States Sue Record Industry for Thwarting
Competition in Sales of Compact Discs

Attorney General Tom Miller said the suit alleges the companies committed anti-trust violations that artificially raised the price of compact discs. "The FTC estimates this activity may have cost consumers as much as $480 million over the last three years," Miller said.

The suit alleges that the five largest distributors, who sell about 85 percent of all CDs purchased in the U.S., used an unlawful scheme designed primarily to stop some retail outlets - such as Best Buy, Target and Circuit City - from offering recordings at deep discount prices. The suit also named several giant retailers as defendants, including retailers operating as Musicland, Sam Goody and Tower Records, alleging they pressed the distributors to impose the policies to squelch price-cutting by competitors.

Miller said the suit alleges a series of events that culminated in the illegal anti-trust activity starting in 1995 and 1996:

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

The distributors responded by establishing minimum advertising price - 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 charges, 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.

"We are undertaking this suit to guarantee competition in a $15 billion per year industry," Miller said.

The suit was filed in the U.S. District Court for the Southern District of New York in New York City. It was filed by 28 states and two territories. The suit asks the Court to assess treble damages and civil penalties and prohibit the alleged illegal activities.

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