Compact Disc War Headed for the Court

Consumers, retailers and record corporations are marching toward a showdown over the price of compact discs.

In a pair of upcoming class-action suits, consumers and independent retailers will charge that the nation’s four-largest record corporations have conspired to fix the price of new CDs, restrain trade and restrict the availability of secondhand compact discs.

“What we’ve got here is a case about greed and big business looking out solely for itself,� said Don Kulak, executive director of the Independent Music Retailers’ Assn., which was expected to file a multimillion-dollar class-action antitrust suit against the four corporations Friday in Los Angeles federal court.

“The distribution companies don’t care about their own customers or artists or the small merchants who serve them. And unfortunately it’s gotten so bad lately that they are in violation of the law.�

A similar class-action claim is expected to be filed as early as Tuesday in San Diego on behalf of consumers--also against CEMA Distribution, Sony Music, Warner Elektra Atlantic Corp. and UNI Distribution Corp. Executives at all four firms declined to comment.

The four companies named in the litigation have retaliated against used-CD merchants by tightening restrictions on returns of opened product and refusing to underwrite millions of dollars in print and radio advertisements that feature their artists.

Kulak said his organization decided to file its suit after CEMA, the company that distributes Garth Brooks’ music, notified several independent music dealers Thursday that they could not place orders for the country star’s upcoming album “In Pieces� because they sell used CDs at their stores.

CEMA’s action was in keeping with the singer’s pledge last month that he would not allow his new album, due late next month, to be sold in stores that sell secondhand discs, because artists aren’t paid royalties on such transactions.

Brooks’ anti-used-CD stance so infuriated West Coast consumers that hundreds of fans last week roasted the singer’s albums in protest at “Garth Buck$ BAR-B-Qs� held from Seattle to Los Angeles--including one bonfire at Silver Lake-based Rockaway Records.

The legal skirmish is being closely watched in the industry because the courts’ eventual rulings could affect the price consumers pay for CDs, both new and used. If the record corporations’ actions are upheld, they could make it impossible for retailers to sell both used and new CDS.

If the verdict goes against the corporations, the used-CD market could flourish--which CEMA executives estimate could eventually represent up to one-quarter of the nation’s annual $9 billion a year in business. Some consumers think a healthy used-CD business might also spur companies to lower the cost of new CDs.

But don’t expect an answer soon. Industry insiders predict that it will take at least a year for the issue to be resolved.

The recording corporations aren’t united in this battle.

PolyGram Group Distribution and Bertelsmann Music Group--the nation’s two other largest record corporations--decided early on not to enter the used-CD war, fearing that it might damage relationships with retailers the companies depend upon to “break� new artists. Sources at the companies said executives were advised against suspending ad subsidies by legal teams who speculated that such action might violate antitrust laws.

“Selling used product has been a small part of our industry for many years,� said Jim Caparro, president and chief executive officer of PolyGram Group Distribution. “We decided against implementing such a policy because it would have forced us to stop advertising at half of the key locations we count on across the country to help break our new acts. It just didn’t make any sense.�

Some legal experts liken the current fight over used CDs to a similar battle years ago between film companies and video retailers.

During the late ‘70s, film companies feared that the new video rental market might cut into theater box-office returns. Several firms considered refusing to sell videos to retail rental outlets but found out that it was illegal.

Under the doctrine of first sale contained in the Copyright Act, royalties need only be paid the first time an album is sold. After the first transaction, artists and the companies that release their work have no right to demand royalties on sales of their used product.

“The record companies are making a very big mistake here,� said Los Angeles entertainment attorney Don Engel. “The artists have no entitlement whatsoever to further royalties. In the end, they won’t have any more luck halting the sale of used CDs than the movie companies did trying to stop the rental of videocassettes. It’s a very short-sighted move.�

The class-action claims are the latest in a flurry of legal threats facing the four record corporations accused of trying to squelch the burgeoning used-CD trade. Among other recent developments:

* Two weeks ago, the Torrance-based 340-outlet Wherehouse Entertainment chain filed a multimillion-dollar antitrust suit in Los Angeles federal court against the same corporations, charging that they conspired to “unreasonably restrain trade� by eliminating advertising and promotional allowances to retailers who traffic in used CDs.

* One week earlier, the Federal Trade Commission launched an investigation to determine whether CEMA, Sony, WEA and UNI, have violated antitrust provisions. Government officials declined to comment on the matter, but sources said FTC officials have already begun interviewing representatives from the corporations plus merchants who sell used CDs.

* Insiders also predict that CEMA will be slapped with additional litigation if Brooks makes good on his promise to withhold “In Pieces� to all used-CD merchants. Other retailers told The Times that they have already consulted attorneys about further lawsuits over the matter.

The brouhaha over secondhand compact discs erupted in December when Wherehouse became the first major retail chain to enter the used-CD market--which until then had been confined to small independent stores, mostly located in college towns.

Used CDs sound just as good as new ones and cost about half as much. Industry surveys indicate that nearly half the nation’s “active� record buyers have bought at least one used CD this year--with prices ranging from $1 to $9.

Record executives oppose the expansion of the used-CD market because they fear that such transactions reduce purchases of new product and may also diminish the perceived value of the industry’s biggest moneymaking audio format. Compact discs accounted for more than $5 billion in 1992.

Members of the Independent Music Retailers’ Assn., which represents more than 200 mom-and-pop stores across the nation, have been fighting the anti-used-CD policies of CEMA, Sony, WEA and UNI and since May by halting promotional displays, in-store airplay and sale pricing for all new artists affiliated with those firms.

Some members of IMRA have also recently begun to voice their opposition by refusing to report computerized tallies of new product sales for the four firms to SoundScan, the research company that compiles information for the Billboard pop charts.

“The bottom line is that there really aren’t many people who can afford to pay 17 bucks for Garth or any other new album,� said Bill McNally, operations manager of the Portland, Ore.-based Music Millennium, who staged the Brooks BAR-B-Qs. “The battle ahead over used CDs poses some serious legal questions for the record distribution companies involved. The used-CD business is not just going to disappear.�