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Labels Owe Consumers $140 Million From Inflated CD Prices, Settlement Says

The five major record label groups and the three largest music retailers have agreed to pay $143 million in cash and CDs to resolve a long-standing class action price-fixing case.

The settlement, announced Monday, brings to a close allegations that the major labels and retailers had violated antitrust laws and illegally inflated the cost of CDs. At issue was a policy called “minimum advertised pricing,” or MAP, under which the major labels would jointly pay for advertising if a retailer agreed to sell CDs above a certain price.

This pricing practice began nearly a decade ago as a way for Musicland’s Sam Goody, Tower Records and Trans World Entertainment to combat the loss of business when large department stores such as Wal-Mart and consumer electronics retailers such as Circuit City and Best Buy began selling CDs below cost. State prosecutors said this amounted to price-fixing, which not only cheated consumers by eliminating price discounting, but violated federal and state antitrust laws by reducing price competition among retailers, according to a suit filed in August 2000 in U.S. District Court in Manhattan.

“This is a landmark settlement to address years of illegal price-fixing,” New York State Attorney General Eliot 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.”

As part of the settlement, the record labels and retailers admit no wrongdoing, but agree to stop using MAP policies and pay $67.4 million in cash to be refunded to consumers who overpaid for CDs between 1995 and 2000 and donate $75.7 million worth of CDs to charities, public schools, libraries and hospitals in all 50 states. Details are still being worked out to distribute the cash refunds, since it’s not expected that the majority of those affected would have kept sales receipts. Prosecutors will make announcements later to inform consumers how to file claims.

The settlement amounts were determined by market share. Universal Music Group confirmed that their share will be $18,850,000 in cash and $21,750,000 in product for a total of $40.6 million in cash and CDs. Warner-Elektra-Atlantic will pay $29.4 million in cash and CDs, while Bertelsmann Music Group (BMG) will pay $27.8 million in cash and CDs, Sony Music Entertainment $27.2 million in cash and CDs, and EMI Music Distribution $15 million in cash and CDs. Musicland, Tower Records and Trans World Entertainment will pay a combined $3 million.

“We deny any wrongdoing,” Warner-Elektra-Atlantic said in a statement. “We have made a business decision to settle these matters and avoid continuing with expensive and protracted litigation. The settlement made sense to us from a business perspective, and enables WEA to put this matter behind us.”

“We believe our polices were pro-competitive and geared toward keeping more retailers, large and small, in business,” Universal Music Group said in a statement. “Continued litigation would only consume millions of dollars of company resources at a time when UMG’s executive energy and business focus are better spent providing consumers with compelling music. Balancing all the factors involved including the complexity of the issues, we believe the settlement is the most prudent business decision.”

The Federal Trade Commission conducted a separate investigation of the MAP practice two years ago. In a May 2000 settlement, the five labels agreed to abandon MAP for seven years. That settlement did not require the labels to refund consumers.

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