Lawsuit Versus Netflix And Wal-Mart Changes Little

A long, arduous and ultimately ineffective lawsuit ended on Feb. 27, when the United States Court of Appeals for the Ninth Circuit upheld a lower court’s decision to throw out a class of Netflix subscribers lawsuit against the company and Wal-Mart for what they called “an unlawful market allocation agreement.”

The case dates back to 2005, before Netflix’s business was based on unlimited streaming and controlled 77.8 percent of the online DVD-rental market, as stated by Chief Judge Sidney R. Thomas in the Ninth Circuit’s publication.

Wal-Mart had launched a competing service in 2003. Despite being cheaper than Netflix and having the resources of the retail behemoth, their DVD-rental service was a flop. The company controlled just 1.4 percent of the market; it peaked with 60,000 subscribers and was no contest for the 2 million Netflix subscribers. Wal-Mart’s failure is largely credited to poor service, a small selection, and slow delivery times, according to Thomas’s opinion.

Wal-Mart ended its rental business as part of an arrangement with Netflix. The retailer would encourage all of its clients to subscribe to Netflix’s rental service and take a portion of the profits from all transferred customers. Wal-Mart further agreed to promote Netflix’s rental service while Netflix promoted Wal-Mart’s DVD sales, as outlined in their Promotion Agreement publicly announced May 19, 2005.

In 2009, a group of eight Netflix subscribers filed a class action lawsuit against the two companies, accusing them of monopolistically controlling the DVD rental market in violation of the Sherman Anti-Trust Act of 1890. Wal-Mart settled in 2011, agreeing to award $27 million to the class without admitting wrongdoing.

Netflix did not agree to settle and said the case was “without any basis.” The key weakness of the suit was that, as Thomas puts it, “the subscribers had failed to raise a triable issue as to antitrust injury-in-fact.” That is, regardless of whether or not Netflix and Wal-Mart were acting anticompetitively, the plaintiffs could not prove that they had come to any harm because of it.

Prices did not increase because of the deal between the two companies. Wal-Mart was Netflix’s competitor, but the retailer’s first forays into DVD rentals were so ineffectual, Thomas summarizes, “Netflix’s internal documents show that by late 2004, Netflix treated Wal-Mart as a negligible threat.” Wal-Mart’s plan was cheaper than Netflix but the latter did not lower its price in response and instead raised its prices in 2004.

The plaintiffs argued that Netflix would have lowered its prices had it not absorbed Wal-Mart’s business, but Netflix had not been lowering its prices in response to encroachments by Amazon and the now defunct Blockbuster, both of which were objectively greater rivals. Netflix filed for a summary judgment and dismissal, which the district court granted. This was the major decision that the Ninth Circuit upheld in Feb. 2015.

However, there was a separate issue that motivated the plaintiffs to bring the case to the higher court: over the course of the lawsuit the plaintiffs had required Netflix to produce data under specific conditions and in specific formats. Netflix responded, with almost 15 million pages of documents. The company went on to request $744,740 to cover the costs of this, which included but was not limited to electronic discovery vendors, metadata, searchable text and PowerPoint presentations. All of this is described in great detail in the court’s publication.

Debate over these PowerPoint’s would go on for several months. Netflix had color adaptations of the presentations on file, and the subscribers requested these rather than the black and white ones the defendant initially gave them. Netflix tried to receive compensation for both the color and the black and white slides. The court rejected this cost in particular, but did consent to award Netflix $710,194.

The only change that the Ninth Circuit made to the lower court’s decision was to reduce this amount in part. In light of all this, the trial seems to have changed little for the plaintiffs or for Netflix. The plaintiffs’ lawyers took away about a quarter of the $27 million received from Wal-Mart’s settlement in 2011. About another $40,000 of this went to the eight lead plaintiffs, which is probably little comfort after the massive investment of time and money they put into the largely ineffectual suit. CNN Money estimated that, due to the sheer number of subscribers, the individuals in the rest of the class willing to fill out the necessary paperwork could expect about $1.50 each.

Wal-Mart was allowed to pay out this portion of the suit in store credit and gift cards. These gift cards include access to Wal-Mart’s website and its new video streaming service Vudu, which is rapidly becoming a noticeable competitor to Wal-Mart’s former business partner. In a public statement Netflix called this “the equivalent of a marketing campaign that costs Wal-Mart only 68 cents per potential customer.”


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