MICHAEL R. STILES
United States Attorney

By:

Assistant United States Attorney
615 Chestnut Street, Suite 1250
Philadelphia, Pennsylvania 19106-4476

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

UNITED STATES OF AMERICA, Plaintiff

v.

CDnow, Inc., and CDnow Online, Inc., Defendants.

Civil Action No. _______________

CONSENT DECREE AND ORDER FOR CIVIL PENALTIES, INJUNCTIVE AND OTHER RELIEF

WHEREAS plaintiff, the United States of America, has commenced this action by filing the Complaint herein; defendants have waived service of the Summons and Complaint; the parties have been represented by the attorneys whose names appear hereafter; and the parties have agreed to settlement of this action upon the following terms and conditions, without adjudication of any issue of fact or law and without defendants admitting liability for any of the matters alleged in the Complaint;

THEREFORE, upon stipulation of plaintiff and defendants, it is hereby ORDERED, ADJUDGED, and DECREED as follows:

1. This Court has jurisdiction of the subject matter and of the parties.

2. The Complaint states a claim upon which relief may be granted against the defendants under Sections 5(a)(1), 5(m)(1)(A), 13(b) and 16(a) of the Federal Trade Commission Act, 15 U.S.C. 45(a)(1), 45(m)(1)(A), 53(b) and 56(a).

DEFINITION

3. For the purposes of this Consent Decree, the term "Mail Order Rule" means the Federal Trade Commission's Trade Regulation Rule Concerning Mail or Telephone Order Merchandise, 16 C.F.R. Part 435, or as the Rule may hereafter be amended.

CIVIL PENALTY

4. Defendants CDnow, Inc. and CDnow Online, Inc., their successors and assigns, shall pay to plaintiff a civil penalty, pursuant to section 5(m)(1)(A) of the Federal Trade Commission Act, 15 U.S.C.  45(m)(1)(A), in the amount of three hundred thousand dollars ($300,000). Based on defendants' sworn representations in the Form 10-K filed with the United States Securities and Exchange Commission for the fiscal year ending December 31, 1999, and the Form 10-Q filed with the United States Securities and Exchange Commission for the quarter ending March 31, 2000, hereinafter designated as "Financial Disclosure Statements," payment of the foregoing civil penalty is waived except for one hundred thousand dollars ($100,000), contingent upon the accuracy and completeness of the Financial Disclosure Statements. Defendants are jointly and severally liable for payment of the civil penalty.

5. Defendants shall make the one hundred thousand dollar ($100,000) payment required by Paragraph 4 in two equal installments. Defendant shall, within five (5) days of the date of entry of this Consent Decree, pay the sum of fifty thousand dollars ($50,000) by electronic fund transfer in accordance with the instructions provided by the Office of Consumer Litigation, Civil Division, U.S. Department of Justice, Washington, D.C. 20530, for appropriate disposition. Defendants shall make a second payment of fifty thousand dollars ($50,000), in the same manner, no later than December 31, 2000.

6. In the event of any default in payment, which default continues for ten (10)days beyond the due date of payment, the entire unpaid penalty, together with interest, as computed

pursuant to 28 U.S.C. 1961, from the date of default to the date of payment, shall immediately become due and payable.

INJUNCTION

7. Defendants, their successors and assigns, and their officers, agents, servants, employees and attorneys, and all other persons in active concert or participation with any one or more of them who receive actual notice of this Consent Decree by personal service or otherwise, are hereby enjoined from violating, directly or through any corporation, subsidiary, division or other device, any provision of the Mail Order Rule, in any way, including but not limited to:

a. Failing to timely offer to the buyer, clearly and conspicuously and without prior demand, an option either to consent to a delay in shipping or to cancel the order and receive a prompt refund, as required by 16 C.F.R. 435.1(b)(1);
 
b. Failing to provide the buyer with a definite revised shipping date, as required by 16 C.F.R.  435.1(b)(1);
 
c. Failing to timely offer to the buyer, clearly and conspicuously and without prior demand, a renewed option either to consent to a delay in shipping or to cancel the order and receive a prompt refund, as required by 16 C.F.R.  435.1(b)(2);
 
d. Failing to advise the buyer in a renewed option notice that the order will be automatically canceled and a prompt refund provided unless the buyer gives specific consent to a further delay prior to expiration of the old definite revised shipping date, as required by 16 C.F.R.  435.1(b)(2)(ii);
 
e. Issuing company credit towards future purchases instead of making a refund, as that term is defined in 16 C.F.R.  435.2(e)(1); and,

8. In the event the Mail Order Rule is hereafter amended or modified, defendants' compliance with that Rule as so amended or modified shall not be deemed a violation of this injunction. A copy of the Mail Order Rule is attached hereto as "Appendix A" and incorporated herein as if fully set forth verbatim.

COMPLIANCE

9. Defendants shall, within thirty (30) days of the entry of this Consent Decree, provide a copy of this Consent Decree and the Business Guide to the Federal Trade Commission's Mail or Telephone Order Merchandise Rule (Jan. 1995) ("Business Guide") to each of their supervisory or managerial agents, servants, employees and attorneys who are engaged in defendants' mail order catalog and Internet business, secure from each such person a signed statement acknowledging receipt of a copy of this Consent Decree and Business Guide, and shall, within ten (10) days of complying with this paragraph, file an affidavit with the Associate Director, Division of Enforcement, Bureau of Consumer Protection, Federal Trade Commission, 600 Pennsylvania Ave., NW, Washington, D.C. 20580, setting forth the fact and manner of their compliance, including the name and title of each person to whom a copy of the Consent Decree has been provided.

10. For a period of five (5) years from the date of entry of this Consent Decree, defendants, their successors and assigns, shall maintain and make available to the Federal Trade Commission, within seven (7) days of the date of receipt of a written request, business records demonstrating compliance with the terms and provisions of this Consent Decree.

11. For a period of twenty (20) years from the date of entry of this Consent Decree, defendants, their successors and assigns, shall notify the Associate Director, Division of Enforcement, Bureau of Consumer Protection, Federal Trade Commission, 600 Pennsylvania Ave., NW, Washington, D.C. 20580, at least thirty (30) days prior to any change in defendants' business, including, but not limited to, merger, incorporation, dissolution, assignment, sale resulting in the emergence of a successor corporation, the creation or dissolution of a subsidiary or parent, or any other change in corporate status that may affect defendants' obligations under this Consent Decree.

12. One hundred twenty (120) days after entry of this Consent Decree, defendants shall provide a written report to the Federal Trade Commission, sworn to under penalty of perjury, setting forth in detail the manner and form in which the defendants have complied and are complying with this Consent Decree. This report shall include but not be limited to:

a. a specimen copy of each delay option notice used to comply with any provision of the Mail Order Rule, and a statement setting forth in detail the procedures in place for providing such notices;
 
b. a specimen copy of each advertisement containing a shipping representation;
 
c. a statement setting forth in detail defendants' procedures for providing prompt refunds pursuant to the Mail Order Rule; and
 
d. a statement setting forth in detail the basis for claiming that defendants will be able to ship merchandise:
 
i. within the time stated in any advertisement;
 
ii. within thirty (30) days, where no time is stated clearly and conspicuously in any advertisement.

Defendants shall mail this written notification to: the Associate Director for Enforcement, Bureau of Consumer Protection, Federal Trade Commission, 600 Pennsylvania Ave., NW, Washington, D.C. 20580.

13. Defendants are hereby required, in accordance with 31 U.S.C.  7701, to furnish to the Federal Trade Commission their taxpayer identifying number (social security number or employer identification number), which shall be used for purposes of collecting and reporting on any delinquent amount arising out of their relationship with the government.

CONTINUING JURISDICTION

14. This Court shall retain jurisdiction of this matter for the purposes of enabling any of the parties to this Consent Decree to apply to the Court at any time for such further orders or directives as may be necessary or appropriate for the interpretation or modification of this Consent Decree, for the enforcement of compliance therewith, or for the punishment of violations thereof.

JUDGMENT IS THEREFORE ENTERED in favor of plaintiff and against defendants, pursuant to all the terms and conditions recited above.

Dated this ___ day of _____, 20__.

UNITED STATES DISTRICT JUDGE

The parties, by their respective counsel, hereby consent to the terms and conditions of the Consent Decree as set forth above and consent to the entry thereof. Defendants waive any rights that may arise under the Equal Access to Justice Act, 28 U.S.C. 2412, concerning the investigation and prosecution of this action.

FOR THE UNITED STATES OF AMERICA:

DAVID W. OGDEN
Acting Assistant Attorney General
Civil Division
U.S. Department of Justice

MICHAEL R. STILES
United States Attorney
Eastern District of Pennsylvania

By:

Assistant United States Attorney
615 Chestnut Street, Suite 1250
Philadelphia, Pennsylvania 19106-4476

EUGENE THIROLF
Director
Office of Consumer Litigation

By: _________________________________

Attorney
Office of Consumer Litigation
Civil Division
U.S. Department of Justice
P.O. Box 386
Washington, D.C. 20044

FOR THE FEDERAL TRADE COMMISSION:

_________________________________
ELAINE D. KOLISH
Associate Director
Division of Enforcement
Bureau of Consumer Protection
Federal Trade Commission

_________________________________
HEATHER A. HIPPSLEY
Assistant Director
Division of Enforcement
Bureau of Consumer Protection

PHYLLIS HURWITZ MARCUS
Attorney
Division of Enforcement
Bureau of Consumer Protection
Federal Trade Commission
600 Pennsylvania Ave., NW
Washington, D.C. 20580
(202) 326-3309

FOR THE DEFENDANTS:

CDnow, Inc.; CDnow Online, Inc.

By:

JASON OLIM
President
CDnow, Inc.
1005 Virginia Drive
Fort Washington, PA 19034

By:

STEPHEN PAUL MAHINKA
Attorney for Defendants
Morgan, Lewis & Bockius LLP
1800 M Street, NW
Washington, DC 20036-5869