The Second Circuit did a brave thing today.  It tossed dismissal of a price-fixing complaint that centered on "parallel" conduct — the very thing the Supremes disparaged as a basis for stating a section 1 Sherman Act claim in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).

The case involved allegations that major record label companies conspired to fix prices for tunes they sold over the Internet.  The court explained:

Applying the language and reasoning of Twombly to the facts of this case leads us to conclude respectfully that the district court erred in dismissing the complaint for failure to state a Section 1 claim. The present complaint succeeds where Twombly’s failed because the complaint alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants. As discussed above, the complaint contains the following non-conclusory factual allegations of parallel conduct. First, defendants agreed to launch MusicNet and pressplay, both of which charged unreasonably high prices and contained similar DRMs. Second, none of the defendants dramatically reduced their prices for Internet Music (as compared to CDs), despite the fact that all defendants experienced dramatic cost reductions in producing Internet Music. Third, when defendants began to sell Internet Music through entities they did not own or control, they maintained the same unreasonably high prices and DRMs as MusicNet itself. Fourth, defendants used MFNs in their licenses that had the effect of guaranteeing that the licensor who signed the MFN received terms no less favorable than terms offered to other licensors. For example, both EMI and UMG used MFN clauses in their licensing agreements with MusicNet. Fifth, defendants used the MFNs to enforce a wholesale price floor of about 70 cents per song. Sixth, all defendants refuse to do business with eMusic, the #2 Internet Music retailer. Seventh, in or about May 2005, all defendants raised wholesale prices from about $0.65 per song to $0.70 per song. This price increase was enforced by MFNs.

More importantly, the following allegations, taken together, place the parallel conduct “in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.” Twombly, 550 U.S. at 557. First, defendants control over 80% of Digital Music sold to end purchasers in the United States. See 7 Phillip E. Areeda and Herbert Hovenkamp, Antitrust Law (hereinafter “Areeda & Hovenkamp”) § 1431a (2d ed. 2003) (“[E]mpirical studies considering many industries have suggested that noncompetitive pricing [that may be the result of price coordination] is likely to appear when the four leading firms account for some 50 to 80 percent of the market.”). Second, one industry commentator noted that “nobody in their right mind” would want to use MusicNet or pressplay, suggesting that some form of agreement among defendants would have been needed to render the enterprises profitable. See id. § 1415b (“Some acts, or failures to act, cannot be profitably continued unless rivals behave in parallel.”); In re Flat Glass Antitrust Litig., 385 F.3d 350, 360-361 (3d Cir. 2004) (“Evidence that the defendant acted contrary to its interests means evidence of conduct that would be irrational assuming that the defendant operated in a competitive market. In a competitive industry, for example, a firm would cut its price with the hope of increasing its market share if its competitors were setting prices above marginal costs.”). Third, the quote from Edgar Bronfman, the current CEO of WMG, suggests that pressplay was formed expressly as an effort to stop the “continuing devaluation of music.”

Fourth, defendants attempted to hide their MFNs because they knew they would attract antitrust scrutiny. For example, EMI and MusicNet’s MFN, which assured that EMI’s core terms would be no less favorable than Bertelsmann’s or WMG’s, was contained in a secret side letter.  “EMI CEO Rob Glaser decided to put the MFN in a secret side letter because ‘there are legal/antitrust reasons why it would be bad idea to have MFN clauses in any, or certainly all, of these agreements.” SCAC ¶ 95. According to the executive director of the Digital Music Association, seller-side MFNs are “inherently price-increasing and anticompetitive.” SCAC ¶ 97.

Fifth, whereas eMusic charges $0.25 per song, defendants’ wholesale price is about $0.70 per song. See 7 Areeda & Hovenkamp § 1415b (“[O]ne cannot profitably increase its price above that charged by rivals unless they follow the price-raiser’s lead.”). Sixth, defendants’ price-fixing is the subject of a pending investigation by the New York State Attorney General and two separate investigations by the Department of Justice. Finally, defendants raised wholesale prices from about $0.65 per song to $0.70 per song in or about May 2005, even though earlier that year defendants’ costs of providing Internet Music had decreased substantially due to completion of the initial digital cataloging of all Internet Music and technological improvements that reduced the costs of digitizing new releases. See Richard A. Posner, Antitrust Law 88 (2d ed. 2001) (“Simultaneous price increases . . . unexplained by any increases in cost may therefore be good evidence of the initiation of a price-fixing scheme.”).

Starr v. Sony BMG Music Entertainment, No. 08-5637-cv, slip op. at 12-15 (2d Cir. Jan. 13, 2010) (footnote omitted).

In perhaps a Freudian slip, concurring Judge Newman wrote at length about the "perplexing" Twombly decision while spelling it Twombley.  Perplexing, indeed.