Antitrust Law Daily Subscribers did not show injury from Netflix-Walmart promotion pact
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Friday, February 27, 2015

Subscribers did not show injury from Netflix-Walmart promotion pact

By Jeffrey May, J.D.

The U.S. Court of Appeals in San Francisco has refused to revive the claims of Netflix subscribers, challenging a 2005 “Promotion Agreement” between Netflix and Walmart regarding DVD sales and rentals. The complaining subscribers failed to raise a triable issue of antitrust injury-in-fact resulting from Walmart's transfer of its poorly-performing, online DVD-rental subscribers to Netflix in exchange for Netflix agreeing to promote Walmart’s DVD sales business. Summary judgment in favor of Netflix was affirmed. Separately, the appellate court upheld a $27,250,000 class action settlement between Walmart and the Netflix DVD subscribers (In re: Online DVD Rental Antitrust Litig., February 27, 2015, Thomas, S.).

The subscribers contended that the promotion agreement violated Sections 1 and 2 of the Sherman Act by illegally allocating and monopolizing the online DVD-rental market. According to the appellate court, the subscribers’ theory of injury was that they paid supracompetitive prices for one of Netflix's subscription plans because Netflix would have reduced the price of that plan but for its allegedly anticompetitive conduct. However, the subscribers failed to adduce evidence raising a triable issue of fact that if Walmart had remained in the market, Netflix would have reduced its prices. Internal company memos, news articles, and unsupported expert testimony did not create a triable issue as to antitrust injury-in-fact. Because the subscribers had not shown injury-in-fact, the appellate court did not reach the merits of the four antitrust claims.

Cost award. After affirming summary judgment, the appellate court turned to a dispute over the cost award for discovery expenses. The court reversed the award to Netflix of some of the costs that the subscribers challenged as “non-recoverable.” Netflix had been awarded $710,194 for discovery-related costs out of a total request of $744,740. Of the $317,616 challenged by the subscribers as non-taxable under 28 U.S.C. §1920(4), only costs attributable to optical character recognition, converting documents to TIFF format, and “endorsing” activities—all of which were explicitly required by subscribers—were deemed recoverable. The appellate court remanded for further consideration of some of those costs pursuant to a narrow construction of §1920(4).

“A narrow construction of § 1920(4) requires recognition that the circumstances in which a copy will be deemed `necessarily obtained' for use in a case will be extremely limited,” the court noted. “That a chosen `document production process' requires the creation of a copy does not establish that the copy is necessarily obtained for use in the case.”

Class action settlement. In a separate opinion, the appellate court affirmed approval of a settlement between Walmart and the Netflix DVD subscriber class, despite assertions that a gift card portion of the settlement constituted a coupon settlement, requiring heightened scrutiny under the Class Action Fairness Act (CAFA) and a re-evaluation of the attorney fee award. The settlement fund included both a “cash component” and a “gift card component.” The cash component was to fund attorney fees and expenses, costs of notice and administration, and $5,000 incentive payments to class representatives (totaling $45,000). The amount remaining constituted the gift card component, which was used to provide class members with either transferable gift cards that could only be used at the Walmart website or the cash equivalent of a gift card.

In response to the notice of the settlement, 1,183,444 claims were submitted, with 744,202 requests for gift cards and 434,253 for the equivalent value in cash. Divided among almost 1.2 million claims, the gift card component would provide claimants with roughly $12 each. More than 700 class members opted out of the class, and 30 lodged objections. Six objectors appealed approval of the settlement and fee award.

The district court properly decided that the portion of the $27,250,000 settlement to be paid in Walmart gift cards was not a “coupon settlement” within the meaning of CAFA, according to the appellate court. Thus, the district court did not need to apply CAFA scrutiny to the case. Further, the district court did not abuse its discretion in its analysis, explanation, and approval of class counsels’ request for attorney fees in the amount of $6,812,500 (25% of the total fund of $27,250,000).

These cases are Nos. 11-1803412-15705.

Attorneys: Theodore H. Frank (Center for Class Action Fairness), Joseph Darrell Palmer (Law Offices of Darrell Palmer PC), and Christopher A. Bandas (Bandas Law Firm, PC) for Theodore H. Frank, Jon M. Zimmerman, Edmund F. Bandas, Maria Cope, John Sullivan, and Tracey Klinge Cox. Todd A. Seaver (Berman DeValerio) for Andrea Resnick; Bryan Eastman; Amy Latham; Melanie Miscioscia; Stan Magee; Michael Orozco, Lisa Sivek, and Michael Wiener. Jeffrey Bank (Wilson Sonsini Goodrich & Rosati) for Netflix, Inc. Lawrence C. DiNardo (Jones Day) and Richard Wolf Hess (Susman Godfrey, LLP) for Wal-Mart Stores, Inc.

Companies: Netflix, Inc.; Wal-Mart Stores, Inc.

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