978-1285770178 Case Printout Case CPC-26-05 Part 1

Page 1

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

C.A.2 (N.Y.),2010.

Starr v. Sony BMG Music Entertainment

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

United States Court of Appeals,

Second Circuit.

Kevin STARR, Matt Putman, Cindy Seley, on behalf of herself and all others similarly situated, David Paschkett, on

behalf of all others similarly situated, Christopher Michaud, on behalf of himself and all others similarly situated,

Lisa Owens, Richard Benham, on behalf of himself and all others similarly situated, Keaton Landry, individually

and on behalf of all others similarly situated, Sheri Clark, Rachael Hall and Mitchell Horton, Plaintiffs-Appellants,

v.

Docket No. 08-5637-cv.

Argued: Sept. 21, 2009.

Decided: Jan. 13, 2010.

Background: Buyers of digital music brought actions in various state and federal courts against sellers for violation

duct was the result of an agreement among the sellers to fix the price of digital music, as required to state claim un-

der the section of the Sherman Act prohibiting trusts in restraint of trade.

Vacated and remanded.

170AXI Dismissal

170AXI(B) Involuntary Dismissal

170AXI(B)5 Proceedings

170Ak1827 Determination

170Ak1835 k. Matters deemed admitted; acceptance as true of allegations in complaint. Most Cited

Page 2

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

cause they are no more than conclusions, are not entitled to the assumption of truth. Fed.Rules Civ.Proc.Rules 8(a),

12(b)(6), 28 U.S.C.A.

170BVIII(K)1 In General

170Bk776 k. Trial de novo. Most Cited Cases

Federal Courts 170B 794

ing all factual allegations as true, but giving no effect to legal conclusions couched as factual allegations. Fed.Rules

Civ.Proc.Rule 12(b)(6), 28 U.S.C.A.

[3] Federal Courts 170B 776

Federal Courts 170B 817

170B Federal Courts

170BVIII Courts of Appeals

170BVIII(K) Scope, Standards, and Extent

170A Federal Civil Procedure

170AXI Dismissal

170AXI(B) Involuntary Dismissal

170AXI(B)3 Pleading, Defects In, in General

Page 3

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

170A Federal Civil Procedure

Generally, while a complaint attacked by a motion to dismiss for failure to state a claim does not need detailed fac-

tual allegations, a plaintiff’s obligation to provide the grounds of his entitlement to relief requires more than labels

and conclusions, and a formulaic recitation of the elements of a cause of action will not do; instead, factual allega–

tions must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations

in the complaint are true, even if doubtful in fact. Fed.Rules Civ.Proc.Rule 12(b)(6), 28 U.S.C.A.

170AXI(B)3 Pleading, Defects In, in General

170Ak1772 k. Insufficiency in general. Most Cited Cases

What is required to survive a motion to dismiss for failure to state a claim are enough facts to state a claim to relief

that is plausible on its face. Fed.Rules Civ.Proc.Rule 12(b)(6), 28 U.S.C.A.

170Ak1772 k. Insufficiency in general. Most Cited Cases

A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable

inference that the defendant is liable for the misconduct alleged; where the well-pleaded facts do not permit the

court to infer more than the mere possibility of misconduct, however, dismissal is appropriate. Fed.Rules

Civ.Proc.Rule 12(b)(6), 28 U.S.C.A.

29Tk537 k. In general. Most Cited Cases

The crucial question in a case under the section of the Sherman Act prohibiting trusts in restraint of trade is whether

the challenged conduct stems from independent decision or from an agreement, tacit or express. Sherman Act, § 1,

15 U.S.C.A. § 1.

Page 4

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

29TVI(B) Cartels, Combinations, Contracts, and Conspiracies in General

29TXVII(B) Actions

29Tk973 Evidence

29Tk976 k. Presumptions and burden of proof. Most Cited Cases

Although parallel business behavior is admissible circumstantial evidence from which the fact finder may infer

agreement, it does not itself constitute a violation of the Sherman Act, because it is consistent with conspiracy, but

29TXVII Antitrust Actions, Proceedings, and Enforcement

29TXVII(B) Actions

29Tk972 Pleading

29Tk972(2) Complaint

29Tk972(4) k. Conspiracy or combination. Most Cited Cases

[10] Antitrust and Trade Regulation 29T 972(4)

29T Antitrust and Trade Regulation

29TXVII Antitrust Actions, Proceedings, and Enforcement

29TXVII(B) Actions

[11] Federal Civil Procedure 170A 1772

170A Federal Civil Procedure

170AXI Dismissal

Page 5

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

[12] Antitrust and Trade Regulation 29T 972(4)

29T Antitrust and Trade Regulation

29TXVII Antitrust Actions, Proceedings, and Enforcement

29TXVII(B) Actions

29Tk972 Pleading

29Tk972(2) Complaint

29Tk972(4) k. Conspiracy or combination. Most Cited Cases

An allegation of parallel conduct coupled with only a bare assertion of conspiracy is not sufficient to state a claim

under the section of the Sherman Act prohibiting trusts in restraint of trade; instead, allegations of parallel conduct

29TXVII Antitrust Actions, Proceedings, and Enforcement

29TXVII(B) Actions

29Tk972 Pleading

29Tk972(2) Complaint

29Tk972(4) k. Conspiracy or combination. Most Cited Cases

29T Antitrust and Trade Regulation

29TXVII Antitrust Actions, Proceedings, and Enforcement

29TXVII(B) Actions

29Tk972 Pleading

(MFN) clauses in their licenses, that their wholesale price was about $0.70 per song whereas a popular online retail-

er charged $0.25, that sellers raised prices despite decreased costs, and that their alleged price-fixing was under gov-

ernment investigation. Sherman Act, § 1, 15 U.S.C.A. § 1.

[15] Antitrust and Trade Regulation 29T 972(4)

Page 6

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

29Tk972(4) k. Conspiracy or combination. Most Cited Cases

Buyers of digital music were not required to identify the specific time, place, or person related to each conspiracy

allegation to state claim against sellers of music under the section of the Sherman Act prohibiting trusts in restraint

of trade, where buyers’ claim of agreement rested on the parallel conduct of sellers described in the complaint.

Sherman Act, § 1, 15 U.S.C.A. § 1.

[16] Antitrust and Trade Regulation 29T 534

29T Antitrust and Trade Regulation

29TVI Antitrust Regulation in General

[17] Antitrust and Trade Regulation 29T 821

29T Antitrust and Trade Regulation

29TX Antitrust and Prices

29T Antitrust and Trade Regulation

29TVI Antitrust Regulation in General

29TVI(A) In General

29Tk532 Judicially Created Tests of Legality

29T Antitrust and Trade Regulation

29TXVII Antitrust Actions, Proceedings, and Enforcement

29TXVII(B) Actions

29Tk972 Pleading

for Plaintiffs-Appellants.

Page 7

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

Kenneth R. Logan (Helena Almeida, of counsel), Simpson Thacher & Bartlett LLP, New York, NY; Alan M.

Wiseman, Mark C. Schechter, and Thomas A. Isaacson, of counsel, Howrey LLP, Washington, DC; Peter T. Barbur

Before: NEWMAN, WALKER, and KATZMANN, Circuit Judges.

KATZMANN, Circuit Judge:

opinion.

BACKGROUND

[1] The SCAC contains the following non-conclusory factual allegations, which we must accept as true.FN1

FN1. The Supreme Court’s most recent iteration of the Federal Rules of Civil Procedure Rule 8(a) pleading

Defendants produce, license and distribute music sold as digital files (“Digital Music”) online via the Internet (“In-

ternet Music”) and on compact discs (“CDs”). Together, defendants EMI, Sony BMG Music Entertainment (“Sony

BMG”), Universal Music Group Recordings, Inc. (“UMG”), and Warner Music Group Corp. (“WMG”), control

over 80% of Digital Music sold to end purchasers in the United States.

cate about pricing, terms, and use restrictions.

To obtain Internet Music from all major record labels, a consumer initially would have had to subscribe to both Mu-

sicNet and pressplay, at a cost of approximately $240 per year. Both services required consumers to agree to unpop-

ular Digital Rights Management terms (“DRMs”). For example, pressplay prohibited consumers from copying more

Page 8

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

these services. SCAC ¶ 77.

Moreover, the pricing of CDs accounted for costs such as copying the compact discs; producing the CD case, labels

and anti-shoplifting packaging; shipping, both to the distributor and then to record stores; labor, such as shelving

CDs and staffing cash registers; and damaged and unsold inventory. All of these costs were eliminated with Internet

Music. SCAC ¶ 71. However, these dramatic cost reductions were not accompanied by dramatic price reductions for

Internet Music, as would be expected in a competitive market.

Eventually, defendants and the joint ventures began to sell Internet Music to consumers through entities they did not

own or control. However, the entities could only sell defendants’ music if they contracted with MusicNet to provide

Defendants also used 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.

Defendants attempted to hide the MFNs because they knew they would attract antitrust scrutiny. For example, EMI

and MusicNet had a “side letter” agreement which assured that EMI‘s core terms would be no less favorable than

Bertelsmann’s and WMG’s. “EMI CEO Rob Glaser decided to put the MFN in a secret side letter because ‘there are

Pressplay has what we call an affiliate model where we determine the price, and we offer a percentage of that

price to the retailing partner.... The reason we’ve chosen that, frankly, is because we are concerned that the contin-

uing devaluation of music will proceed unabated unless we do something about it.

SCAC ¶ 86.

chasers can upload their music to digital music players (like the iPod) or burn to CDs, defendants’ wholesale price is

more than double, about $0.70 per song. Moreover, all defendants refuse to do business with eMusic, the # 2 Inter-

net Music retailer behind only the iTunes Store.

FN2. The allegation that defendants agreed to this price floor is obviously conclusory, and is not accepted

as true.

Page 9

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

Based on all of these factual allegations, plaintiffs allege that defendants engaged in a continuing conspiracy to “re–

strain 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.” SCAC ¶ 126. They also allege that they were injured by paying more for Internet Music and

CDs than they would have in the absence of an illegal agreement.

From December 29, 2005 through July 2006, plaintiffs filed actions in various state and federal courts, alleging de-

fendants had agreed to fix the price of Digital Music. The Judicial Panel on Multidistrict Litigation transferred and

centralized twenty-eight actions to the Southern District of New York, before Judge Loretta Preska. In April 2007,

plaintiffs filed a First Consolidated Amended Complaint. Pursuant to the district court’s orders, defendants then pro-

At oral argument, plaintiffs requested leave to amend paragraph ninety-nine of the SCAC to allege a parallel price

increase. The proposed amendment alleged that:

By early 2005, Defendants Sony BMG‘s, Capitol-EMI Music’s, UMG‘s and WMG’s direct costs had gone substan-

tially down because each of these Defendants‘ digitization costs of the initial cataloging had been completed,

technological improvements (including increased computer processing power and speed) had reduced the remain-

MFNs, were similar to Defendants’ causing, as alleged in ¶¶ 74-75, the joint ventures, via MFNs and other means,

to increase the prices of Internet Music during 2002 to 2003 to unreasonably high levels despite substantial reduc-

tions in the direct costs of Internet Music relative to CDs.

Third Consolidated Amendment Complaint ¶ 99.

Litig., 592 F.Supp.2d 435, 442 (S.D.N.Y.2008). 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.” Id. at 443. The district court went on to hold that other circumstances alleged by plain-

tiffs 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. Id. at 444-45. Finally, the district court denied plaintiffs’ motion to amend paragraph nine-

ty-nine of the SCAC as futile. Id. at 445 n. 14. This appeal followed.

DISCUSSION