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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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