Netflix prevails; Walmart settles in DVD class action

Walmart too small? That’s the verdict of Judge Phyllis Hamilton of the Northern District of California in a class action suit against the retailer and Internet movie house Netflix. According to Judge Hamilton, a marketing agreement between the two companies was outside the scope of the Sherman Antitrust Act because Walmart’s DVD rental business was too tiny to affect the market for online movies.

Plaintiffs alleged that a 2005 “Promotion Agreement” between the companies was an attempt to allocate the DVD market in violation of sections 1 and 2 of the Sherman Act. The agreement called for Walmart to end its online movie rental business, while Netflix would promote Wal-Mart’s offerings of DVDs for-sale.

In granting Netflix’s motion for summary judgment last week, Judge Hamilton relied on the Ninth Circuit’s recent decision in California ex rel. Harris v. Safeway, which held that an agreement did not violate the Sherman Act when it left the parties free to engage in the business at a later date. In this case, “the Promotion Agreement does not restrict or prevent Netflix from engaging in the sale of new DVDs, nor does it prevent Walmart from re-entering the online DVD rental market.”

Additionally, in keeping with Safeway, Judge Hamilton ruled that the plaintiffs had failed to demonstrate that the Agreement would have a negative effect on competition because Walmart’s roughly 57,000 subscribers were “outnumbered by Netflix’s subscriber base by a factor of 39.” Moreover, plaintiffs’ evidence did not show that the companies’ CEOs understood the agreement to be a quid-pro-quo. “[T]he evidence fails to definitively suggest that Walmart’s decision to exit the online DVD rental market was not truly independent,” Judge Hamilton wrote.

Having failed to show the Agreement was a pro se violation of the Act, the plaintiffs next turned to the “rule of reason,” which states that activities may violate the Sherman Act when “anticompetitive aspects of the challenged practice outweigh precompetitive effects.” The plaintiffs claimed that Netflix would have lowered its subscription prices in the absence of an agreement with Walmart.  However, Judge Hamilton found that there was no evidence that Netflix felt threatened by Walmart’s miniscule DVD rental business or that Walmart’s presence in the market swayed Netflix’s choices over pricing. As a result, the plaintiffs could not show an injury in-fact, which is a necessary element of a claim under section 1 of the Sherman Act.

For the same reasons, Judge Hamilton granted summary judgment in favor of the defendants on the section 2 claims, which require a showing that defendants held monopoly power over the market.

Prior to Judge Hamilton’s decision last week, Walmart had already agreed to settle with plaintiffs over its half of the case for $27.5 million. Netflix members who subscribed between May 19, 2005 and Sept. 2, 2011 are eligible to participate in the settlement.

Nicholas Turner is a third year law student at New York Law School.  He is a Notes & Comments editor of Law Review and a John Marshall Harlan Scholar.  Mr. Turner came in second in the 2011 ABA Torts, Insurance, and Compensation Law Section Writing contest.  He was a 2011 Review Editor of the school’s Global Human Rights Bulletin.  Mr. Turner is proficient in French.

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.