28 States Sue Record Companies

N E W  Y O R K, Aug. 9, 2000 -- Record companies should pay back millions of

dollars in illegal profits they collected by forcing discount

stores to raise CD prices in 1995, attorneys general for 28 states

alleged in a lawsuit.

“These illegal actions certainly have not been music to theears of the public,” New York Attorney General Eliot Spitzer saidat a news conference on Tuesday as the lawsuit was filed in U.S.District Court in Manhattan.

Mitigating CircumstancesThe music companies maintain that they threatened to stopsupplying discount chains with thousands of advertising dollars inthe mid-1990s because the chains were selling CDs at belowwholesale cost, driving some record stores out of business. Theyindicated Tuesday that they would contest the lawsuit.

The lawsuit comes three months after the five major musicdistributors, while admitting no wrongdoing, settled Federal TradeCommission charges they unfairly inflated CD prices.

Under that deal, the companies agreed to discontinue minimumadvertised price programs that forced retailers to sell music CDsat or above a set level in return for getting substantialadvertising funding.

Spitzer said the lawsuit, which seeks unspecified damages, wasmeant to force record companies to pay back the profits they madeillegally.

He said he could not yet estimate the value of those profits butsaid the $480 million estimated by the FTC sounded reasonable.

Business as UsualKeith Estabrook, a spokesman for BMG Music, said the companystill believed that the pricing policy “was a legitimate andappropriate practice and we are confident that the courts willreach the same conclusion.”

Will Tanous, a Warner Music spokesman, concurred, saying thepricing policies served “a valid business purpose and benefitedconsumers by substantially furthering retail competition.”

“It was an appropriate and lawful practice,” he added.

Dawn Bridges, an EMI Music spokeswoman, said the claims werewithout merit. Sony Music spokesman Keith McCarthy said he had nocomment, while Universal Music did not immediately return atelephone message seeking comment.

Doug Curry, a spokesman for the Recording Industry Associationof America, declined to comment.

Trying to Correct WrongdoingThe lawsuit by the states essentially does what the FTC promisednot to do in its settlement deal: seek damages for past pricingtactics. But the attorneys general said they were seeking damageson behalf of the consumers they represent.

They said the record companies in February 1995 conspired toforce several large discount retailers to raise prices after theretailers bought CDs in such large volume that they could undercutthe prevailing high retail prices.

“The purpose of the illegal agreements was to raise prices andreduce retail price competition which threatened the high andstable profit margins for CDs enjoyed by both the defendant labelsand distributors and many music retailers,” the lawsuit said.

The deals initially drew vigorous protests from discountretailers but the chains eventually gave up because the financialpenalty for not participating in the scheme was too costly, thelawsuit said.

As a result, CD prices stabilized and then rose, the lawsuitsaid.

Also on the ListBesides the record companies, the lawsuit named some largerecord stores as defendants, including Tower Records.

Russ Solomon, chairman of the Sacramento, Calif.-based Tower,did not immediately return a telephone message. But he scoffed atthe FTC’s prediction earlier this year that the settlement wouldresult in lower CD prices.

“Prices are not coming down,” he told the Los Angeles Times.“They’re already at rock bottom. It’s outrageous to mislead musicfans to think otherwise.”

According to the FTC, the five companies distribute 85 percentof the music CDs sold in the United States, an industry thatreported a record $15 billion in sales last year. The average CDnow costs $14 to $17, though discount stores had once sold somepopular CDs for as little as $10.

The following states were named as plaintiffs in the lawsuit:Arizona, Arkansas, Connecticut, Delaware, Florida, Hawaii,Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Mississippi,Missouri, Nevada, New Mexico, New York, North Carolina, Oklahoma,Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Vermont,Washington, West Virginia and Wisconsin. Also named as plaintiffswere the Northern Mariana Islands and Puerto Rico.