Netflix Antitrust Lawsuit Tossed By Judge

Netflix - Generic Image - 2010
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A federal judge in California has dismissed a class action against Netflix that alleged the online movie retailer had struck an illegal "market allocation" agreement with Walmart. On Tuesday, U.S. District Judge Phyllis Hamilton handed Netflix a victory on summary judgment, finding that the plaintiffs couldn't show any collusive agreement.

The dismissal cuts short a trial that was tentatively scheduled for January.

The plaintiffs brought their claims to federal court in 2009, pointing to an agreement made between Netflix and Walmart four years earlier.

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At the time, Blockbuster had just entered the DVD online rental market and rumors circulated that Amazon would soon do the same. Netflix approached Walmart in a purported effort to stave off the perceived Amazon threat. At first, the talks went nowhere, but then Walmart decided to exit the DVD rental business. In 2005, the two companies reached a deal on a so-called "Promotion Agreement," whereby existing Walmart DVD rental customers would be transitioned to Netflix.

Amazon didn't jump into the DVD business, and Blockbuster later flopped, leading eight individuals to lead a class action lawsuit that alleged that antitrust behavior between Netflix and Walmart had led to higher prices. The plaintiffs estimated that damages could be as high as $654 million.

But now, Judge Hamilton has curtailed a trial that was scheduled to feature Netflix CEO Reed Hastings as well as former top media executives from Amazon, Walmart and Blockbuster. She ruled that the plaintiffs simply couldn't show that the "Promotion Agreement" was illegal. According to the decision:

"The Promotion Agreement on its face discloses an agreement by both parties to undertake cross-promotional efforts with respect to each other's complementary online DVD rental and sales services, in light of Walmart's independent decision to exit the DVD rental market. Not only does the agreement expressly acknowledge the 'independent nature of Walmart's decision to exit the market, but it furthermore expressly states that Walmart is free to re-enter the same market. Under these circumstances, the court cannot agree that the agreement on its face reflects a blatant agreement to eliminate Walmart from the online DVD rental market as a form of market allocation."

The class plaintiffs are free to appeal the decision, but in the meantime, they won't walk away empty-handed.

Walmart made an independent decision about a year ago to settle instead of spending money on lawyers. In retrospect, given the judge's decision yesterday, Walmart seems to have made a $27.25 million error. That's the amount that Walmart agreed to pay out in order to avoid this class action fight.

The retail giant can't even claim to have saved that much in legal costs.

Walmart first reached a very complicated settlement with the plaintiffs in December 2010 that included a pay-out range (between $29 million and $40 million depending on the number of claims), that included a sub-class of customers who rented DVDs online from Blockbuster, and a provision where Wal-Mart had the right to "blow-out" the entire settlement if a substantial portion of potential class members opted-out of the deal.

The judge didn't like this deal very much, and Netflix objected too, leading to seven months of continued revisions before a final settlement was reached. Most importantly, the pay-out became fixed and Blockbuster class members were removed.

In September, a judge blessed the settlement, leading to an e-mail from plaintiffs' lawyers about a week ago to many Netflix subscribers, informing them of the settlement. Per the agreement, all those who rented DVDs from Netflix anytime between May 19, 2005 and September 2, 2011 have the opportunity to claim a piece of the $27.25 million pot in the form of gift cards or cash.

Initially, Walmart's settlement was criticized by customers who worried they were only getting pennies on the dollar of potential damages. The aggrieved individuals noted that the class action lawyers would take home 25 percent of the settlement fund, or nearly $7 million, and also be reimbursed up to $1.7 million in legal costs. Now, that remaining money looks better than nothing.

Twitter: @eriqgardner