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September 30, 2002

States Settle Case that Alleged Record Industry Thwarted Competition in in Compact Disc Sales

Miller says industry will pay over $140 million in cash and CDs.

DES MOINES. Attorney General Tom Miller said today that the nation's top distributors of recorded music and three large retailers have agreed to pay over $140 million in cash and CDs to settle an antitrust case that alleged the companies used illegal tactics to squelch price discounting and maintain artificially high retail prices for music compact discs.

Miller said the lawsuit filed August 8, 2000, by Iowa and other states alleged that the five large distributors, who sell about 85% of all CDs purchased in the U.S., and three large music retailers entered into illegal conspiracies to raise the price of prerecorded music to consumers. The suit alleged the unlawful scheme was designed primarily to stop some other retail outlets -- such as Best Buy and Target - from offering recordings at steep discount prices.

"This case has helped restore fair competition in a $15 billion per year industry," Miller said.

Under a settlement involving a total of 40 states plus three territories, the five distributors and three large retailer defendants agreed to pay $67,375,000 in cash, provide $75,000,000 worth of music CDs, and not engage in sales practices that allegedly led to artificially high retail prices for music CDs. The defendants denied the allegations. The settlement is subject to approval by the Federal District Court in Portland, Maine.

If the Court gives preliminary approval, the States will then propose specific plans for distributing the money and CDs in ways that generally benefit music-related purposes or programs and CD buyers. CDs are likely to go to charitable or not-for-profit organizations or public entities such as libraries and schools. Cash and CD distribution are likely to be done early next year.

Iowa's share of the CD distribution is expected to be about 56,000 CDs (based on Iowa's pro rata population percentage of just over one percent), with an estimated cash value of over $775,000.

Cash refunds are likely for consumers who file a claim. Claims procedures and CD distribution will be developed by the states, and also must be approved by the Court. There likely will be a single refund amount for all claimants regardless of how many CDs they purchased, with the refund amount ranging from $5 up to about $20, depending on the number of claims submitted.

The music distributor defendants in the lawsuit are Bertelsmann Music Group, Inc.; EMI Music Distribution; Warner-Elektra-Atlantic Corporation; Sony Music Entertainment, Inc.; and Universal Music Group. The national retail chain defendants are Transworld Entertainment Corporation, Tower Records, and Musicland Stores Corporation (Sam Goody.)

The suit alleged that the large distributors took illegal action to stop some other retail outlets (such as Best Buy and Target) from offering deep discounts on CD prices. It alleged the defendant retailers pressed the distributors to impose the polices to squelch price-cutting by competitors.

The Antitrust Case:

The suit alleged a series of events culminating in the illegal antitrust activity starting in 1995 and 1996:

When the discount retailers entered the market in the early 1990s, the average CD price dropped from $15 to $10 in a short time. Market share for CD sales grew dramatically for discount retailers such as Best Buy, Circuit City, Target, Wal-Mart and K-Mart.

The suit alleged distributors responded by establishing "minimum advertising price" or MAP policies in 1992 -- policies to withhold distributor reimbursements to retailers for advertising, if the retailer's advertised price was lower than the distributors' prescribed price. MAP policies were based on the practice of distributors reimbursing retailers for certain advertising expenses.

The suit alleges the initial MAP policies were legal - but were ineffective at quashing price competition. But by 1995, the complaint charged, the MAP programs became illegal when the distributors "transformed their MAP programs into blunt and effective instruments for putting an end to price competition."

Minimum advertising price policies were extended well beyond just print and electronic media and came to include even all forms of in-store displays and signs, with the sole exception of a small price sticker on the CD itself. The MAP policies penalized retailers even if their ads or promotions were paid entirely by the retailers themselves, if the retailers featured prices below those dictated by the distributors.

Non-complying retailers faced the loss of millions of dollars per year in advertising funds, the suit alleged. To enforce compliance, a single violation of MAP policies by a retailer would result in the loss of all promotional funds available from the distributor for 60 to 90 days, and a violation at a single store would jeopardize promotional funds for an entire chain.

"In effect, the policies prohibited virtually all commercially practicable means of communicating discounted prices to consumers," the suit said, and "essentially ended retailers' ability to sell prerecorded music products at discounted prices." Prices for recorded music increased.

In May 2000 the Federal Trade Commission resolved an investigation involving the defendant music distributors by obtaining an injunction barring the illegal practices, but that resolution did not involve monetary relief or payments by the companies. The States filed their lawsuit on August 8, 2000, seeking both injunctive and monetary relief as obtained in the proposed settlement announced today.

The 40 states and 3 territories participating in the settlement are: Florida, New York, Alabama, Alaska, Arizona, Arkansas, California, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Mississippi, Montana, Nevada, New Mexico, North Carolina, North Dakota, Northern Mariana Islands, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Virgin Islands, Washington, West Virginia, Wisconsin, and Wyoming.

The states were led in this action by New York, Florida, California, and Texas.

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