The proposed Universal-EMI merger could lead to another remix of antitrust and copyright law as regulators grapple with consolidation in the recorded-music business.

Notably, the proposed acquisition could affect digital sampling, the technique musicians use to digitally copy and remix sounds from existing albums into a new sound recording.

As described in a previous Antitrust Today post, the FTC and the European Commission are reviewing the proposed merger and the antitrust subcommittee of the U.S. Senate Judiciary Committee will hold a hearing on the controversial acquisition.  The idiosyncrasies of the music industry, however, as well as the challenge of defining the relevant market, make the analysis of the proposed merger’s likely effects on competition difficult. 

This analysis is complicated by the fact that current copyright law, at least under the Sixth Circuit’s reasoning in Bridgeport Music, Inc. v. Dimension Films, 410 F.3d 792 (6th Cir. 2005), eliminates certain defenses when a plaintiff claims the defendant’s digital sample infringed a copyright in the sound recording.  In support of this conclusion, the Sixth Circuit stated, “[t]he sound recording copyright holder cannot exact a license fee greater than what it would cost the person seeking the license to just duplicate the sample in the course of making the new recording.”  

A recent article by a Constantine Cannon attorney explores the antitrust overtones of the Sixth Circuit’s statement and examines how the proposed consolidation of record labels might affect the practice of digital sampling and the potential market of licensing sound recordings for sampling.

Microsoft’s restrictions on third-party web browsers in its upcoming Windows RT mobile operating system is drawing criticism from the general counsel of the Mozilla Foundation, the non-profit organization responsible for the development of the popular Firefox web browser.

Google, which has developed its own Chrome web browser, has wasted no time in joining Mozilla’s criticism. 

Windows RT is a slimmed-down version of Windows 8, the next-generation Windows operating system due late this year.  Windows RT is specifically designed for ARM microprocessors, which are commonly used in mobile devices like tablets and smartphones.  It represents the first version of the Windows operating system not intended for the x86 architecture used in desktop and laptop computers for decades.  In short, Windows RT is Microsoft’s response to the runaway successes of Apple’s iOS and Google’s Android operating systems. 

The restrictions at issue allegedly prevent other browsers from running in Windows RT’s “classic” Windows mode, although other browsers can be used in the new Windows Metro “tiled” mode.  The controversy evokes memories of 1998, when Netscape, Mozilla’s predecessor, accused Microsoft of illegally bundling Internet Explorer with Windows 95.  The controversy led to a series of lawsuits against Microsoft, including United States v. Microsoft, and the European Commission’s investigation. 

However, 14 years have gone by, and the operating system landscape has shifted dramatically.

Nevertheless, and perhaps not surprisingly, Microsoft’s decision to restrict third-party web browsers immediately attracted the interest of the United States government and the European Commission.  The U.S. Senate Judiciary Committee is reportedly looking at Mozilla’s and Google’s allegations, and the European Commission is exploring the issue as well.  The EC is likely to invoke Microsoft’s commitment to give European Union consumers a choice of browsers, implemented as the so-called “browser ballot” agreement with the European Commission.  However, both the European and U.S. cases involved desktop and laptop operating systems, and their applicability to Windows RT is debatable. 

In addition, Microsoft’s announced restrictions on third-party applications are hardly unusual for mobile devices.  For example, through its popular App Store, Apple exerts complete control over which applications can be installed on iPhones and iPads, and Apple’s policies have been repeatedly criticized for allegedly restricting competition from third-party applications and services.

The latest round of music industry consolidation is coming under antitrust scrutiny as the antitrust subcommittee of the U.S. Senate Judiciary Committee prepares for a hearing examining Universal Music Group’s proposed acquisition of the recorded-music business of EMI Music Ltd.

If the proposed $1.9 billion acquisition is approved, the number of major music labels will be half of what it was in the mid-1990s.

Universal Music Group’s 2011 proposal to acquire competitor EMI Music is already under review by the U.S. Federal Trade Commission and the European Commission.  Although the review by the Senate antitrust subcommittee will have no formal impact on the FTC decision, discussions in the Senate hearing could well shape the debate on whether the acquisition should be approved.

Currently, four major labels control 90 percent of the U.S. recorded music market.  If Universal and EMI merge, 90 percent of the U.S. market would be controlled by just three companies.

Universal is the largest recorded music company with roughly 30 percent of the global recordings market.  EMI is the fourth largest with roughly 10 percent of the global market.  Approval of the deal would concentrate roughly 40 percent of the recorded music market in Universal.

The FTC is reviewing whether the deal would violate antitrust laws by giving Universal enough market power to stifle competition either individually or collusively.  Opponents of the acquisition argue that it would reduce competition by allowing too much market concentration and by creating a company that could effectively control the future of digital media services.  Such opponents include rival music label Warner Music Group, the Consumer Federation of America, and digital rights group Public Knowledge.  Supporters include the American Federation of Musicians and SAG-AFTRA.

When asked about the Senate hearing, a Universal spokesman stated that the company “welcome(s) the opportunity to answer any questions that the subcommittee may have, address the facts and debunk myths.”  The hearing could be scheduled as early as June.

The Autorite de la Concurrence, the French competition authority, has slapped fines on three leading French pet food manufacturers that restricted competition in premium dry dog and cat food sold in specialty outlets such as pet shops and veterinary offices. 

The manufacturers are Nestle Purina Petcare France SAS, Royal Canin SAS (owned by Mars, Inc.), and Hill’s Pet Nutrition (owned by Colgate Palmolive Co.).  Collectively, they sold 70 percent of Frances’ premium dry pet food during the relevant period of 2004 to 2008.   

Nestle Purina and Royal Canin sell their pet food to wholesale distributors, who then sell it to retailers, who in turn sell it to pet owners.  Their wholesaler agreements restricted resale territories and prices, and “set up distinct and impenetrable distribution systems” that “partition[ed] the markets . . . for some product ranges.”  The results were reduced choices and increased costs, which were passed on to consumers.

Hill’s, which markets its pet food only through veterinary offices and specialty stores, prohibited its distributors from exporting its products outside France.  This prohibition had little or no impact, however, because it pertained only to veterinary offices and was never actually applied.  

Nonetheless, the Autorite noted that on the whole, these agreements could cause significant damage because the price elasticity of demand for pet food is low.  The reason is that pet food “elicit[s] an emotional investment for end consumers, who are vulnerable to brand loyalty.”      

Nestle Purina was fined 19.5 million euros, Royal Canin 11.6 million, and Hill’s 4.6 million, for a total of 35.3 million euros ($46.7 million).

In setting these fines, the Autorite considered the duration of the restrictions and each company’s global reach and financial resources.  It also considered prior offenses – which probably hurt Royal Canin, which was sanctioned in 2005 for abusing its dominant position.  Hill’s, on the other hand, likely owes the comparatively small size of its fine to the minimal impact of its restriction.  Nestle Purina’s and Royal Canin’s fines also were reduced, by 18 and 20 percent respectively, because they declined to dispute the Autorite’s allegations and committed to reinforce their competition compliance programs.

The United Kingdom’s Department for Business, Innovation and Skills (BIS), has announced that the Government plans to introduce legislation that would lower the threshold for criminal prosecution in cartel cases.

Under the proposed law, the prosecution would no longer have to prove an individual’s dishonesty in entering into a cartel agreement.    

The cartel offense was introduced by the Enterprise Act of 2002.  Under the Act, a person is guilty of the cartel offense “if he dishonestly agrees with one more other persons” to engage in price-fixing, limitation of supply or production, market-sharing, and/or bid-rigging.  The Act does not define the term “dishonestly.”  However, the traditional test for dishonesty in English law is that an individual acts dishonestly if his conduct is “dishonest by the standards of reasonable honest people, and the defendant knew what he did was dishonest by those standards.”

Critics of the proposed removal of the dishonesty requirement argue that criminal liability and imprisonment should be reserved for persons that brazenly and actively engage in hardcore cartel activity.  They fear that this change could extend criminal enforcement to peripheral participants in a scheme whose conduct may have been more naive than it was cunning and calculated.

Supporters of the amendment reject this argument and counter that persons do not accidentally participate in a hardcore cartel.  They regard doing away with the dishonesty requirement as a necessity in order to achieve the deterrent effect of the cartel offense.  Indeed, many lament that the criminal enforcement of competition in the United Kingdom has failed to deliver in that respect.  Since its adoption in 2003, the only convictions under this law resulted from plea agreements in the United States, not any proactive enforcement by the Office of Fair Trading (OFT).  The Government expressly stated that one of its goals in proposing this change to the cartel offense is to obtain more convictions that would serve as cautionary tales for individuals.

In what may seem like a paradox, the reform proposed by BIS also contemplates that the cartel offense could be avoided if the parties agree to publish key details of their arrangements in an official newspaper of record such as the London Gazette before they are implemented.  Some have commented that this “publication exception” to the cartel offense could be exploited by cartel participants, who might publish only an innocuous description of their arrangements while concealing their nefarious aspects.  Some critics argue that while the Government is seeking to expand the scope of criminal liability in one aspect, it may also be giving a way out to the most sophisticated – and dishonest – violators of competition law.

The proposed amendments to the cartel offense are but one element of a wider reform of the United Kingdom’s competition law regime proposed by the Government, which includes the merger of the OFT and the Competition Commission, Britain’s two competition authorities.  The British Parliament will ultimately decide the fate of the reform. If adopted, the reforms are expected to come into effect in 2014.