Second Circuit Revives Internet Music Price-Fixing Case That Record Giants Thought Had Been Killed By The Twombly Silver Bullet

Antitrust defendants got a reminder yesterday that while the United States Supreme Court may have stiffened pleading requirements in recent years, its Twombly decision is not always a silver bullet.

Applying Twombly (which often means the dismissal of an antitrust case), the Court of Appeals for the Second Circuit yesterday restored a complaint alleging price fixing of internet music by major record labels – including EMI, Sony BMG, Universal, Warner, and others – controlling over 80% of digital music in the U.S.

Judge Preska had dismissed the complaint under Twombly.  The appeals court reversed Judge Preska, holding that “[t]he present complaint succeeds where Twombly’s failed because the complaint alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants.”

The complaint focused on internet music joint ventures pressplay and Music Net, which along with the Recording Industry Association of America “provided a forum and means through which defendants could communicate about pricing, terms, and use restrictions.”  According to the complaint, both ventures charged unreasonably high prices, burdened users with unpopular DRM software, and failed to account for increasingly lower costs in the digitization of music. Through the ventures and other licensing agreements (including several “secret” side agreements guaranteeing most favored nation status), the defendants effectively enforced a wholesale price floor of 70 cents per song in the early part of the decade.

The court – both in the main opinion and Judge Newman’s concurrence closely examining the Twombly standard – pointed out that “allegations of parallel conduct” must be carefully judged in “context” – a word which appears 10 times in the opinion.  Among other allegations, the court was persuaded by the alleged behavior “that would plausibly contravene each defendant’s self-interest in the absence of similar behavior by rivals” – including the fact that that “it would not be in each individual defendant’s self-interest to sell Internet Music at prices, and with DRMs, that were so unpopular as to ensure that ‘nobody in their right mind’ would want to purchase the music, unless the defendant’s rivals were doing the same.”