Wal-Mart Stores, Inc. had a DVDs-by-mail rental business that was in competition with Netflix. In May 2005, Wal-Mart decided to pull out of the DVDs-by-mail rental industry and struck an agreement with Netflix: Wal-Mart would encourage its members to transfer their service to Netflix and in exchange Netflix would encourage its members to buy Wal-Mart DVDs. Wal-Mart was expressly authorized to re-enter the DVD-by-mail rental industry anytime it wanted.

In 2009, a group of disgruntled Netflix users filed a lawsuit alleging that the two companies had an agreement to carve up the DVD rental and sales market and to not compete with each other in their respective markets. The plaintiffs filed claims under both Section 1 and Section 2 of the Sherman Act. The case was certified as a class action in 2010 and Wal-Mart decided to settle in September 2011. Wal-Mart agreed to setup a $27.25 million settlement fund in cash and Wal-Mart gift cards. The class includes anyone who had a Netflix subscription between May 19, 2005 and September 2, 2011. (Claims can be made between now and February 14, 2012 at http://onlinedvdclass.com/) Wal-Mart has not admitted any wrong doing and instead maintains “that the lawsuit has no basis.”

This position may have been bolstered when U.S. District Judge Phyllis Hamilton in Oakland, California, ruled on November 23, 2011 that the plaintiffs failed to show the agreement was a constraint on trade or that it led to higher prices as it relates to the claims against Netflix.

The Sherman Act uses broad language and has been interpreted by the Courts in a common law fashion. The Sherman Act Section 1 states that “[e]very contract . . . in restraint of trade . . . among the several states . . . is declared to be illegal.” On its face, this language would make almost every contract illegal because virtually all restrain trade in some way. Through case law the courts have created a more defined set of rules for Section 1 claims, limiting them to those that “unreasonably” restrain trade. The courts have adopted a heavy economic view of what falls under “unreasonably” but if consumers are harmed the court is more likely to find the restraint is unreasonable. The allegations here allege that Wal-Mart and Netflix allocated the market between them and this is an unreasonable restraint on trade.

Plaintiffs additionally made a Sherman Act Section 2 claim, which makes monopolization (not monopoly) and attempts or conspiracy to monopolize illegal. The courts have interpreted this section in a common law fashion as well, finding that there must be a monopoly and there must also be bad acts to maintain the monopoly. The plaintiffs here allege monopolization of the DVDs-by-mail market against Netflix and another section 2 claim for conspiracy to monopolize the online DVD rental market against Wal-Mart and Netflix.

Wal-Mart has agreed to settle its claims but it has not yet been approved by the court. Netflix decided to fight on and won its case when it was summarily dismissed. It is unclear whether plaintiffs will appeal the District Court’s ruling.

Wal-Mart may be re-thinking its settlement proposal now. But there are still major advantages for Wal-Mart in the settlement. Because the Wal-Mart settlement is for Wal-Mart gift cards, which will likely be less than a few dollars, it could drive customers to their store to use the gift card. (If half of Netflix subscribers submit a claim, it would work out to around $1.50 per claimant.) This could work out as an advertising campaign for Wal-Mart, driving customers to its store with a few dollars on a gift card and who will likely spend more than the gift card. Wal-Mart can essentially settle its legal claims by a court ordered advertising campaign.

It almost sounds like Wal-Mart and Netflix both came out winners.

– Nicholas Barry

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7 Responses to Wal-Mart Pays Settlement in Anti-Trust Case While Netflix Fights and Wins

  1. dave says:

    as walmart decided to settle netflix didnt so u have to wait until they do to get your giftcard wonder if when netflix settles walmart will decide not too and thus we have a 10 year long fiasco to get 4 dollars.

  2. Kendall Short says:

    I wonder how Wal-Mart’s relationship with Redbox, allowing Redbox to place its kiosks at the entrances of Wal-Mart stores, might have impacted this settlement (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aa7ajcyDJc74). At the very least, now when these claimants are redeeming their $1.50 gift cards they will be walking right past a competitor’s DVD rental kiosk, which will harm Netflix’s sales even more. As Christina pointed out, Netflix has been suffering from increasing competition, and it recently lost over 800,000 customers (http://www.usatoday.com/tech/news/story/2011-10-24/netflix-loses-subscribers/50895290/1) due to price hikes and the loss of the Starz movies (http://latimesblogs.latimes.com/entertainmentnewsbuzz/2011/09/netflix-to-lose-starz-its-most-valuable-source-of-new-movies.html). Netflix may have won a legal victory on summary judgment, but Wal-Mart’s settlement appears ultimately to benefit itself financially while adding one more hit to the ailing Netflix’s bottom line.

  3. Caroline Fleming says:

    Great post. I’m wondering what the process is for submitting a claim. As one of the posts above mentions, do you just get an e-mail with a form to fill out and submit either online or by mail? If enough people ignore the e-mail, would the cash/gift card amount increase for those who choose to submit? Even if it would, I guess it would not be much of an increase. But still, you can rack up at Wal-Mart for $1.50!

  4. Tom B. says:

    Great post – and it clears up the email I recently received from Netflix about Wal-Mart’s settlement. To me, the agreement between Netflix and Wal-Mart seems more like a joint-venture relationship than collusion. As far as I’m aware, Wal-Mart was never a big player in the DVD rental market and Netflix does not sell DVDs. I certainly agree with your assessment of the Wal-Mart settlement. It seems the only winners here are probably the plaintiff’s attorneys (it certainly isn’t Netflix customers who stand to gain roughly $1.50).

  5. Christina Santana says:

    Nick,

    I really enjoyed your post! Your analysis of Wal-Mart’s settlement appears to be spot on, as Wal-Mart’s proposed settlement does seem to be the functional equivalent of a court-ordered advertising campaign. Wal-Mart’s decision to draft the settlement in this manner clearly signals its belief that the case against it was not very strong. Indeed, from an ex ante perspective, it would seem highly unlikely that a court would find either monopolization or an unreasonable restraint of trade in this context. Significantly, Netflix has faced a lot of competition from alternative movie rental companies (such as Redbox, onDemand, Blockbuster Express) since Wal-Mart and Netflix made their agreement. This competitive environment would make proving the plaintiffs’ case a daunting task.

    Christina

  6. Sophia Behnia says:

    Great post! I can’t believe the plaintiffs agreed to a settlement with Wal-Mart gift cards. I agree that it seems like they are letting Wal-Mart get away easily by using their settlement as a way to get people into their stores. You mentioned in your post that there was a cash portion to the settlement as well — how much was cash and how much were gift cards? Either way, it doesn’t seem like there was an unreasonable restraint on trade or a monopoly here. Under the Wal-Mart/Netflix agreement, customers weren’t forced to use Wal-Mart or Netflix, they could still go to many other places to get their DVDs (like Redbox!).

    • Nick B. says:

      Hey Sophia,

      From what I read, you would get cash if you submited the reuqest form, by mail. Which would cost at least 44 cents (not counting the envelope and form itself) to get maybe $1.00-$1.50. If you submit online, then you get a Wal-Mart gift card for the final amount and saving the 44 cents.

      I think most people will opt for the gift card. Especially Netflix users who are probably not prone to using snail-mail.

      Nick