Netflix Beats Antitrust Class Action at Appeals Court

No support for subscriber injuries from a Netflix-Walmart pact means the lawsuit falls like a collapsing house of cards.
Netflix

It's no secret that the law sometimes moves slowly. On the day that millions will begin binging on the latest season of House of Cards, most know Netflix as the company that streams videos. Once upon a time, Netflix was primarily recognized for the way its customers rented DVDs through the postal mail. In this stone age, Netflix had competition from Blockbuster and Walmart, but then Netflix came to an agreement to acquire Walmart's customers, which triggered a class action lawsuit alleging violations of antitrust law.

On Friday, Netflix pulled a Frank Underwood by getting the 9th Circuit Court of Appeals to affirm the dismissal of the lawsuit because suing subscribers couldn't support claims of being injured.

Unlike Netflix, which grew at an amazing clip to tens of millions of customers, Walmart never had more than 60,000 subscribers for its rental service. Nevertheless, upon rumored competition from Amazon, Netflix chief Reed Hastings reached out to Walmart to form a partnership. He met with Walmart CEO John Fleming. What he didn't know was that Walmart was exploring partnerships with Yahoo and Microsoft but was probably going to fold the online DVD-rental business.

So Walmart and Netflix eventually came to an agreement in 2005 whereby Walmart would transfer its DVD-rental subscribers to Netflix in return for 10 percent of the revenue plus a $36 bounty for each new subscriber Netflix gained through referral. In addition, Netflix agreed to promote Walmart's DVD sales business.

That led to antitrust lawsuits against both companies, and Walmart decided to settle rather than spend years fighting. On Friday, in a separate opinion, the 9th Circuit blessed the $27 million settlement that included cash, litigation expenses and, triggering more dispute, gift cards. (Here's that opinion finding it to be consistent with the Class Action Fairness Act.)

As for Netflix, which decided to fight, the dispute zeroed in on plaintiffs' theory that they had been charged supracompetitive prices for their DVD-rental subscriptions once Walmart exited the business.

About a decade ago, Netflix and Blockbuster were engaged in much competition, and at certain times, the companies had a soft pricing war, and the plaintiffs asserted that the price for renting three DVDs at a time would have dropped from $15.99 a month but for the Netflix-Walmart deal.

"The undisputed record belies this assertion," writes 9th Circuit chief judge Sidney Thomas. He continues:

"Netflix never lowered its 3U price at any time in response to Walmart. Even though Walmart entered the market with a lower price ($18.76 to Netflix’s $19.95) for a comparable 3U plan, Netflix did not alter its 3U plan price for a full year after Walmart entered the market. When Netflix eventually did change the price, a year later, it increased the price to $21.99 per month. Netflix also did not reduce its price when Blockbuster offered a 3U plan for $14.99 (while Netflix’s was $17.99), even though Blockbuster had a much greater share of the market than Walmart, and even though Netflix rightfully viewed Blockbuster as a competitive threat. Thus, the district court properly determined that no reasonable juror could conclude that Netflix was going to lower its 3U price..."

The appeals court affirms the district judge's opinion that subscribers did not raise a genuine issue of material fact as to antitrust injury-in-fact, a prerequisite before even getting into some of the other factors determining any antitrust liability. Netflix also had to fight to hold onto more than $700,000 in court fees it was awarded by the district judge. For the most part, it is successful in doing so, though the appeals court has ordered some slight modifications that will trim this amount.

Here's the full opinion.

Email: Eriq.Gardner@THR.com
Twitter: @eriqgardner

comments powered by Disqus