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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:

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