NEW YORK – The world's five largest music companies and the three largest music retailers will pay $143.1 million to settle a CD price fixing case launched by New York and Florida two years ago, New York State Attorney General Eliot Spitzer said on Monday.
In August 2000, most U.S. states joined in a lawsuit alleging that an industry practice called "minimum advertised pricing" (MAP) artificially inflated the price of CDs between 1995 and 2000, violating federal and state anti-trust laws. Under MAP, the labels subsidized advertising for retailers that agreed not to sell CDs below a certain price.
The five record labels -- Vivendi Universal's Universal Music Group, Sony Corp.'s Sony Music, Bertelsmann AG's BMG Music Group, Warner Music Group, a division of AOL Time Warner Inc. and EMI Group Plc -- and the three retailers, Musicland Stores Corp., Trans World Entertainment Corp. and Tower Records, agreed to stop using MAP policies as part of the settlement.
The companies, which did not admit any wrongdoing, will pay $67.4 million in cash to compensate consumers who overpaid for CDs between 1995 and 2000. The companies also agreed to distribute $75.7 million worth of CDs to public entities and nonprofit organizations throughout the country.
"This is a landmark settlement to address years of illegal price fixing," Spitzer said in a statement. "Our agreement will provide consumers with substantial refunds and result in the distribution of a wide variety of recordings for use in our schools and communities."
MAKES MORE SENSE TO SETTLE
John Sullivan, chief financial officer of Trans World said, "It's always been absurd to us to even be involved in this case. Given the cost of lengthy litigation, it made more sense for us to settle the case." Trans World owns the FYE and Coconuts music chains.
Universal Music Group, the world's largest record company said it believes MAP policies were legal, although it wanted to avoid the cost of lengthy litigation. "We believe our policies were pro-competitive and geared toward keeping more retailers, large and small, in business," the company said in a statement.
BMG and Warner Music each issued similar statements.
In a May 2000 settlement with the U.S. Federal Trade Commission, the five labels agreed to ban the MAP policy for seven years. The settlement did not require the labels to pay any damages, nor did the labels admit any wrongdoing.
In the mid-1990s, large department stores and consumer electronics retailers began selling CDs below cost as a "loss leader," in an effort to get people into the store to buy big-ticket items, the labels have said in the past.
The labels have said MAP policy helped smaller retailers compete with chains like Wal-Mart Stores Inc., Circuit City Stores Inc. and Best Buy Co. Inc. . They argued that smaller retailers do not have the option of offsetting losses from cut-price CD sales with the sale of other products.
The labels have said they received no financial gain from the MAP policy, noting that the wholesale price charged to retailers was the same whether or not they participated in the policy.
But the states allege that if a retailer advertised a price below the minimum, the retailer risked losing promotional funds from that record label.