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In Re: National Association of Music Merchants

August 19, 2011


The opinion of the court was delivered by: Honorable Larry Alan Burns United States District Judge

(USDC Case Nos. 09cv2002, 09cv2146, 09cv2151, 09cv2211, 09cv2267, 09cv2285, 09cv2332, 09cv2418, 09cv2423)


After Plaintiffs filed their consolidated complaint, Defendant National Association of Music Merchants (NAMM) moved to strike references to a Federal Trade Commission investigation and consent decree, and all Defendants moved to dismiss. The Court received briefing on all the motions and held argument. After considering the motions and arguments thoroughly, the Court is now prepared to rule. At argument, the Court suggested it would rule quickly, but it has turned out this was not possible. The Court apologizes to the parties for the delay in ruling on these motions, which was occasioned by unexpected demands on the Court's criminal docket.

I. Motion to Strike

This motion seeks to strike the complaint's allegations to the FTC's investigation, and the consent decree NAMM entered into. Beginning in 2007, the FTC investigated the music products industry. NAMM settled with the FTC, agreeing to a consent decree without admitting wrongdoing, and also argues the FTC investigation didn't uncover any wrongdoing.

NAMM argues the investigation never uncovered evidence of wrongdoing. The FTC's decision and order says the FTC had reason to believe NAMM had violated section 5 of the Federal Trade Commission Act (which declares "unfair methods of competition, and unfair or deceptive acts or practices" unlawful and gives the FTC power to issue cease and desist orders). In short, it appears the FTC ordered NAMM not to do certain things, without making factual findings that what NAMM was doing was an unlawful practice.

NAMM points out the Clayton Act, 15 U.S.C. § 16(a), provides that the FTC's final antitrust judgments or decrees can be used as evidence of wrongdoing in later civil litigation, but under this same section, consent decrees, or decrees entered before any testimony is taken, don't constitute evidence of wrongdoing. To be clear, this section doesn't forbid referring to such decrees in allegations, nor does it forbid them from being admitted for some other purpose.

In reply, Plaintiffs argue they are only citing the investigation and consent decree for purposes of meeting the plausibility requirement of Bell Atlantic v. Twombly, 550 U.S. 544 (2007). They cite a recent district court opinion, In re Packaged Ice Antitrust Litigation, 723 F. Supp. 2d 987 (E.D.Mich., 2010), which considered government investigations as bolstering the plausibility analysis and "heighten[ing] the Court's expectation that 'discovery will reveal evidence of illegal agreement.'" Id. at 1009 (quoting Bell Atlantic at 556). That case also cited Hinds County v. Wachovia Bank, 700 F. Supp. 2d 378, 394--95 (S.D.N.Y. 2010) for the principle that "pending government investigations could be used to enhance the plausibility of plaintiffs' claims. . . ." Hinds County in turn cites a number of other cases where government investigations of price fixing supported the plausibility analysis. Among these was In re Tableware Antitrust Litig., 363 F. Supp.2d 1203, 1205 (N.D.Cal., 2005), which aptly held "A plaintiff may surely rely on governmental investigations, but must also . . . undertake his own reasonable inquiry and frame his complaint with allegations of his own design." The Court agrees with this holding.

Although these cases concern motions to dismiss and consider allegations about investigations as part of plaintiffs' attempt to resist dismissal, they are also apposite in the context of a motion to strike impertinent material from the complaint.

Plaintiffs also point out the Clayton Act doesn't forbid using the consent decree to support allegations against other Defendants. The weight of authority appears to be that such investigations can properly be included in the complaint, but that they are far from sufficient to show a conspiracy to fix prices. It is also worth noting that the consent decree suggests that the investigation uncovered matters of, at the very least, matters of concern to the FTC. Had the FTC merely investigated the matter and dropped it, the investigation would be a non-factor. See In re Graphics Processing Units Antitrust Litig., 527 F. Supp. 2d 1011, 1024 (N.D.Cal, 2007) (uncompleted grand jury investigation "carrie[d] no weight in pleading an antitrust claim," because it was "unknown whether the investigation [would] result in indictments or nothing at all" and secrecy requirements prevented the scope of the investigation from becoming known).

Because the consolidated complaint is being dismissed with leave to amend, the Court need not strike any material. Assuming Plaintiffs are able to amend, they will not be barred from referring to the investigation and consent decree.

II. Motions to Dismiss

All three motions to dismiss make essentially the same argument: that the complaint is too vague and conclusory, lacking in specifics, and fails to meet the pleading standard under Bell Atlantic, including both specificity and plausibility. Defendants also attack the complaint's plausibility using what are essentially factual arguments. Each of the motions to dismiss also raises unique issues, which will be discussed in individual sections.

Because full briefing was received and full argument was held, the Court will not discuss all details of the claims and arguments, except as necessary for its ruling.

A. Core Allegations

NAMM is a nonprofit trade association with over 9,000 members, including most manufacturers, and dealers of musical instruments and related products. Guitar Center is, by far, the largest retailer of musical instruments, selling five times as much as the second-place retailer and fifteen times as much as the third. The remaining Defendants, Fender, Gibson, Hoshino (Ibanez), Kaman, and Yamaha are manufacturers. These manufacturers dominate the high-quality market.

The consolidated complaint alleges that, in response to competition from internet retailers, NAMM and music retailers and advertisers in 2004 entered into an agreement or conspiracy to set the minimum prices (MAPPs, or MAPs) that could be advertised for fretted instruments and guitar amplifiers (collectively, Musical Instruments and Equipment). The consolidated complaint alleges this served no legitimate ...

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