was later renamed as “pressplay.” Id. The class action complaint alleged that “defendants signed distribution agreements with MusicNet or pressplay and sold music directly to consumers over the Internet through these ventures (the ‘joint ventures’),” and that “[b]oth the joint ventures and the Recording Industry Association of America (‘RIAA’) provided a forum and means through which defendants could communicate about pricing, terms, and use restrictions.” Id. Moreover, “[t]o 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,” and “[b]oth services required consumers to agree to unpopular Digital Rights Management terms (‘DRMs’).” Id. Defense attorneys moved to dismiss the class action complaint for failure to meet the pleading requirements enunciated in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). Starr, at 3, 7. The district court granted the motion, id., at 7. The Second Circuit reversed, concluding that the non-conclusory allegations in the class action complaint were adequate to survive the defense motion to dismiss. Id., at 2.

The Circuit Court summarized the basis of the class action’s claims at page 4 as follows: “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. [Citation.]” The class action complaint also alleged that “dramatic cost reductions” realized by the individual defendants were not passed on to consumers “as would be expected in a competitive market.” Starr, at 4. Moreover, defendants allegedly entered into “Most Favored Nation clauses (‘MFNs’) in their licenses that had the effect of guaranteeing that the licensor who signed the clause received terms no less favorable than the terms offered to other licensors.” Id., at 5. Defendants allegedly hid these agreements “because they knew they would attract antitrust scrutiny.” Id. At bottom, the class action alleged “that defendants engaged in a continuing conspiracy to ‘restrain the availability and distribution of Internet Music, fix and maintain at artificially high and non-competitive levels the prices at which they sold Internet Music and impose unreasonably restrictive terms in the purchase and use of Internet Music’” and that plaintiffs “were injured by paying more for Internet Music and CDs than they would have in the absence of an illegal agreement.” Id., at 6.

The Circuit Court summarized the district court’s ruling at pages 7 and 8 as follows: “The district court first found that plaintiffs did not challenge the existence or creation of the joint ventures, and the operation of the joint ventures therefore did not yield an inference of illegal agreement. At the same time, the district court held that plaintiffs’ ‘bald allegation that the joint ventures were shams is conclusory and implausible.’ [Citation.] According to the district court, plaintiffs did not challenge the joint ventures’ ‘explicit agreement,’ and any inference ‘of subsequent agreement based on prior, unchallenged explicit agreement is unreasonable.’ [Citation.] The district court went on to hold that other circumstances alleged by plaintiffs were ‘equivocal’ and did not justify the inference of agreement, and the imposition of the unpopular DRMs and pricing structure was not against defendants’ individual economic self-interest when viewed against the backdrop of widespread music piracy. [Citation.]”

Reviewing the district court’s dismissal order de novo, the Second Circuit explained, “While for purposes of a summary judgment motion, a Section 1 plaintiff must offer evidence that ‘tend[s] to rule out the possibility that the defendants were acting independently,’…to survive a motion to dismiss under Rule 12(b)(6), a plaintiff need only allege ‘enough factual matter (taken as true) to suggest that an agreement was made.’” Starr, at 8-9 (citations omitted). We do not here parse the Circuit Court’s detailed opinion: for our purposes, it is sufficient to note that the Court concluded “that the district court erred in dismissing the complaint for failure to state a Section 1 claim” because the complaint “alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants.” Id., at 12; see also id., at 12-15. We note also that the Second Circuit rejected defendants’ claim that the alleged conduct “would be entirely consistent with independent, though parallel, action,” thus rendering the allegations inadequate under Twombly, because it found that “in this case plaintiffs have alleged behavior that would plausibly contravene each defendant’s self-interest ‘in the absence of similar behavior by rivals.’” Id., at 19. Accordingly, the Circuit Court reversed, id., at 20.

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