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. SONY BMG MUSIC ENTERTAINMENT, Sony Corporation of America, Bertelsmann, Inc., Universal Music Group, Time Warner Inc., formerly known as AOL Time Warner Cable, Inc., Warner Music Group Corp., EMI Music North America, Capitol Records Inc., doing business as EMI Music North America, John Does 1-100, Bertelsmann Music Group, Inc., BMG Music, BMG Music Publishing, doing business as the RCA Record Label, Capitol-EMI Music, Inc. and Virgin Records America, Inc., Defendants-Appellees.
Docket No. 08-5637-cv.
United States Court of Appeals, Second Circuit.
Argued: Sept. 21, 2009. Decided: Jan. 13, 2010.
592 F.3d 314
We have considered all of Appellants’ remaining contentions and find them to be without merit. Consequently, the judgment of the district court is AFFIRMED.
Gary S. Jacobson (Christopher Lovell, Imtiaz A. Siddiqui, of counsel), Lovell Stewart Halebian LLP, New York, NY; John Stoia and Bonny Sweeney, of counsel, Coughlin Stoia Geller Rudman & Robbins LLP, San Diego, CA, for Plaintiffs-Appellants.
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 and Rachel G. Skaistis, of counsel, Cravath, Swaine & Moore LLP, New York, NY, for Defendants-Appellees.
Before: NEWMAN, WALKER, and KATZMANN, Circuit Judges.
KATZMANN, Circuit Judge:
This case calls upon us to determine whether an antitrust complaint alleging a conspiracy by major record labels to fix the prices and terms under which their music would be sold over the Internet states a claim for violation of Section 1 of the Sherman Act under Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). We hold that Plaintiffs-Appellants’ Second Consolidated Amended Complaint (“SCAC“) contains “enough factual matter (taken as true) to suggest that an agreement was made,”
BACKGROUND
The SCAC contains the following non-conclusory factual allegations, which we must accept as true.1
Initially, defendants Bertelsmann, Inc. (“Bertelsmann“), WMG, and EMI agreed to launch a service called MusicNet. Defendants UMG and Sony Corporation (“Sony“) agreed to launch a service called Duet, later renamed pressplay. All defendants signed distribution agreements with MusicNet or pressplay and sold music directly to consumers over the Internet through these ventures (the “joint ventures“). Both 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.
To 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. Both services required consumers to agree to unpopular Digital Rights Management terms (“DRMs“). 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. 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 Internet Music for the same prices and with the same restrictions as MusicNet itself or other MusicNet licensees. If the licensee attempted to license music from another company, defendants forced them to pay penalties or terminated their licenses. In addition, each defendant was paid shares of the total revenue generated by a joint venture licensee, rather than on a per song basis, linking each defendant‘s financial interest in the joint venture to the total sales
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 legal/antitrust reasons why it would be bad idea to have MFN clauses in any, or certainly all, of these agreements.‘” SCAC ¶ 95. UMG also used MFN clauses in its license agreements. A January 12, 2006 article in the Wall Street Journal confirmed that defendants used MFNs, and, according to Jonathan Potter, the executive director of the Digital Music Association, “seller-side MFNs are inherently price-increasing and anticompetitive.” SCAC ¶ 197.
Edgar Bronfman, Jr., the current CEO of WMG, explained pressplay‘s pricing scheme as follows:
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 continuing devaluation of music will proceed unabated unless we do something about it.
SCAC ¶ 86.
After services other than defendants’ joint ventures began to distribute defendants’ Internet Music, defendants “agreed”2 to a wholesale price floor of about 70 cents per song, which they enforced in part through MFN agreements. The MFN agreements, signed by Internet Music retailers and defendants, specified that the retailers had to pay each defendant the same amount per song. Whereas eMusic, the most popular online music service selling Internet Music owned by independent labels, currently charges $0.25 per song and places no restrictions on how purchasers 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 Internet Music retailer behind only the iTunes Store.
Finally, the SCAC alleges that defendants’ price fixing is currently the subject of: 1) a pending investigation by the Office of the New York State Attorney General regarding wholesale prices charged for Internet Music; 2) a Department of Justice (“DOJ“) investigation into collusion and price fixing begun in March 2006; and 3) a DOJ investigation into whether defendants misled DOJ about the formation and operation of MusicNet and pressplay.
Based on all of these factual allegations, plaintiffs allege 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.” 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.
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 substantially 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 remaining costs of digitizing new releases, the return and store credit and other costs alleged in ¶ 71 remained at zero or virtually zero despite substantially higher sales volumes, and the fixed costs of each of these Defendants’ digital business per unit of sales volume had declined by approximately two-thirds. Nonetheless, these Defendants then engaged in or about May 2005 in the parallel, highly unusual behavior of each raising prices from the 65 cents per song level to at or about 70 cents per song.... These parallel, highly unusual increases in prices when direct costs had substantially decreased, enforced by 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 reductions in the direct costs of Internet Music relative to CDs. Third Consolidated Amendment Complaint ¶ 99.
By Memorandum and Order dated October 9, 2008, the district court granted the defendants’ motion to dismiss, holding that the complaint did not state a claim under Bell Atlantic Corp. v. Twombly. 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.” In re Digital Music Antitrust 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.”
DISCUSSION
We review de novo a district court‘s dismissal of a complaint for failure to state a claim under
Generally, “[w]hile a complaint attacked by a
Under Section 1 of the Sherman Act, “[e]very contract, combination ..., or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is ... illegal.”
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,”
Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement. And, of course, a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.
Thus, an allegation of parallel conduct coupled with only a bare assertion of conspiracy is not sufficient to state a Section 1 claim.
In Twombly, plaintiffs brought a Section 1 claim centered around the market for local telephone service. In 1984, a system of seven regional local-telephone-service monopolies, called Baby Bells, was created, along with a separate, competitive market for long-distance telephone service from which the regional Baby Bells were excluded.
The Supreme Court held that the ultimate conspiracy allegation was merely a “legal conclusion[] resting on the prior allegations,”
Applying the language and reasoning of Twombly to the facts of this case leads us to conclude respectfully that the district court erred in dismissing the complaint for failure to state a Section 1 claim. The 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. As discussed above, the complaint contains the following non-conclusory factual allegations of parallel conduct. First, defendants agreed to launch MusicNet and pressplay, both of which charged unreasonably high prices and contained similar DRMs. Second, none of the defendants dramatically reduced their prices for Internet Music (as compared to CDs), despite the fact that all defendants experienced dramatic cost reductions in producing Internet Music. Third, when defendants began to sell Internet Music through entities they did not own or control, they maintained the same unreasonably high prices and DRMs as MusicNet itself. Fourth, defendants used MFNs in their licenses that had the effect of guaranteeing that the licensor who signed the MFN received terms no less favorable than terms offered to other licensors. For example, both EMI and UMG used MFN clauses in their licensing agreements with MusicNet. Fifth, defendants used the MFNs to enforce a wholesale price floor of about 70 cents per song. Sixth, all defendants refuse to do business with eMusic, the # 2 Internet Music retailer. Seventh, in or about May 2005, all defendants raised wholesale prices from about $0.65 per song to $0.70 per song. This price increase was enforced by MFNs.3
More importantly, the following allegations, taken together, place the parallel conduct “in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.” Twombly, 550 U.S. at 557, 127 S.Ct. 1955. First, defendants control over 80% of Digital Music sold to end purchasers in the United States. See
Fourth, defendants attempted to hide their MFNs because they knew they would attract antitrust scrutiny. For example, EMI and MusicNet‘s MFN, which assured that EMI‘s core terms would be no less favorable than Bertelsmann‘s or WMG‘s, was contained in a secret side letter. “EMI CEO Rob Glaser decided to put the MFN in a secret side letter because ‘there are legal/antitrust reasons why it would be bad idea to have MFN clauses in any, or certainly all, of these agreements.‘” SCAC ¶ 95. According to the executive director of the Digital Music Association, seller-side MFNs are “inherently price-increasing and anticompetitive.” SCAC ¶ 197.
Fifth, whereas eMusic charges $0.25 per song, defendants’ wholesale price is about $0.70 per song. See 7 Areeda & Hovenkamp § 1415b (“[O]ne cannot profitably increase its price above that charged by rivals unless they follow the price-raiser‘s lead.“). Sixth, defendants’ price-fixing is the subject of a pending investigation by the New York State Attorney General and two separate investigations by the Department of Justice. Finally, defendants raised wholesale prices from about $0.65 per song to $0.70 per song in or about May 2005, even though earlier that year defendants’ costs of providing Internet Music had decreased substantially due to completion of the initial digital cataloging of all Internet Music and technological improvements that reduced the costs of digitizing new releases. See Richard A. Posner, Antitrust Law 88 (2d ed. 2001) (“Simultaneous price increases ... unexplained by any increases in cost may therefore be good evidence of the initiation of a price-fixing scheme.“).
This complaint does not resemble those our sister circuits have held fail to state a claim under Twombly. See, e.g., Rick-Mik Enters., Inc. v. Equilon Enters., LLC, 532 F.3d 963, 975-976 (9th Cir.2008) (dismissing Section 1 price fixing complaint under Twombly where complaint alleged only that defendant conspired with “numerous” banks to fix the price of credit and debit card processing fees and received kickbacks from “numerous” banks as consideration for its unlawful agreement); Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1048-50 (9th Cir.2008) (where plaintiffs alleged no facts to support their theory that defendant banks conspired or agreed with each other, dismissing Section 1 claim because plaintiffs pleaded only legal conclusions, and “failed to plead the necessary evidentiary facts to support those conclusions“).
Defendants next argue that Twombly requires that a plaintiff identify the specific time, place, or person related to each conspiracy allegation. This is also incorrect. The Twombly court noted, in dicta, that had the claim of agreement in that case not rested on the parallel conduct described in the complaint, “we doubt that the ... references to an agreement among the [Baby Bells] would have given the notice required by Rule 8 ... [because] the pleadings mentioned no specific time, place, or person involved in the alleged conspiracies.”
Defendants then argue that inferring a conspiracy from the facts alleged is unreasonable because plaintiffs’ allegations “are the very same claims that were thoroughly investigated and rejected by the Antitrust Division of the Department of Justice,” Appellee‘s Br. 17-18, which closed its inquiry in December 2003 and publicly announced that it had uncovered no evidence that the joint ventures had harmed competition or consumers of digital music. Even if we could consider this evidence on a motion to dismiss, defendants cite no case to support the proposition that a civil antitrust complaint must be dismissed because an investigation undertaken by the Department of Justice found no evidence of conspiracy. Second, this argument neglects the fact that the complaint alleges that the Department of Justice has, since 2003, launched two new investigations into whether defendants engaged in collusion and price fixing and whether defendants misled the Department about the formation and operation of MusicNet and pressplay.
The only one of defendants’ contentions that merits more than a brief discussion is the impact of the Supreme Court‘s decision in Texaco Inc. v. Dagher, 547 U.S. 1, 126 S.Ct. 1276, 164 L.Ed.2d 1 (2006). That case concerned a joint venture formed by Texaco and Shell Oil to completely consolidate their operations in the western United States. The joint venture, Equilon, produced significant cost savings in production and marketing, see Dagher v. Saudi Refining, Inc., 369 F.3d 1108, 1111 (9th Cir.2004), rev‘d, 547 U.S. 1, 126 S.Ct. 1276, 164 L.Ed.2d 1 (2006), and ended competition between Texaco and Shell Oil altogether in the domestic refining and selling of gasoline. Because Texaco and Shell Oil‘s market share exceeded
Dagher does not support the dismissal of the complaint in this case. First, although the district court below stated that plaintiffs did not challenge the joint ventures here, the complaint makes clear that plaintiffs do challenge the joint ventures. See, e.g., SCAC ¶¶ 67, 72-73, 76, 78, 81-83, 85. In the legal memorandum relied upon by the district court for the proposition that plaintiffs did not challenge the joint ventures, plaintiffs wrote that while “it is not the existence or creation of these joint ventures that form the basis of the [p]laintiffs’ allegations,” defendants used the joint ventures “as a means to implement their anticompetitive agreements” and to “facilitat[e] anticompetitive ... horizontal combinations.” See Pls.’ Consolidated Mem. of Law in Opp‘n to Defs.’ Supplemental Mem. of Law 10-11. The memorandum also called MusicNet and pressplay “mere puppets of [the][d]efendants.” See
Finally, defendants claim that the conduct alleged in the complaint “would be entirely consistent with independent, though parallel, action.” Appellee‘s Br. 20. Under Twombly, allegations of parallel conduct that could “just as well be independent action” are not sufficient to state a claim.
CONCLUSION
The Second Consolidated Amendment Complaint contains “plausible grounds to infer an agreement.” Twombly, 550 U.S. at 556, 127 S.Ct. 1955. We therefore hold that the district court erred in dismissing the complaint. The case is remanded for further proceedings consistent with this opinion.
JON O. NEWMAN, Circuit Judge, concurring:
I concur in Judge Katzmann‘s comprehensive opinion, but add these additional
The perplexing aspect of the Court‘s opinion is contained in the very first paragraph of the Court‘s substantive discussion. The Court there stated:
While a showing of parallel “business behavior is admissible circumstantial evidence from which the fact finder may infer agreement,” it falls short of “conclusively establish[ing] agreement or ... itself constitut[ing] a Sherman Act offense.
Twombly, 550 U.S. at 553, 127 S.Ct. 1955 (emphasis added) (citing Theatre Enterprises v. Paramount Film Distributing Corp., 346 U.S. 537, 540-41, 74 S.Ct. 257, 98 L.Ed. 273 (1954)) (alterations and ellipsis in original).1
If, as the Court states in the first part of this sentence, a fact-finder is entitled to infer agreement from parallel conduct, one may wonder why a complaint alleging such conduct does not survive a motion to dismiss. The answer is surely not supplied by the remainder of the Court‘s sentence. That portion states the unexceptional proposition that parallel conduct alone is not conclusive evidence of an agreement to fix prices. To support that proposition, the Court cites Theatre Enterprises. But that case was an appeal by an antitrust plaintiff whose complaint had survived a motion to dismiss. Indeed, that plaintiff had been permitted to present its evidence to a jury, only to have the jury reject on the merits the claim of a section 1 violation. The plaintiff sought review on the ground that the trial court had erred in not granting a motion for a directed verdict in the plaintiff‘s favor. See Theatre Enterprises, 346 U.S. at 539, 74 S.Ct. 257. The Supreme Court understandably found no error. See
In view of the Court‘s initial observation in Twombly that parallel conduct is sufficient to support a permissible inference of an agreement, the reason for the rejection of the complaint in Twombly must arise from something other than the plaintiff‘s reliance on parallel conduct. That reason is not difficult to find. It is the context in which the defendants’ parallel conduct occurred. “[W]hen allegations of parallel conduct are set out in order to make a § 1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.”
The context in Twombly was the aftermath of the divestiture of At & T‘s local
In that context, it was entirely understandable for the Court to cast a jaundiced eye on the claim that the parallel conduct of these newly created ILECs would suffice to permit an inference of agreement. As the Court observed:
[The parallel conduct of the ILECs] was not suggestive of conspiracy, not if history teaches anything. In a traditionally unregulated industry with low barriers to entry, sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement, but here we have an obvious alternative explanation. In the decade preceding the 1996 Act and well before that, monopoly was the norm in telecommunications, not the exception. The ILECs were born in that world, doubtless liked the world the way it was, and surely knew the adage about him who lives by the sword. Hence, a natural explanation for the noncompetition alleged is that the former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing.
Two years after Twombly, the Court emphasized its view that whether a bare allegation of illegality would suffice to withstand a motion to dismiss depends on the context in which the allegation is made. “Determining whether a complaint states a plausible claim for relief will, as the Court of Appeals observed, be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Ashcroft v. Iqbal, — U.S. —, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009).
I believe it would be a serious mistake to think that the Court has categorically rejected the availability of an inference of an unlawful section 1 agreement from parallel conduct. Even in those contexts in which an allegation of parallel conduct will not suffice to take an antitrust plaintiff‘s case to the jury, it will sometimes suffice to overcome a motion to dismiss and permit some discovery, perhaps leaving the issue for later resolution on a motion for summary judgment.
In the pending case, as Judge Katzmann has carefully demonstrated, the context in which the defendants’ alleged parallel conduct occurred, amplified by specific factual allegations making plausible an inference of agreement, suffices to render the allegation of a section 1 violation sufficient to withstand a motion to dismiss.
JON O. NEWMAN
UNITED STATES CIRCUIT JUDGE