A class-action saga, payback, 3,480,762 victims and $13.86

PLUGGED IN

March 11, 2004|By MIKE HIMOWITZ

WHEN I unfolded the missive from the attorney general of Maryland, I was puzzled. How did I get on this guy's mailing list? But at the bottom of the page, I found a pleasant surprise: a check for the grand sum of $13.86.

The memory bell went off: This was my payoff as one of 3,480,762 victims in a class-action lawsuit against the Big Five record labels. The producers had carted off truckloads of money over five years by fixing the retail price of music CDs, and now it was payback time.

I mentioned the issue here back in January of last year, when attorneys general from 43 states were figuring out how to distribute $67 million to consumers who had been cheated by the scheme - and how to let those record buyers know there was money waiting for them.

Although class action lawsuits go on all the time, I was intrigued by this one for two reasons. First, the evidence showed that online music file traders had good reason to believe that they'd been ripped off by the recording industry for years. This didn't justify piracy, but it proved music fans had a real complaint about prices they paid for CDs.

Second, the attorneys general had created a Web site encouraging aggrieved music fans to file claims online, as well as by mail. Since I qualified as an aggrieved party because I'd bought albums during the price-fixing period, I signed up to see what would happen. Then I promptly forgot about it - until a reader who had received a check wrote to thank me for tipping him off to the deal 14 months ago.

As it turns out, this may be the first class-action suit that reached claimants almost entirely over the Internet. It may just be the audience - CD buyers tend to be young and wired. But of the 3.5 million people who filed claims, all but 92,477 used the Web, said Ellen Cooper, chief of the Maryland attorney general's antitrust division.

As I poked around a bit, I learned an interesting lesson in how these class-action suits eventually get resolved.

First, the reason for the payout. Court documents say the price-fixing scheme began in the mid-1990s, when traditional record retailers complained that deep discounting by mass marketers such as Wal-Mart, Circuit City, Best Buy and Target was threatening their profits.

So the Big Five record labels - Bertelsmann, EMI, Warner, Sony and Universal - which collectively have a lock on most of today's popular artists, hatched a plan with the National Association of Recording Merchandisers to establish restrictive "minimum advertised pricing" policies.

They threatened to chop millions of dollars in promotional advertising help from any store or chain that advertised a CD below a set minimum price. The retail price of CDs shot back up, and without retail competition, the record companies were able to increase their wholesale prices and profits.

This cozy arrangement went on for years until a group of state attorneys general filed suit in May 2000 to stop it. After two more years of legal wrangling, the record companies agreed to settle. They denied any illegal conduct, of course, but they agreed to give up the minimum pricing scheme and pay $143 million in cash and merchandise just to show what great guys they were.

The settlement came in two parts, $67.4 million in cash for consumers, and $75.6 million worth of CDs to be distributed to the states for libraries, schools and other institutions.

First, the lawyers had to get their fees, which amounted to 10 percent of the cash settlement - about $14.3 million. This sounds like a lot of money, but a lot of lawyers put in a lot of time on it. Most of them were civil servants representing taxpayers, and their payout was considerably less than the 30 percent to 40 percent that private attorneys often get.

According to Cooper, Maryland had slightly more than 59,000 claimants, and its cut of the fees was about $200,000, based on the hours the division's lawyers worked. But no one there got the money. It went to the state's general fund.

Another $5.7 million was set aside for the cost of administering the payout - identifying claimants, writing checks and mailing them. That left about $48 million, or 72 percent of the cash payout, for consumers.

How to distribute it? The case was unique for lawyers accustomed to class-action suits involving drugs, automobiles, aggrieved employees, cheated stockholders or homeowners who bought defective deck sealer, plywood and so on.

"The problem is that CDs don't have individual identifying information on them," said Steven Steingard, a Philadelphia class-action attorney whose firm represented private plaintiffs in the case. "And most people who buy CDs don't keep receipts as a matter of practice."

So the lawyers assumed that virtually everyone could have bought a CD between 1995 and 2000. The system they established allowed anyone who asserted that he had done so to file a single claim. When all the claims were filed, the money would be divvied up among them.

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