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August 8, 2000

CORNYN ANNOUNCES PRICE-FIXING LAWSUIT AGAINST MUSIC DISTRIBUTORS

Lawsuit calls for millions in penalties and an injunction

AUSTIN - Texas Attorney General John Cornyn and the attorneys general from 29 other states and territories today announced a lawsuit charging the nation's largest distributors of recorded music of conspiring with various retailers to fix the prices of compact discs (CDs) and similar products. The distributors created standard marketing practices which effectively prohibited advertising below a certain price and punished violations of these practices with serious financial penalties. The lawsuit calls for an injunction against this illegal activity and millions of dollars in fines and penalties.

An antitrust complaint was filed in New York federal court today against distributors and affiliated labels BMG Music, Bertelsmann Music Group Inc., Capitol Records Inc. (doing business as EMI Music Distribution), Virgin Records America Inc., Priority Records, LLC, Sony Music Entertainment Inc., Universal Music & Video Distribution Corp., Universal Music Group Inc., UMG Recordings Inc., Warner-Elektra-Atlantic Corp., Warner Music Group Inc., Warner Bros. Records Inc., Atlantic Recording Corp., Elektra Entertainment Group Inc., and Rhino Entertainment Co.

Also named were retail giants Musicland, which operates more than 1,300 retail outlets under the Musicland and Sam Goody names, Trans World, which operates more than 900 stores under the names Camelot, FYE, Music & Movies, Planet Music, Record Town, Saturday Matinee, Spec's Music, Strawberries and the Wall, and MTS Inc. (doing business as Tower Records).

"Those businesses which attempt to manipulate the marketplace through predatory and anticompetitive schemes are on notice. I will uphold our laws and protect consumers," said Attorney General John Cornyn. "A fair and competitive marketplace means lower prices and savings for consumers."

The distributors are charged with engaging in an unlawful scheme with the retailers to prohibit other retail outlets, such as Best Buy, Circuit City and Target, from offering music at deep discounts. The emergence of such outlets in the early 1990's began to offer stiff competition to mall-based music stores.

According to the lawsuit, the distributors and their labels established minimum advertising price (MAP) policies in 1992. The initial MAP policies withheld distributors' reimbursements for advertising expenditures by retailers if the advertised price for a particular product was not at or above the distributors' prescribed price. These initial MAP policies were legal, but ineffective at quashing price competition.

According to the lawsuit, the illegal scheme began in February 1995. Certain retailers were instrumental in pressuring each of the major distributors to adopt new MAP policies that applied market-wide.

The lawsuit alleges that the distributors "transformed their MAP programs into blunt and effective instruments for putting an end to price competition." They did so in large part by expanding the reach of MAP policies well beyond print and electronic media to include all forms of in-store promotion. That change effectively prevented retailers from communicating discount prices to consumers through any means other than the price sticker on the CD itself.

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

In the lawsuit, the Attorney General's office seeks restitution for triple the damages sustained by consumers, (up to $1 million per violation), investigative costs and attorneys fees, and an injunction preventing the defendants from engaging in any plan or program having a similar program or effect. The states and territories charging the companies with antitrust violations include Arizona, Arkansas, Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Mississippi, Missouri, Nevada, New Mexico, New York, North Carolina, Northern Mariana Islands, Oklahoma, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Utah, Vermont, Washington, West Virginia, and Wisconsin.

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Contact Mark Heckmann, Heather Browne, or Tom Kelley at (512) 463-2050
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