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States Sue Music Companies, Allege Price-Fixing
NEW YORK (Reuters) - Twenty-eight U.S. states filed suit accusing the world's five largest record labels and three large music retailers of fixing prices of compact discs. The states are seeking "hundreds of millions of dollars" in damages.

The suit, filed in U.S. District Court for the Southern District of New York, centers on a policy called "minimum advertised pricing" (MAP), under which the labels subsidized advertising for retailers that agreed not to sell CDs below a minimum price determined by the labels.

New York State Attorney General Eliot Spitzer said in a statement, "This illegal action...has not been music to the ears of the public. Because of these conspiracies, tens of millions of consumers paid inflated prices to buy CD's..."

The suit alleges that the MAP policy increased CD prices in violation of state and federal antitrust law, kept CD prices artificially high, and penalized retailers who did not participate.

The five labels are Time Warner Inc.'s Warner Brothers music group; Sony Corp.'s (6758.T) Sony Music Entertainment; Seagram Co.'s Universal Music Group; BMG, the music unit of Bertelsmann AG (BTGGga.D), and EMI Group Plc (EMI.L).

Also named as defendants were three retailers: MusicLand Stores Corp, which owns the Sam Goody chain of stores, Trans World Entertainment Corp., which owns the Camelot Music chain, and Tower Records.

Spitzer told a press conference the states were still calculating the amount of the damages but said they would come to "hundreds of millions of dollars," or "several dollars per CD."

A Warner Music Group spokesman said the lawsuit has no merit. "We continue to believe that MAP served a valid business purpose and benefited consumers by substantially furthering retail competition and that it was an appropriate and lawful practice."

His statement was echoed by a BMG spokesman, who called the practice "legitimate and appropriate and we are confident that the courts will reach the same conclusion."

EMI also said the claims had no merit and would defend itself vigorously.

MusicLand, Tower, Sony and Universal executives declined to comment. Trans World executives were not immediately available for comment.

In a settlement with the U.S. Federal Trade Commission announced in May, the five labels agreed to ban the MAP policy for seven years. The settlement did not require the labels to pay any damages, nor did the labels admit any wrongdoing.

Spitzer said the FTC estimated damages to consumers at $480 million. He called the figure "a number that fair-minded people can rely upon."

Many executives in the music industry have taken issue with the FTC's damage estimate. "We have no idea how they arrived at that number," said Pamela Horowitz, president of the National Association of Recording Merchandisers (NARM).

She noted that based on the estimates of the labels' trade group Recording Industry of Association, the U.S. market for compact discs totaled about $14.6 billion in 1999, which is based on the labels' list prices.

NARM's 1999 estimate of actual selling prices totaled $10 billion. And while she noted that there are differences in the ways that the two trade groups derive their numbers, the difference "indicates a retail marketplace aggressively competing for the consumer."

The FTC was not available for comment.

According to the states' lawsuit, the MAP policy was put in place beginning in February 1995.

At that time, large department stores and consumer electronics retailers began selling CD's below cost as a "loss leader," in an effort to get people into the stores to buy big-ticket items, labels said.

The labels say they started the MAP policy in an effort to help smaller music retailers compete with chains such as Wal-Mart Stores Inc.and Circuit City Stores Inc. They say smaller retailers do not have the option of offsetting losses from cut-price CD sales with sales of other products.

The labels say they received no financial gain from the MAP policy. "The wholesale price we charged retailers was the same whether or not they participated in MAP," one label executive said.

But the states allege that if a retailer advertised a price below the agreed minimum, the retailer risked "the loss of all promotional funds available from that (label) for a period of 60 to 90 days...(and) would jeopardize promotional funds for an entire chain."

Labels were providing "upwards of millions of dollars in advertising funds to retailers per year," according to the lawsuit.

New York and Florida were leading the complaint, Spitzer said, joined by Arizona, Arkansas, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Mississippi, Missouri, Nevada, New Mexico, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Vermont, Washington, West Virginia and Wisconsin.

The U.S. territories Northern Mariana Islands and Puerto Rico were also included.

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