[Federal Register: September 20, 2005 (Volume 70, Number 181)]
[Notices]
[Page 55167-55174]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20se05-102]
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DEPARTMENT OF JUSTICE
Antitrust Division
Proposed Final Judgment and Competitive Impact Statement
United States v. Ecast, Inc. and NSM Music Group, Ltd.
Notice is hereby given pursuant to the Antitrust Procedures and
Penalties Act, 15 U.S.C. section 16(b)-(h), that a Complaint, proposed
Final Judgment, Stipulation, and Competitive Impact Statement have been
filed with the United States District court for the District of
Columbia in United States v. Ecast, Inc. and NSM Music Group, Ltd.,
Civil Case No. 05 CV 1754. The proposed Final Judgment is subject to
approval by the Court after compliance with the Antitrust Procedures
and Penalties Act, 15 U.S.C. 16(b)-(h), including expiration of the
statutory 60-day public comment period.
On September 2, 2005, the United States filed a Complaint alleging
that Ecast, Inc. and NSM Music Group, Ltd. reached an agreement in
February 2003 not to compete in the market for digital jukebox
platforms in the United States in violation of Section 1 of the Sherman
Act. As a result of the agreement, NSM terminated its plans to release
a new digital jukebox with its own platform in the United States.
To restore competition, the proposed Final Judgment filed with the
Complaint will terminate the defendants' existing noncompete agreement,
and forbid them from entering future noncompete agreements with other
digital jukebox platform competitors. A Competitive Impact Statement,
filed by the United States, describes the Complaint, the proposed Final
Judgment, and the remedies available to private litigants. Copies of
the Complaint, proposed Final Judgment, and Competitive Impact
Statement are available for inspection at the Department of Justice in
Washington, DC in Room 215 North, 325 Seventh Street, NW., 20530
(telephone: 202/514-2692) and at the Office of the Clerk of the United
States District Court for the District of Columbia, 333 Constitution
Avenue, NW., Washington, DC 2001.
Public comment is invited within 60 days of the date of this
notice. Such comments, and responses thereto, will be published in the
Federal Register and filed with the Court. Comments should be directed
to John Read, Chief, Litigation III Section, Antitrust Division, U.S.
Department of Justice, 325 7th Street, NW., Suite 300, Washington, DC
20530 (Telephone (202) 616-5935).
J. Robert Kramer, II
Director of Operations, Antitrust Division.
In the United States District Court for the District of Columbia
United States of America, Department of Justice, Antitrust
Division, 325 7th Street, N.W.; Suite 300, Washington, DC 20530,
Plaintiff, v. Ecast, Inc., 49 Geary Street, Mezzanine, San Francisco,
CA 94108, and NSM Music Group, LTD. 3 Stadium Way, Elland Road, Leeds,
West Yorkshire, United Kingdom, LS11 OEW, Defendants; Civil Case
Number: 1:05CV01754, Judge: Colleen Kollar-Kotelly, Deck Type:
Antitrust, Date Stamp: September 2, 2005.
Complaint
The United States of America, acting under the direction of the
Attorney General of the United States, brings the civil antitrust
action to obtain equitable relief against defendants Ecast, Inc.
(``Ecast'') and NSM Music Group, Ltd. (``NSM''), alleging as follows:
Nature of the Action
1. This action challenges an agreement between Ecast and NSM to not
compete in the U.S. market for digital jukebox platforms.
2. A digital jukebox is an Internet-connected device installed in
bars and restaurants that is capable of playing digital music files
that are either stored on a hard drive inside the jukebox, or are
downloaded from a remote server via the Internet. The jukebox consists
of two primary components, a physical jukebox and a ``platform,'' which
is the term the industry applies to the combination of the software
that powers the jukebox and the licensed collection of music that the
jukebox is capable of playing at the request of bar or restaurant
patrons.
3. At all time relevant to this complaint, defendant Ecast was one
of
[[Page 55168]]
only two digital jukebox platform providers in the United States. Ecast
does not manufacture physical jukeboxes and has instead elected to work
with existing jukebox manufacturers. Ecast's manufacturing partners
produce digital jukeboxes incorporating Ecast's platform and distribute
the jukeboxes through their established distribution networks to
``operators,'' which purchase the jukeboxes and install them in bars
and restaurants.
4. In 2002, Ecast was informed by its then manufacturing partner of
the manufacturer's plans to terminate its supply relationship with
Ecast. Ecast turned to other jukebox manufacturers to avoid an
interruption in the flow of digital jukeboxes powered by its platform
into the digital jukebox marketplace.
5. At that time, defendant NSM, a jukebox manufacturer, was
developing its own distinctive digital jukebox platform, which it
planned to incorporate into its physical jukeboxes and release in the
United States in competition with Ecast.
6. In the fall of 2002, Ecast initiated negotiations with defendant
NSM regarding a possible manufacturing agreement. NSM expressed some
interest in manufacturing digital jukeboxes incorporating Ecast's
platform, but Ecast and NSM disagreed on how Ecast should compensate
NSM in such a relationship. During the negotiations, Ecast requested
that NSM agree to abandon its plans to enter the U.S. market in return
for an upfront payment. NSM accepted Ecast's condition and entered an
agreement with Ecast in February 2003.
7. NSM's agreement to manufacture only Ecast-powered digital
jukeboxes caused it to abandon its plan to incorporate its own
distinctive digital jukebox platform into its physical jukeboxes and
enter the United States market.
8. Defendants' agreement constitutes an unreasonable agreement in
restraint of trade in violation of Section 1 of the Sherman Act, 15
U.S.C. 1.
9. The United States seeks an order to prohibit defendants from
enforcing and adhering to any agreement restraining competition between
them and to obtain other equitable relief necessary to restore
competition, potential or actual, for the benefit of digital jukebox
purchasers throughout the United States.
Jurisdiction and Venue
10. The Court has subject matter jurisdiction under section 4 of
the Sherman Act, 15 U.S.C. 4, and under 28 U.S.C. 1331 and 1337 to
prevent and restrain the defendants from continuing to violate section
1 of the Sherman Act, 15 U.S.C. 1.
11. Venue is proper in this judicial district under section 12 of
the Clayton Act, 15 U.S.C. 22, and under 28 U.S.C. 1391(b)(1), (c)
because defendants transact or have transacted business here.
Defendants
12. Defendant Ecast, Inc. is a privately held company organized and
existing under the laws of the State of Delaware, with is principal
place of business in San Francisco, California.
13. Defendant NSM Musical Group, Ltd. is a company incorporated
under the laws of the United Kingdom. Since 2002, NSM has offered a
digital jukebox powered by an NSM platform in the United Kingdom. NSM's
U.S. subsidiary, NSM Music, Inc., is based outside of Chicago,
Illinois.
Industry Background
14. Digital jukeboxes emerged in the United States in 1997. Because
of the advantages of digital jukeboxes both to consumers and to the
``operators'' that purchase the jukeboxes and install them (along with
other coin-operated devices) in bars and restaurants, the pace of
conversion from CD jukeboxes to digital jukeboxes is expected to
increase rapidly.
15. Digital jukeboxes provide consumers access to a dramatically
broader selection of music than they have available to them through CD
jukeboxes. Jukeboxes powered by Ecast's platform, for example, allow
consumers to choose from among 300 albums stored on each jukebox's hard
drive. For an additional fee, consumers can download any of the
additional 150,000 songs that Ecast stores on its remote servers.
Consumers can also pay an additional fee to have their song choice jump
to the front of the song queue. These features are not only popular
with consumer users of digital jukeboxes, they also increase the
revenue opportunities available to their operator purchasers.
16. After making a one-time payment to a jukebox distributor (the
traditional intermediary between the manufacturer and the operator),
operators then pay monthly fees to the platform provider to maintain
access both to the music collection the platform provider licensed from
U.S. copyright holders and to the proprietary software that allows the
operator to remotely control the jukebox and the special features
associated with it.
17. At all times relevant to the complaint, Ecast had only one
other digital jukebox platform competitor, with which it competed on
the monthly fee collected from operators. Ecast and its competitor each
charged a monthly fee based on a percentage of the revenues generated
by the jukebox. Ecast also competed on the special features available
through jukeboxes incorporating its platform.
18. Under Ecast's business model, it sought to collaborate closely
with and take advantage of the manufacturing expertise and distribution
networks maintained by traditional jukebox manufacturers. Ecast
believed that by combining the traditional jukebox companies' strengths
with Ecast's Internet technology capabilities and the music collection
it licensed from U.S. copyright holders, they could provide high-
quality, Ecast-powered jukeboxes to the U.S. market more quickly than
if Ecast had proceeded on its own.
19. Digital jukebox platforms provide to digital jukebox operators
the software that powers digital jukeboxes and the music licensed from
U.S. copyright holders that consumers can access through the jukebox.
Because of the unique features and the enhanced revenue opportunities
that digital jukeboxes offer to operators, if a hypothetical monopolist
of digital jukebox platforms were to raise price by a small, but
significant amount, digital jukebox manufacturers would not turn to
other types of platforms (such as CD libraries). Neither would such a
price increase cause operators of digital jukeboxes to switch to
possible substitutes (such as CD jukeboxes). Additionally, if such a
hypothetical digital jukebox platform monopolist raised its price,
digital jukebox manufacturers that sold in the United States and
operators that installed jukeboxes in the United States would not
switch to platform providers that did not hold the necessary licenses
to the U.S. copyrights associated with the music played by the jukebox.
The Illegal Noncompete Agreement
20. In the fall of 2002, defendant NSM was preparing to enter the
U.S. digital jukebox market using its own platform in competition with
Ecast and the other platform competitor. It had begun obtaining the
U.S. copyright licenses necessary to provide a jukebox platform in the
United States and had secured a line of credit to pay advances demanded
by the copyright holders. NSM had also modified its U.K. jukebox and
platform for release in the U.S. market, and it had completed a
prototype of its planned
[[Page 55169]]
digital jukebox for demonstration at trade shows.
21. NSM saw a significant market opportunity to distinguish itself
from Ecast and the other platform competitor by offering a more
operator-friendly business model for the digital jukebox platform than
the incumbents' revenue-sharing model. NSM's plan was to release a
digital jukebox platform at a fixed monthly cost to operators.
Operators had expressed interest in NSM's platform and several of them
delayed purchases of jukeboxes incorporating Ecast's platform in
anticipation of NSM's launch. NSM's commitment to a distinctive
business model attractive to operators promised to generate competitive
responses from the existing platform providers.
22. At an industry trade show in September 2002, NSM displayed a
prototype of a digital jukebox and platform that it intended to release
in the U.S. market. Ecast, having learned of its manufacturing
partner's plans to terminate Ecast's only manufacturing relationship,
approached NSM at the September 2002 trade show and proposed that NSM
produce digital jukeboxes that would be powered by Ecast's platform.
23. Given its efforts to introduce a NSM-powered digital jukebox,
NSM demanded appropriate compensation from Ecast before it would agree
to assist Ecast by producing Ecast-powered digital jukeboxes. During
subsequent negotiations, Ecast agreed to make a significant upfront
cash payment to NSM in return for NSM's agreement to manufacture only
East-powered digital jukeboxes and not compete against Ecast.
24. After those negotiations, Ecast forwarded a letter of intent to
NSM. The December 31, 2002, letter of intent contained a provision that
stated:
NSM agrees that it will abandon its attempts to acquire music
licenses for the U.S. market (the ``Territory'') and advise all
content providers and licensors with which NSM has entered licenses
with [sic] that it has abandoned entering the US market with its own
digital music platform. NSM also agrees that for as long as Ecast
offers the Ecast Platform in the Territory NSM will not produce a
competing product in the Territory.
25. Ecast sought through the noncompete provision to prevent NSM
from entering and disrupting the digital jukebox platform marketplace.
NSM's board thereafter approved the deal with Ecast that included the
noncompete provision as quoted above.
26. After agreeing with Ecast to manufacture Ecast-powered
jukeboxes exclusively and not to proceed with its own entry into the
U.S. platform market, NSM fired the two employees that had been
responsible for its planned entry. Upon learning of NSM's action, Ecast
reneged on its deal with NSM and refused to make the upfront payment to
NSM as previously promised.
27. Ecast and NSM subsequently negotiated a second agreement that
also contained a noncompete provision obligating NSM to produce only
Ecast-powered digital jukeboxes. The second agreement also called for
Ecast to make a smaller upfront payment to NSM and contained a license
by NSM to Ecast of a patent relating to digital jukebox technology.
28. NSM did not, and has not, entered the U.S. market with its own
digital jukebox using its platform. Its presence in the United States
is only as a manufacturer and distributor of CD jukeboxes and digital
jukeboxes powered by Ecast's platform.
Cause of Action (Violation of Section 1 of the Sherman Act)
29. The United States hereby incorporates paragraphs 1 through 28.
30. The anticompetitive effects of defendants' noncompete agreement
outweigh any procompetitive benefits offered by that agreement.
31. The noncompete agreement prevented NSM from entering the market
for digital jukebox platforms and denied to U.S. operators and jukebox
users the benefits of competition among NSM and existing participants
in the market. The noncompete agreement offered few, if any,
procompetitive benefits to weigh against the harm to U.S. consumers.
32. Defendants' agreement unreasonably restrained competition in
the digital jukebox platform market in violation of Section 1 of the
Sherman Act, 15 U.S.C. 1.
Requested Relief
The United States requests that:
(A) The Court adjudge and decree that 6the defendants' agreement
not to compete constitutes an illegal restraint of interstate trade and
commerce in violation of Section 1 of the Sherman Act;
(B) The defendants be permanently enjoined and restrained from
enforcing or adhering to existing contractual provisions that restrict
competition between them;
(C) Each defendant be permanently enjoined and restrained from
establishing any agreement restricting competition between it and
another digital jukebox platform competitor;
(D) The United states be awarded such other relief as the Court may
deem just and proper to redress and prevent recurrence of the alleged
violation and to dissipate the anticompetitive effects of Ecast's and
NSM's illegal agreement; and
(D) The United States be awarded the costs of this action.
Dated: September 2, 2005.
Thomas O. Barnett,
Acting Assistant Attorney General.
J. Robert Kramer II,
Director of Operations.
John R. Read,
Chief.
Nina Hale,
Assistant Chief, Litigation III.
David C. Kully (DC Bar 448763),
Jill A. Beaird,
Attorneys for the United States, United States Department of
Justice, Antitrust Division, 325 7th Street, NW; Suite 300,
Washington, DC 20530, Telephone: (202) 305-9969, Facsimile: (202)
307-9952.
In the United States District Court for the District of Columbia
United States of America, Plaintiff, v. Ecast, Inc. and NSM Music
Group, Ltd., Defendants; Civil No.: 05 1754
Proposed Final Judgment
Whereas, the United States of America filed its Complaint on
September 2, 2005, alleging that defendants Ecast, Inc. (``Ecast'') and
NSM Music Group, Ltd. (``NSM'') entered into an agreement in violation
of Section 1 of the Sherman Act, and plaintiff and defendants, by their
respective attorneys, have consent to the entry of this Final Judgment
without trial or adjudication of any issue of fact or law, and without
this Final Judgment constituting any evidence against, or any admission
by, any party regarding any such issue of fact or law;
And whereas, Ecast and NSM agree to be bound by the provisions of
this Final Judgment pending its approval by this Court;
And whereas, the essence of this Final Judgment is the prevention
of future conduct by Ecast and NSM that impairs competition in the
digital jukebox platform market;
And whereas, the United States requires Ecast and NSM to agree to
certain procedures and prohibitions for the purpose of preventing the
loss of competition;
Now therefore, before any testimony is taken, without trial or
adjudication of any issue of fact or law, and upon consent of the
parties, it is ordered, adjudged, and decreed:
[[Page 55170]]
I. Jurisdiction
This Court has jurisdiction over the subject matter of and each of
the parties to this action. The Complaint states a claim upon which
relief may be granted against Ecast and NSM under Section 1 of the
Sherman Act, as amended, 15 U.S.C. 1.
II. Definitions
As used in this Final Judgment:
A. ``Digital Jukebox'' means a commercial vending device that upon
payment plays for public performance digital music files that are
delivered electronically from a remote server and stored on any
internal or connected data storage medium.
B. ``Digital Jukebox Platform competitor'' means any natural
person, corporate entity, partnership, association, or joint venture
that has licensed (or that Ecast or NSM knows or has reason to believe
has plans to license) a collection of digital music files from U.S.
copyright holders for the purpose of supplying music content in the
United States to a Digital Jukebox.
C. ``Ecast'' means defendant Ecast, Inc., a privately held company
organized and existing under the laws of the State of Delaware, with
its principal place of business in San Francisco, California, its
successors and assigns, and its subsidiaries, divisions, groups,
affiliates, partnerships, and joint ventures, and their officers,
managers, agents, employees, and directors acting or claiming to act on
its behalf.
D. ``NSM'' means defendant NSM Music Group, Ltd., a company
incorporated under the laws of the United Kingdom, its successor and
assigns, and its subsidiaries, divisions, groups, affiliates,
partnerships, and joint ventures, and their officers, managers, agents,
employees, and directors acting or claiming to act on its behalf.
III. Applicability
This Final Judgment applies to Ecast and NSM, as defined above, and
all other persons in active concert or participation with any of them
who receive actual notice of this Final Judgment by personal service or
otherwise.
IV. Prohibited and Required Conduct
1. Each defendant, its officers, directors, agents, and employees,
acting or claiming to act on its behalf, and successors and all other
persons acting or claiming to act on its behalf, are enjoined and
restrained from directly or indirectly adhering to or enforcing section
4 (``EXCLUSIVITY'') of defendants' September 2003 ``Manufacturing
License, Distribution License and Patent License Agreement,'' or from
in any manner, directly or indirectly, entering into, continuing,
maintaining, or renewing any contractual provision that prohibits NSM
from becoming or limits NSM's ability to become a Digital Jukebox
Platform Competitor.
2. Each defendant, its officers, directors, agents, and employees,
acting or claiming to act on its behalf, and successors and all other
persons acting or claiming to act on its behalf, are enjoined and
restrained from, in any manner, directly or indirectly, entering into,
continuing, maintaining, or renewing any agreement with any Digital
Jukebox Platform Competitor that prohibits such person from supplying
or limits the ability of such person to supply music content in the
United States to Digital Jukeboxes, provided however, that (a) any
merger or acquisition involving either defendant; (b) any valid license
of U.S. Patent No. 5,341,350 from either defendant to a nonparty; or
(c) any valid license of U.S. patent No. 5,341,350 from NSM to Ecast,
which does not in any way prohibit NSM from becoming or limit NSM's
ability to become a Digital Jukebox Platform Competitor, will not be
considered, by itself, a violation of this paragraph.
V. Compliance Program
1. Each defendant shall establish and maintain an antitrust
compliance program which shall include designating, within thirty days
of entry of this Final Judgment, an Antitrust Compliance Officer with
responsibility for implementing the antitrust compliance program and
achieving full compliance with this Final Judgment and the antitrust
laws. The Antitrust Compliance Officer shall, on a continuing basis, be
responsible for the following:
a. Furnishing a copy of this Final Judgment within thirty days of
entry of the Final Judgment to each defendant's officers, directors,
and employees;
b. Furnishing within thirty days a copy of this Final Judgment to
any person who succeeds to a position described in Section V.1.a;
c. Arranging for an annual briefing to each person designated in
Section V.1.a or b on the meaning and requirements of this Final
Judgment and the antitrust laws;
d. Obtaining from each person designated in Section V.1.a or b
certification that he or she (1) has read and, to the best of his or
her ability, understands and agrees to abide by the terms of this Final
Judgment; (2) is not aware of any violation of the Final Judgment that
has not been reported to the Antitrust Compliance Officer; and (3)
understands that any person's failure to comply with this Final
Judgment may result in an enforcement action for civil or criminal
contempt of court against each defendant and/or any person who violates
this Final Judgment;
e. Maintaining (1) a record of certifications received pursuant to
this Section; (2) a file of all documents related to any alleged
violation of this Final Judgment and the antitrust laws; and (3) a
record of all communications related to any such violation, which shall
identify the date and place of the communication, the persons involved,
the subject matter of the communication, and the results of any related
investigation;
f. Reviewing the content of each e-mail, letter, memorandum, or
other communication to any Digital Jukebox Platform Competitor written
by or on behalf of an officer or director of either defendant that
relates to the recipient's supply of music content in the United States
to Digital Jukeboxes in order to ensure their adherence with this Final
Judgment.
2. If defendant's Antitrust Compliance Officer learns of any
violations of any of the terms and conditions contained in this Final
Judgment, defendant shall immediately take appropriate action to
terminate or modify the activity so as to comply with this Final
Judgment.
VI. Compliance Inspection
1. For the purposes of determining or securing compliance with this
Final Judgment, or of determining whether the Final Judgment should be
modified or vacated, and subject to any legally recognized privilege,
from time to time duly authorized representatives of the United States
Department of Justice, including consultants and other persons retained
or designated thereby, shall, upon written request of a duly authorized
representative of the Assistant Attorney General in charge of the
Antitrust Division, and on reasonable written notice to defendants, be
permitted:
a. Access during defendants' office hours to inspect and copy, or
at the United States' option, to require defendants to provide copies
of, all books, ledgers, accounts, records, and documents in their
possession, custody, or control relating to any matters contained in
this Final Judgment; and
b. To interview, either informally or on the record, defendant's
officers, employees, or agents, who may have their individual counsel
present, regarding such matters. The interviews shall be subject to the
reasonable
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convenience of the interviewee and without restraint or interference by
defendants.
2. Upon the written request of a duly authorized representative of
the Assistant Attorney General in charge of the Antitrust Division,
defendants shall submit written reports, under oath if requested,
relating to any of the matters contained in this Final Judgment as may
be requested.
3. No information or documents obtained by the means provided in
this section shall be divulged by plaintiffs to any person other than
an authorized representative of the executive branch of the United
States, except in the course of legal proceedings to which the United
States is a party (including grand jury proceedings), or for the
purpose of securing compliance with this Final Judgment, or as
otherwise required by law.
4. If at the time defendants furnish information or documents to
the United States, they represent and identify in writing the material
in any such information or documents to which a claim of protection may
be asserted under Rule 26(c)(7) of the Federal Rules of Civil
Procedure, and mark each pertinent page of such material, ``Subject to
claim of protection under Rule 26(c)(7) of the Federal Rules of Civil
Procedure,'' then the United States shall use its best efforts to give
defendants ten calender days notice prior to divulging such material in
any legal proceeding (other than a grand jury proceeding).
VII. Retention of Jurisdiction
This Court retains jurisdiction to enable any party to this Final
Judgment to apply to this Court at any time for further orders and
directions as may be necessary or appropriate to carry out or construe
this Final Judgment, to modify any of its provisions, to enforce
compliance, and to punish violations of its provisions.
VIII. Expiration of Final Judgment
Unless this Court grants an extension, this Final Judgment shall
expire ten years from the date of its entry.
IX. Notice
For purposes of this Final Judgment, any notice or other
communication shall be given to the persons at the addresses set forth
below (or such other addresses as they may specify in writing to Ecast
or NSM): John Read, Chief, Litigation III Section, U.S. Department Of
Justice, Antitrust Division, 325 Seventh Street, NW., Suite 300,
Washington, DC 20530.
X. Public Interest Determination
Entry of this Final Judgment is in the public interest.
Dated:-----------------------------------------------------------------
Court approved subject to procedures of Antitrust Procedures and
Penalties Act, 15 U.S.C. 16 United States District Judge.
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In the United States District Court for the District of Columbia
United States of America, Department of Justice, Antitrust
Division, 325 7th Street, NW.; Suite 300, Washington, DC 20530,
Plaintiff, v. Ecast, Inc., 49 Geary Street, Mezzanine, San Francisco,
CA 94108, and NSM Music Group, Ltd., 3 Stadium Way, Elland Road, Leeds,
West Yorkshire, United Kingdom LS11 OWE, Defendants; Civil Case Number
1:05CV01754, Judge: Colleen Kollar-Kotelly, Deck Type: Antitrust, Date
Stamp: September 2, 2005.
Competitive Impact Statement
The United States, pursuant to Section 2(b) of the Antitrust
Procedures and Penalties Act (``APPA''), 15 U.S.C. 16(b), files this
Competitive Impact Statement relating to the proposed Final Judgment
submitted for entry in this civil antitrust proceeding.
On September 2, 2005, the United States filed a civil antitrust
Complaint pursuant to section 4 of the Sherman Act, as amended, 15
U.S.C. 4, against Ecast, Inc. (``Ecast'') and NSM Music Group, Ltd.
(``NSM''). The Complaint alleges that defendants entered into a
noncompete agreement that caused NSM not to proceed with its plans to
enter the U.S. digital jukebox platform market and compete with Ecast.
That agreement, as the Complaint further alleges, is a restraint of
interestate trade in violation of Section 1 of the Sherman Act, 15
U.S.C. 1.
The Complaint seeks an order to prohibit defendants from enforcing
or adhering to any agreement restraining competition between them, and
other equitable relief necessary to prevent a recurrence of the illegal
conduct.
The United States filed simultaneously with the Complaint a
proposed Final Judgment, which constitutes the parties' settlement.
This proposal Final Judgment seeks to prevent defendants' illegal
conduct by expressly enjoining them from enforcing or adhering to their
existing noncompete agreement, prohibiting them from establishing
future noncompete agreements with digital jukebox platform competitors,
and requiring each to establish a rigorous antitrust compliance
program.
The United States, Ecast, and NSM have stipulated that the proposed
Final Judgment may be entered after compliance with the APPA, unless
the United States withdraws its consent. Entry of the proposed Final
Judgment would terminate this action, except that this Court would
retain jurisdiction to construe, modify, and enforce the proposed Final
Judgment and to punish violations thereof.
I. Description of the Events Giving Rise to the Alleged Violation of
the Antitrust Laws
A. Defendants
I. Ecast
Ecast is a San Francisco-based, privately held company organized
under the laws of the State of Delaware. It developed a digital jukebox
platform that supplies the software and music for jukeboxes
manufactured by traditional jukebox manufacturers. Ecast refers to
jukeboxes that incorporate its platform as ``powered by Ecast.''
2. NSM
NSM is a jukebox manufacturer based in the United Kingdom. It
conducts business in the United States through its operating
subsidiary, NSM Music, Inc., based outside of Chicago, Illinois.
B. The Digital Jukebox Industry
Digital jukeboxes are Internet-connected devices installed in bars
and restaurants that are capable of playing digital music files that
are either stored on a hard drive inside each jukebox or are downloaded
from a remote server via the Internet. Digital jukeboxes consist of two
primary components, a physical jukebox and a ``platform,'' which is the
term the industry applies to the combination of the software that
powers the jukebox and the licensed collection of music that the
jukebox is capable of playing.
As is the case with CD jukeboxes and most other coin-operated
devices found in bars and restaurants, digital jukeboxes are purchased,
installed, and maintained by 3,000, mostly local businesses called
``operators.'' Operators purchase both CD and digital jukeboxes from
distributors, which maintain relationships with jukebox
manufacturers.\1\ When operators elect to purchase a digital jukebox,
they incur--in addition to the one-time, out-of-pocket payment to the
distributor--an obligation to make recurring monthly payments to the
platform provider to
[[Page 55172]]
maintain continuous access to the provider's proprietary software and
to the music collection that the platform provider licensed from U.S.
copyright holders.
---------------------------------------------------------------------------
\1\ Operators then negotiate with bars and restaurants for space
in their establishments in which to place the digital jukeboxes.
---------------------------------------------------------------------------
There are roughly 15,000 digital jukeboxes in the United States.
The popularity of digital jukeboxes to consumers, and their ability to
generate greater revenue for the operator than CD jukeboxes, lead many
in the industry to predict the pace of digital jukebox adoption to
increase in the coming years.
Digital jukeboxes offer consumers a song selection dramatically
larger than CD jukeboxes. Ecast, for example, preloads jukeboxes
incorporating its platform with 300 albums, but also permits consumers
to access, for a higher price, a licensed collection of 150,000
additional songs that it stored on its remote servers. Ecast-powered
jukeboxes also allow consumers to pay to jump to the front of the song
queue. Because operators can control the song selection on their
digital jukeboxes from a remote location over the Internet, digital
jukeboxes also relieve operators of the need to visit each their
jukeboxes to load new releases or holiday favorites.
Ecast released its platform in the United States in 2001. It did so
under an agreement with a jukebox manufacturer, which manufactured and
distributed (through the manufacturer's established chain of
distributors) digital jukeboxes incorporating the Ecast platform. When
the manufacturer notified Ecast in 2002 that it intended to terminate
their agreement, Ecast immediately sought to avoid an interruption in
the delivery of Ecast-powered digital jukeboxes to the U.S. market by
finding another manufacturer partner.
C. The Illegal Noncompete Agreement
At a September 2002 industry trade show, NSM displayed a prototype
of a digital jukebox and platform that it intended to release in the
U.S. market. By that time, NSM was actively negotiating with U.S.
copyright holders to obtain the license it needed to provide music to
consumers through its digital jukebox platform, and had secured a line
of credit to pay advances typically demanded by the copyright holders.
NSM had also modified the digital jukebox and platform it had
previously released in the United Kingdom for release in the United
States. It had publicly communicated its intention to enter the U.S.
market, and it was internally committed to proceeding with those plans.
Ecast approached NSM at the September 2002 industry trade show and
proposed that NSM produce digital jukeboxes which would be powered by
Ecast's platform. During subsequent negotiations, Ecast agreed to make
a significant upfront payment to NSM, provided that NSM abandon its
entry plans in the U.S. and agree not to compete against Ecast. After
further negotiations on those terms, Ecast submitted to NSM a letter of
intent calling for an upfront payment by Ecast of $700,000, and
containing the following noncompete agreement:
NSM agrees that it will abandon its attempts to acquire music
licenses for the U.S. market (the ``Territory'') and advise all
content providers and licensors with which NSM has entered licenses
with [sic] that it has abandoned entering the US market with its own
digital music platform. NSM also agrees that for as long as Ecast
offers the Ecast Platform in the Territory NSM will not produce a
competing product in the Territory.
To Ecast, the principal motivation for requesting the noncompete
provision was to prevent NSM from entering and disrupting the digital
jukebox platform market. NSM went ahead and approved the deal with
Ecast that included the above-quoted noncompete provision.
Pursuant to the agreement, NSM thereafter ceased all efforts to
enter the U.S. market with its own digital jukebox platform. NSM also
fired the two employees responsible for its planned entry. Those
employees were the only NSM representatives involved in its copyright
license negotiations, its successful efforts to obtain financing
necessary to pay advances to copyright holders, and its communications
with U.S. operators and distributors concerning NSM's impending U.S.
entry.
Ecast recognized that without those employees, NSM no longer
possessed the ability to enter quickly with its own platform. Ecast
then refused to pay NSM the full $700,000 as agreed. Ecast and NSM
subsequently renegotiated the terms of their agreement such that NSM
would remain prohibited from entering the U.S. market with its own
digital jukebox platform with smaller payments from Ecast. The revised
agreement also included a license by NSM to Ecast of a patent
concerning digital jukebox technology.
D. Defendants' Noncompete Agreement Is an Unreasonable Restraint of
Trade
Noncompete agreements between competitors can violate Section 1 of
the Sherman Act. In this case, the noncompete agreement was entered
into in conjunction with an agreement to jointly produce and distribute
a product. The Department analyzed this noncompete agreement pursuant
to the rule of reason because it was reasonably related to the venture
and enhanced its efficiency. Under the rule of reason, the Department
considers ``all of the circumstances of a case in deciding whether a
restrictive practice should be prohibited as imposing an unreasonable
restraint on competition.'' Chicago Bd. of Trade v. United States, 246
U.S. 231, 238 (1918). After consideration of the circumstances in this
case, the Department concluded that the noncompete agreement
significantly suppressed competition and that harm to competition
outweighed the procompetitive benefits of the agreement.
The noncompete agreement between Ecast and NSM forced NSM to
abandon its efforts to enter the U.S. market with its own digital
jukebox platform. Many operators had expressed great interest in NSM's
entry because NSM intended to utilize a more attractive pricing model
for its jukebox platform (a flat-price model as opposed to a
percentage-or-revenue model) than either Ecast or its only U.S.
platform competitor. This and other significant potential benefits to
consumers were eliminated by the noncompete provision. The
procompetitive benefits of the venture were very limited. Accordingly,
the Department concluded that the anticompetitive effects of the
noncompete agreement outweighed the procompetitive effects.
II. Explanation of the Proposed Final Judgment
The Antitrust Division typically seeks, through an enforcement
action, to restore the competitive conditions that existed prior to
defendants' establishment of their illegal agreement. The Antitrust
Division cannon require NSM to enter the U.S. digital jukebox platform
market, but believes it is important to eliminate the artificial
impediments to NSM's ability to do so in the future. The proposed Final
Judgment thus enjoins defendants from enforcing or adhering to this or
any other noncompete agreement that restricts NSM's entry into the U.S.
digital jukebox platform market. The proposed Final Judgment also
prohibits defendants from establishing noncompete agreements with other
digital jukebox platform competitors and imposes a rigorous antitrust
compliance program upon each defendant.
[[Page 55173]]
III. Remedies Available to Potential Private Litigants
Section 4 of the Clayton Act, 15 U.S.C. 15, provides that any
person who has been injured as a result of conduct prohibited by the
antitrust laws may bring suit in a federal court to recover three times
the damages the person has suffered, as well as costs and reasonable
attorney's fees. Entry of the proposed Final Judgment will neither
impair nor assist the bringing of any private antitrust damage action.
Under provisions of section 5(a) of the Clayton Act, 15 U.S.C. 16(a),
the proposed Final Judgment has no prima facie effect in any subsequent
lawsuit that any private party may bring against the defendants.
IV. Procedures Available for Modification of the Proposed Final
Judgment
The United States and the defendants have stipulated that the
proposed Final Judgment may be entered by the Court after compliance
with the provisions of the APPA, provided that the United States has
not withdrawn its consent. The APPA conditions entry upon the Court's
determination that the proposed Final Judgment is in the public
interest.
The APPA provides a period of at least 60 days preceding the
effective date of the proposed Final Judgment within which any person
may submit to the United States written comments regarding the proposed
Final Judgment. Any person who wishes to comment should do so within 60
days of the date of publication of this competitive Impact Statement in
the Federal Register. The United States will evaluate and respond to
the comments. All comments will be given due consideration by the
United States, through the Department of Justice, which remains free to
withdraw its consent to the proposed Final Judgment at any time prior
to entry. The comments and the response of the United States will be
filed with the Court and published in the Federal Register. Written
comments should be submitted to John Read, Chief, Litigation III
Section, Antitrust Division, United States Department of Justice, 325
Seventh Street, NW., Suite 300, Washington, DC 20530.
The proposed Final Judgment provides that the Court retains
jurisdiction over this action, and the parties may apply to the Court
for any order necessary or appropriate for the modification,
interpretation, or enforcement of the Final Judgment.
V. Alternative to the Proposed Final Judgment
The United States considered, as an alternative to the proposed
Final Judgment, a full trial on the merits of its Complaint against the
defendants. The United States could have continued the litigation and
sought preliminary and permanent injunctions against Ecast and NSM.
However, the United States is satisfied that the relief provided in the
proposed Final Judgment will prevent a recurrence of conduct that
restricted competition in the digital jukebox platform market. Thus,
the proposed Final Judgment would achieve substantially all the relief
the United States would have obtained through litigation, but avoids
the time, expense, and uncertainty of a full trial on the merits of the
Complaint.
VI. Standard of Review Under the APPA for the Proposed Final Judgment
The APPA requires that proposed consent judgments in antitrust
cases brought by the United States be subject to a 60-day comment
period, after which the Court shall determine whether entry of the
proposed Final Judgment ``is in the public interest.'' 15 U.S.C.
16(e)(1). In making that determination, the Court shall consider:
(1) The competitive impact of such judgment, including
termination of alleged violations, provisions for enforcement and
modification, duration or relief sought, anticipated effects of
alternative remedies actually considered, whether its terms are
ambiguous, and any other competitive considerations bearing upon the
adequacy of such judgment that the court deems necessary to a
determination of whether the consent judgment is in the public
interest; and
(2) The impact of entry of such judgment upon competition in the
relevant market or markets, upon the public generally and
individuals alleging specific injury from the violations set forth
in the complaint including consideration of the public benefit, if
any, to be derived from a determination of the issues at trial.
15 U.S.C. 16(e)(1). As the United States Court of Appeals for the D.C.
Circuit has held, the APPA permits a court to consider, among other
things, the relationship between the remedy secured and the specific
allegations set forth in the government's complaint, whether the decree
is sufficiently clear, whether enforcement mechanisms are sufficient,
and whether the decree may positively harm third parties. See United
States v. Microsoft, 56 F.3d 1448, 1461-62 (D.C. Cir. 1995).
``Nothing in this section shall be construed to require the court
to conduct an evidentiary hearing or to require the court to permit
anyone to intervene.'' 15 U.S.C. 16(e)(2). Thus, in conducting this
inquiry, ``[t]he court is nowhere compelled to go to trial or to engage
in extended proceedings which might have the effect of vitiating the
benefits of prompt and less costly settlement through the consent
decree process.'' 119 Cong. Rec. 24,598 (1973) (statement of Senator
Tunney).\2\ Rather,
---------------------------------------------------------------------------
\2\ See also United States v. Gillette Co., 406 F. Supp. 713,
716 (D. Mass. 1975) (recognizing it was not the court's duty to
settle; rather, the court must only answer ``whether the settlement
achieved [was] within the reaches of the public interest''). A
``public interest'' determination can be made properly on the basis
of the Competitive Impact Statement and Response to Comments filed
pursuant to the APPA. Although the APPA authorizes the use of
additional procedures, 15 U.S.C. 16(f), those procedures are
discretionary. A court need not invoke any of them unless it
believes that the comments have raised significant issues and that
further proceedings would aid the court in resolving those issues.
See H.R. Rep. No. 93-1463, 93rd Cong., 2d Sess. 8-9 (1974),
reprinted in 1974 U.S.C.C.A.N. 6535, 6538.
[a]bsent a showing of corrupt failure of the government to discharge
its duty, the Court, in making its public interest finding, should *
* * carefully consider the explanations of the government in the
competitive impact statement and its responses to comments in order
to determine whether those explanations are reasonable under the
---------------------------------------------------------------------------
circumstances.
United States v. Mid-Am. Dairymen, Inc., 1977-1 Trade Cas. (CCH) ]
61,508, at 71,980 (W.D. Mo. May 17, 1977).
Accordingly, with respect to the adequacy of the relief secured by
the decree, a court may not ``engage in an unrestricted evaluation of
what relief would best serve the public.'' United States v. BNS, Inc.,
858 5.2d 456, 462 (9th Cir. 1988) (citing United States v. Bechtel
Corp., 648 F.2d 660, 666 (9th Cir. 1981)); see also Microsoft, 56 F.3d
at 1460-62. Case law requires that
[t]he balancing of competing social and political interests affected
by a proposed antitrust consent decree must be left, in the first
instance, to the discretion of the Attorney General. The court's
role in protecting the public interest is one of insuring that the
government has not breached its duty to the public in consenting to
the decree. The court is required to determine not whether a
particular decree is the one that will best serve society, but
whether the settlement is ``within the reaches of the public
interest.'' More elaborate requirements might undermine the
effectiveness of antitrust enforcement by consent decree.
Bechtel, 648 F.2d at 666 (emphasis added) (citations omitted).\3\
---------------------------------------------------------------------------
\3\ Cf. BNS, 858 F.2d at 463 (holding that the court's
``ultimate authority under the [APPA] is limited to approving or
disapproving the consent decree''); Gillette, 406 F. Supp. at 716
(noting that, in this way, the court is constrained to ``look at the
overall picture not hypercritically, nor with a microscope, but with
an artist's reducing glass''). See generally Microsoft, 56 F.3d at
1461 (discussing whether ``the remedies [obtained in the decree are]
so inconsonant with the allegations charges as to fall outside of
the `reaches of the public interest' '').
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[[Page 55174]]
The proposed Final Judgment, therefore, should not be reviewed
under a standard of whether it is certain to eliminate every
anticompetitive effect of a particular practice or whether it mandates
certainty of free competition in the future. Court approval of a final
judgment requires a standard more flexible and less strict than the
standard required for a finding of liability. ``[A] proposed decree
must be approved even if it falls short of the remedy the court would
impose on its own, as long as it falls with the range of acceptability
or is `within the reaches of public interest.''' United States v. Am.
Tel. & Tel. Co., 552 F. Supp. 131, 151 (D.D.C. 1982) (citations
omitted) (quoting Gillette, 406 F. Supp. at 716), aff'd sub nom.
Maryland v. United States, 460 U.S. 1001 (1983); see also United States
v. Alcan Aluminum Ltd., 605 F. Supp. 619, 622 (W.D. Ky. 1985)
(approving the consent decree even though the court would have imposed
a greater remedy).
Moreover, the Court's role under the APPA is limited to reviewing
the remedy in relationship to the violations that the United States has
alleged in its Compliant, and does not authorize the Court to
``construct [its] own hypothetical case and then evaluate the decree
against that case.'' Microsoft, 56 F.3d at 1459. Because the ``court's
authority to review the decree depends entirely on the government's
exercising its prosecutorial discretion by bringing a case in the first
place,'' it follows that ``the court is only authorized to review the
decree itself,'' and not to ``effectively redraft the compliant'' to
inquire into other matters that the United States might have but did
not pursue. Id. at 1459-60.
VII. Determinative Documents
There are no determinative materials or documents within the
meaning of the APPA that were considered by the United States in
formulating the proposed Final Judgment.
Dated: September 2, 2005.
Respectfully submitted,
David C. Kully (DC Bar 448763),
Jill A. Beaird,
Attorneys for the United States, U.S. Department of Justice,
Antitrust Division, Litigation III Section, 325 Seventh Street, NW.,
Suite 300, Washington, DC 20530, (202) 305-9969 (telephone), (202)
307-9952 (facsimile), David.Kully@usdoj.gov.
[FR Doc. 05-18498 Filed 9-19-05; 8:45 am]
BILLING CODE 4410-11-M