The opinion of the court was delivered by: Loretta A. Preska, Chief United States District Judge:
THIS DOCUMENT RELATES TO: ALL ACTIONS
Before the Court is a joint motion to dismiss a class-action complaint alleging federal and state antitrust violations by major record labels in the distribution of music over the Internet. Defendants include Bertelsmann, Inc.; Sony BMG Music Entertainment; Sony Corporation of America; Capitol Records, Inc. d/b/a EMI Music North America; EMI Group North America, Inc.; Capitol-EMI Music, Inc.; Virgin Records America, Inc.; Time Warner Inc.; UMG Recordings, Inc.; and Warner Music Group Corp.*fn1 Several individual plaintiffs seek to represent a putative nationwide class of digital music purchasers. The operative complaint before the Court is the Third Consolidated Amended Complaint ("TCAC"), filed June 2, 2010. The Court's previous judgment dismissing the Second Consolidated AmendedComplaint was vacated, and the case returned on remand from the Court of Appeals. Starr v. Sony BMG Music Entm't, 592 F.3d 314, 327 (2d Cir. 2010), cert. denied, 131 S. Ct. 901 (2011).
I. BACKGROUND Because the allegations in the TCAC are, with certain
exceptions, the same as those previously considered in published opinions both here and in the Court of Appeals,*fn2 the Court assumes familiarity with the factual allegations in the TCAC. Starr, 592 F.3d at 317-22; In re Digital Music Antitrust Litig., 592 F. Supp. 2d 435, 437-39 (S.D.N.Y. 2008). To situate this discussion, a summary of the alleged facts follows. The Court assumes that all nonconclusory facts alleged are true for present purposes. Starr, 592 F.3d at 317 & n.1.
Defendants produce, license, and distribute music sold online ("Internet Music") and on compact discs ("CDs"). They control eighty percent of the market for digital music in the United States. Defendants Bertlesmann, Inc., Warner Music Group Corp., and EMI launched an online service called MusicNet, a joint venture entity owned and controlled by various Defendants. (TCAC ¶ 67.) Defendants UMG and Sony Corporation of America launched a similar online music service called Duet, later renamed pressplay. (TCAC ¶ 67.) It too was a joint venture. All Defendants signed distribution agreements with MusicNet and pressplay. (TCAC ¶ 67.) These joint ventures, along with the Recording Industry Association of America, provided a forum for Defendants to exchange pricing information, terms of sale, and use restrictions. (TCAC ¶¶ 34, 67-68, 87-88.)
Plaintiffs allege that Defendants conspired to fix the price, terms of sale, and restrictions on the use of Internet Music through these joint ventures. (TCAC ¶¶ 72, 98.) Defendants used these joint ventures as a forum to discuss their desire to engage in the alleged conduct, to share licensing terms and pricing information, and to police the alleged agreements, among other things. (TCAC ¶¶ 67-68, 98.) Through the use of Most Favored Nation ("MFN") clauses in Defendants' licensing agreements, a licensor would receive at least equivalent licensing terms as another licensor. (TCAC ¶¶ 92, 99.) The alleged effect of the MFN agreements was to set a wholesale price floor for Internet Music of seventy cents per song. (TCAC ¶¶ 99-100.) Plaintiffs allege that despite the fact that the price of distributing Internet Music fell to essentially zero, the wholesale price of Internet Music increased uniformly. (TCAC ¶¶ 99-100.) This was due in material part to Defendants' enforcement of the MFN clauses, which Defendants attempted to hide. (TCAC ¶¶ 93, 99-100.) In addition, Defendants included digital rights management ("DRM"), which restricted transfer of songs to portable players, among other things. (TCAC ¶ 76.) Plaintiffs allege that but for the conspiracy, a defendant may have removed DRM to gain market share. (TCAC ¶ 76.) Allegedly, both the wholesale price and DRM included with Defendants' music was fixed among Defendants because of Defendants' collusion, even when they sold to unaffiliated retailers. (TCAC ¶ 69.)
The core allegation is that Defendants' behavior sustained high prices for Internet Music, which made it less attractive to consumers and hampered the growth of Internet Music services generally. (TCAC ¶¶ 81-82.) Plaintiffs point to eMusic, an independent competitor in the online music business, as an example of competitive pricing. It is the second-largest online retailer and charges -- at retail -- less than half of Defendants' wholesale price, and Defendants refuse to do business with it. (TCAC ¶¶ 103-104.) Plaintiffs allege that Defendants' motive to conspire was to support their ability to charge supracompetitive prices for CDs; they could do so because Internet Music was priced, through the alleged conspiracy, so as to be an unattractive or economically uncompetitive substitute. (TCAC ¶ 83.)
The procedural history of this case is also well-described in the earlier opinions in this case. E.g., Starr, 592 F.3d at 320-21. The Court of Appeals remanded for further proceedings consistent with its opinion, and Defendants have again moved to dismiss the action, relying mainly on arguments made but not addressed in their original motion to dismiss.
In evaluating this motion, the Court first will
discuss the Sherman Act claims, beginning with a brief discussion of the Twombly analysis by the Court of Appeals. Then the Court will turn to the arguments made regarding the Sherman Act claims but not addressed in the original motion to dismiss and renewed in the motion to dismiss sub judice. Next, the Court will analyze Defendants' arguments relating to the state claims, aside from the Twombly-related argument, made in the original motion to dismiss but not addressed previously. The Court will also discuss new arguments raised in relation to newly added claims under the Illinois and New York antitrust laws. Following the state-law discussion, the Court will analyze Defendants' motion to dismiss claims against the Parent Companies. Finally, the Court will discuss the associated motion to strike portions of the TCAC. Before delving into these matters, the Court sets out the applicable legal standard.
A. Legal Standard for Motions to Dismiss
In assessing a motion to dismiss, the Court must accept all non-conclusory factual allegations as true and draw all reasonable inferences in the plaintiff's favor. Goldstein v. Pataki, 516 F.3d 50, 56 (2d Cir. 2008) (internal quotation marks omitted). To survive such a motion, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A complaint that offers "labels and conclusions" or "a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555. The complaint must allege "enough facts to state a claim to relief that is plausible on its face." Id. "Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of entitlement to relief.'" Iqbal, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 557) (internal quotation marks omitted). In other words, "where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct," dismissal is appropriate. Id. at 1950. "Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Twombly, 550 U.S. at 555 (citations omitted).
In analyzing a motion to dismiss a claim under section 1 of the Sherman Act, the Court is mindful that a plaintiff needs to allege only "enough factual matter . . . to suggest that an agreement was made," id. at 556, but he need not, unlike in the summary judgment context, "rule out the possibility that the defendants were acting independently," id. at 554. "Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of an illegal agreement." Id. at 556. "Thus, an allegation of parallel conduct coupled with only a bare assertion of conspiracy is not sufficient to state a Section 1 claim." Starr, 592 F.3d at 322. "Instead, allegations of parallel conduct 'must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.'" Id. (quoting Twombly, 550 U.S. at 557).
B. Pleading of Sherman Act Claims
In its opinion vacating the judgment entered in this case, the Court of Appeals concluded that the Second Consolidated Amended Complaint "alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants." Id. at 323. The TCAC being the same in material part, Defendants do not argue their motion to dismiss on Twombly grounds. In light of the Court of Appeals clarification of the importance of context in claims under section 1 of the Sherman Act and its conclusion that the allegations above suffice, Plaintiffs' section 1 claims may proceed because the TCAC meets Twombly's pleading standards. Id. at 323-24.
C. Other Sherman Act Arguments
In their original motion to dismiss, Defendants made two arguments with respect to the federal claims that were not addressed. First, Defendants argue that Plaintiffs' claims through February 1, 2005, were settled and released because of a state class action settlement in Ottinger v. EMI Music Distrib., Civ. Action No. 24885-II (Tenn. Cir. Ct.). (Declaration of Helena Almeida in Support of Defendants' Motion to Dismiss dated July 30, 2007 ("Almeida Decl."), Ex. E.) Second, Defendants argue that Plaintiffs' claims involving CDs cannot survive because the TCAC does not state a claim of anticompetitive conduct involving CDs, which deprives Plaintiffs of antitrust standing for CD purchases. The Court considers these arguments in this section.
1. Settlement and Release
Defendants argue that the Ottinger case involved an alleged conspiracy that Defendants conspired to elevate the price of CDs despite cost reductions. Because the Ottinger settlement released all claims that the settlement class "alleged or could have alleged" (Defendants' October 2007 Reply Brief ("Def. 2007 Reply Br.") at 11) based on the allegations in that case, the argument is that the instant claims, which Defendants argue could have been alleged, were released.
Defendants correctly note that "[a] court may release not only those claims alleged in the complaint and before the court, but also claims which could have been alleged . . . in connection with any matter or fact set forth or referred to in the complaint." Wal-Mart Stores, Inc. v. Visa, 396 F.3d 96, 107 n.13 (2d Cir. 2005) (quoting In re Corrugated Container Antitrust Litig., 643 F.2d 195, 221 (5th Cir. 1981)) (internal quotation marks omitted). However, they fail to appreciate that a release applies only "as long as the released conduct arises out of the 'identical factual predicate' as the settled conduct." Id. at 107. In other words, a settlement may be framed to prevent future suits "depending on the very same set of facts," Nat'l Super Spuds, Inc. v. N.Y. Mercantile Exch., 660 F.2d 9, 18 n.7 (2d Cir. 1981), but future claims are barred only "where there is a realistic identity of issues" between the former and future cases and "where the relationship between the suits is at the time of the class action foreseeably obvious to notified class members." TBK Partners, Ltd. v. W. Union Corp., 675 F.2d 456, 461 (2d Cir. 1982).
Here, the claims do not arise out of the "identical factual predicate" as the Ottinger claims. Ottinger involved allegations that record-company defendants used various schemes to maintain higher CD profit margins than they could achieve for vinyl records and cassette tapes, despite cost reductions in the price of CD production. (Almeida Decl. Ex. G ¶ 1.) The alleged schemes had to do with the ways CDs were priced at wholesale and marketed to retailers, and the schemes involved allegations of direct price agreements and price signaling for CDs. (Id. ¶ 2.) The allegations simply have nothing to do with Internet Music, the interplay between the online music market and the CD market, or the related allegations here. This complaint involves allegations that the market for online music downloads was priced at set, artificially high levels. It involves a different factual predicate from the Ottinger complaint. That this complaint, like the complaint in Ottinger, also alleges anticompetitive effects in the CD market or a motive to maintain higher CD prices is insufficient; a release bars future suits that depend on "the very same set of facts." Nat'l Super Spuds, 660 F.2d at 18 n.7; see Wal-Mart Stores, 396 F.3d at 107. The source of the alleged antitrust conspiracy here is wholly different from the source of the alleged antitrust conspiracy in Ottinger. Thus, the Ottinger release does not bar these claims.*fn3
2. Standing to Assert CD-Purchaser Claims Defendants next argue that the TCAC does not allege antitrust injury to purchasers of CDs but, rather, only to Internet Music purchasers. This is an argument about antitrust standing. Defendants say that the TCAC is insufficient to confer standing on a CD purchaser class because it does not allege that any CD purchaser would have bought Internet Music instead of CDs absent the alleged conspiracy. They also argue that the complaint does not specify how restricting Internet Music affected the price of CDs. In sum, Defendants' argument is that the CD-purchaser plaintiffs may not recover for an antitrust injury in a separate market.
In addition to Article III standing, "an antitrust plaintiff must also establish antitrust standing." In re DDAVP Direct Purchaser Antitrust Litig., 585 F.3d 677, 688 (2d Cir. 2009). Antitrust standing is analyzed using two metrics. First, a plaintiff must demonstrate "antitrust injury, which is'injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful.'" Id. (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)). Second, a plaintiff must show that he is a proper plaintiff in light of the factors discussed in Associated General Contractors v. California State Council of Carpenters, 459 U.S. 519, 540-45 (1983). These include:
(1) the directness or indirectness of the asserted injury; (2) the existence of an identifiable class of persons whose self-interest would normally motivate them to vindicate the public interest in antitrust enforcement; (3) the speculativeness of the alleged injury; and (4) the difficulty of identifying damages and apportioning them among direct and indirect victims so as to avoid duplicative recoveries.
In re DDAVP, 585 F.3d at 688. In addition, the existence of an improper motive is a relevant consideration, but it "is not a panacea that will enable any complaint to withstand a motion to dismiss." Associated Gen., 459 U.S. at 537; Balaklaw v. Lovell, 14 F.3d 793, 797 n.9 (2d Cir. 1994).
Ultimately, antitrust standing is about the question of "which persons have sustained injuries too remote [from an antitrust violation] to give them standing to sue." Blue Shield of Va. v. McCready, 457 U.S. 465, 476 (1982) (alteration and emphasis in original). "Just as in common-law tort and contract litigation, concepts such as 'foreseeability and proximate cause, directness of injury, certainty of damages, and privity of contract' circumscribe a party's right to recovery, so in antitrust actions 'the plaintiff's harm, the alleged wrongdoing by the defendants, and the relationship between them,' can limit the right to sue." Daniel v. Am. Bd. of Emergency Med., 428 F.3d 408, 437 (2d Cir. 2005) (quoting Associated Gen., 459 U.S. at 532-33, 535-36); Reading Int'l, Inc. v. Oaktree Capital Mgmt. LLC, 317 F. Supp. 2d 301, 316 n.8 (S.D.N.Y. 2003) ("In considering the question of antitrust standing, the Supreme Court has likened the analysis to that of proximate cause.").
As to the first part of the analysis, there is little doubt that the CD-purchaser plaintiffs' alleged injury is an antitrust injury. The CD-purchaser plaintiffs allege that they bought Defendants' CDs but were "forced to pay supra-competitive prices as a result of the defendants' anticompetitive conduct. Such an injury plainly is 'of the type the antitrust laws were intended to prevent.'" In re DDAVP, 585 F.3d at 688 (quoting Brunswick, 429 U.S. at 489).
The second part of the analysis is less straightforward, however. Defendants argue that there are several infirmities in the CD-purchaser plaintiffs' antitrust standing: (1) the allegedly unlawful conduct has only to do with Internet Music; (2) no plaintiff alleges he would have bought Internet Music instead of CDs but for the allegedly unlawful conduct; and (3) there is no alleged connection between the allegedly unlawful conduct and its effect on the CD market. Plaintiffs counter that "injuries to different groups of consumers of related products can be inflicted by a single antitrust conspiracy." (Plaintiffs' September 2007 Opposition Memorandum ("Pl. 2007 Opp.") at 21.) Neither side cites a case directly on point.
The Court begins by laying out the allegations relevant to the CD market in the TCAC. It states:
"Internet Music and CDs are viewed as substitutes by both record labels and consumers as evidenced by the inverse relationship between sales of CDs and Internet Music." (TCAC ¶ 41.)
"Defendants' collusion in setting high prices for
Internet Music . . . made Internet Music less attractive to consumers, allowing Defendants to sell CDs at supracompetitive prices." (TCAC ¶ 82.) "Acting alone, no defendant could sustain the supracompetitive prices prevailing in the CD market. This inability to charge high CD prices, as market factors made consumer demand for CDs more elastic over time at the prices charged by Defendants during the conspiracy, gave Defendants motive to conspire." (TCAC ¶ 83.)
"In consequence, Defendants' conspiracy to restrain the availability and distribution of Internet Music, and to fix and maintain the price of Internet Music, has protected the sale of CDs and enables Defendants to ...