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In re Online Dvd-Rental Antitrust Litigation

United States Court of Appeals, Ninth Circuit

February 27, 2015

IN RE ONLINE DVD-RENTAL ANTITRUST LITIGATION, ANDREA RESNICK; BRYAN EASTMAN; AMY LATHAM; MELANIE MISCIOSCIA; STAN MAGEE; MICHAEL OROZCO; LISA SIVEK; MICHAEL WIENER, Plaintiffs-Appellants,
v.
NETFLIX, INC.; WAL-MART STORES, INC.; WALMART.COM USA LLC, Defendants-Appellees. IN RE ONLINE DVD-RENTAL ANTITRUST LITIGATION, ANDREA RESNICK; BRYAN EASTMAN; AMY LATHAM; MELANIE MISCIOSCIA; STAN MAGEE; MICHAEL OROZCO; LISA SIVEK; MICHAEL WIENER, Plaintiffs-Appellants,
v.
NETFLIX, INC., Defendant-Appellee, and WAL-MART STORES, INC.; WALMART.COM USA LLC, Defendants. IN RE ONLINE DVD-RENTAL ANTITRUST LITIGATION, ANDREA RESNICK; AMY LATHAM; MELANIE MISCIOSCIA; STAN MAGEE; MICHAEL OROZCO; LISA SIVEK; MICHAEL WIENER; BRYAN EASTMAN, Plaintiffs-Appellees,
v.
NETFLIX, INC., Defendant-Appellant, and WAL-MART STORES, INC.; WALMART.COM USA LLC, Defendants

Argued and Submitted, San Francisco, California: February 13, 2014.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Appeal from the United States District Court for the Northern District of California. D.C. No. 4:09-md-02029-PJH. Phyllis J. Hamilton, District Judge, Presiding.

SUMMARY[**]

Antitrust

The panel affirmed the district court's summary judgment and affirmed in part and reversed in part its award of costs in consolidated antitrust actions arising out of a promotion agreement whereby Walmart transferred its online DVD rental subscribers to Netflix, and Netflix agreed to promote Walmart's DVD sales business.

The plaintiffs, individuals representing a class of Netflix subscribers, contended that this arrangement violated § § 1 and 2 of the Sherman Act by illegally allocating and monopolizing the online DVD-rental market. The panel held that the subscribers did not raise a triable issue of fact as to whether they suffered antitrust injury-in-fact on a theory 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.

In light of Taniguchi v. Kan.Pac. Saipan, Ltd., 132 S.Ct. 1997, 182 L.Ed.2d 903 (2012), which underscored the narrow scope of taxable costs under 28 U.S.C. § 1920, the panel affirmed in part and reversed in part the district court's cost award. Finding persuasive the reasoning of the Third, Fourth, and Federal Circuits, the panel held that certain charges for " data upload" and " keywording" were not recoverable as costs for making copies under § 1920(4). The panel remanded for consideration of whether costs were properly awarded for " professional services." The panel concluded that of the costs challenged as non-taxable under § 1920(4), only those costs attributable to optical character recognition, converting documents to TIFF, and " endorsing" activities--all of which were explicitly required by the plaintiffs--were recoverable on the record before it. The panel held that the district court did not abuse its discretion in awarding costs for preparation of visual aids, for TIFF conversions, and for copying of paper documents. The district court also did not abuse its discretion in declining to award Netflix costs for production of certain PowerPoint documents.

Robert G. Abrams and Gregory Lynn Baker, Baker Hostetler LLP, Washington, D.C.; William G. Caldes, Eugene A. Spector, and Jonathan M. Jagher, Spector Roseman Kodroff & Willis, P.C., Philadelphia, Pennsylvania; Merrill G. Davidoff, H. Laddie Montague, Jr., Sarah Rebecca Schalman-Bergen, and David Francis Sorensen, Berger & Montague, P.C., Philadelphia, Pennsylvania; Guido Saveri and Lisa Saveri, Saveri & Saveri, Inc., San Francisco, California; Todd A. Seaver and Joseph J. Tabacco, Jr., Berman DeValerio; San Francisco, California, for Plaintiffs-Appellants/Cross-Appellees.

Jeffrey Bank, Tiffany L. Lee, Jonathan M. Jacobson and David Reichenberg, Wilson Sonsini Goodrich & Rosati, New York, New York; Keith Edward Eggleton, Dylan James Liddiard, Maura L. Rees, and Anthony Weibell, Wilson Sonsini Goodrich & Rosati, Palo Alto, California; Scott Sher, Wilson Sonsini Goodrich & Rosati, Washington, D.C.; attorneys for Defendant-Appellee/Cross-Appellant Netflix.

Lawrence C. DiNardo and Paula W. Render, Jones Day, Chicago, Illinois; Richard Wolf Hess and Neal Manne, Susman Godfrey, LLP, Houston, Texas; Kathryn Parsons Hoek and Marc M. Seltzer, Susman Godfrey L.L.P., Los Angeles, California; Stephen E. Morrissey and Genevieve Vose, Susman Godfrey LLP, Seattle, Washington, for Defendants Wal-Mart Stores, Inc. and Walmart.com USA LLC.

Before: Sidney R. Thomas, Chief Judge, Stephen Reinhardt, Circuit Judge, and Lloyd D. George, Senior District Judge.[*] Opinion by Chief Judge Thomas.

OPINION

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Sidney R. Thomas, Chief Judge:

These consolidated antitrust actions arise out of an agreement (" Promotion Agreement" ) between Netflix and Walmart[1] whereby Walmart transferred its online DVD-rental subscribers to Netflix, and Netflix agreed to promote Walmart's DVD sales business. The plaintiffs, individuals representing a class of Netflix subscribers (" Subscribers" ), contend that this arrangement violated § § 1 and 2 of the Sherman Act by illegally allocating and monopolizing the online DVD-rental market. The Subscribers' theory of injury is 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.

We agree with the district court that the Subscribers have not raised a triable issue of fact as to whether they suffered antitrust injury-in-fact, and we affirm the district court's grant of summary judgment. We vacate in part the district court's cost award, and remand for consideration in light of this opinion.

I

In 1997, Reed Hastings and Marc Randolph co-founded Netflix, the first internet-based DVD rental service. Netflix

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commenced operations in 1998, offering customers through its website the option to rent or buy DVDs by mail. Netflix initially offered DVD rentals on a pay-per-rental basis, but soon replaced that system with a monthly subscription model. In 2000, it discontinued its DVD sales business altogether. Several Netflix subscription plans permitted customers to rent an unlimited number of DVDs, differing in how many DVDs a customer could borrow at a given time. For example, in 2003, Netflix offered its " 3U" plan, which permitted three DVDs to be rented at a time, for $19.95 per month, while its " 4U" plan cost $24.95 per month and allowed four DVDs at a time. Netflix's DVD-rental business flourished under the new model, and by 2005 it had a 77.8% share of the online DVD-rental market, rising to 92.3% by 2010.

Netflix faced no serious competition in its early years. However, in 2003, Walmart, one of the nation's largest retail companies, launched its own online DVD-rental service. Walmart initially offered its 3U plan for $18.76 a month. Although Walmart's 3U plan was cheaper than Netflix's ($19.95 per month), Netflix did not alter its 3U plan price for a full year. When Netflix eventually did change its 3U price, in June 2004, it increased the price to $21.99 per month.

Two months later, in August 2004, Blockbuster, the largest store-based DVD rental company, launched its own online DVD rental service, becoming the third major competitor in the market. Blockbuster offered its 3U plan at $19.99 per month and included with it two free coupons per month for in-store rentals.

In October 2004, in apparent response to rumors that Amazon planned to enter the online DVD-rental market as well, Netflix announced that it would lower the price of its 3U plan from $21.99 to $17.99 per month. Blockbuster responded the next day by announcing that it would cut its 3U price to $17.49 per month. In November 2004, Walmart reduced its 3U price to $17.36 per month. In December 2004, Blockbuster again reduced the price of its 3U plan, this time to $14.99 per month--the lowest 3U plan price in the market. Netflix maintained its $17.99 price until August 2007, when it lowered the price to $16.99.

During this period, Walmart's online DVD-rental business performed poorly. Walmart never had more than 60,000 subscribers. In contrast, in mid-2004 Netflix had over 2 million subscribers, and Blockbuster had 400,000 subscribers. From June 2003, when Walmart opened its online DVD-rental business, until it signed the Promotion Agreement with Netflix in March 2005, Walmart gained an average of 5,000 subscribers per quarter. Netflix added 250,000 subscribers per quarter over the same period. Walmart's subscriber share peaked at 2.4% in early 2004 and declined from that point. By February 2005, Walmart had only a 1.4% market share. In contrast, Netflix controlled 77.8% of the market in 2005. Walmart lost 7,000 subscribers during the final quarter of 2004.

In October 2004, Netflix's CEO Reed Hastings sought a meeting with Walmart CEO John Fleming. Hastings testified that he requested the meeting because he hoped to form a partnership with Walmart that would strengthen Netflix's position before Amazon entered the market. Hastings was aware that Walmart's online DVD-rental service was performing poorly, and hoped that Walmart might therefore be open to a partnership. The two CEOs met on October 27, 2004. Hastings recounts that Walmart seemed uninterested in a deal at the time and that there was no discussion about Netflix selling new

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DVDs. Fleming provided a similar account. No agreement was reached at the meeting.

Unbeknownst to Hastings, Walmart was entertaining other suitors. Walmart considered a potential partnership with Yahoo!, and a draft partnership agreement to that effect was prepared as early as December 1, 2004. Walmart considered a similar deal with Microsoft.

Walmart began considering alternative strategic options for its online DVD-rental business, and ultimately looked in depth at four possibilities: (1) continuing to run the business with a low subscriber amount, (2) aggressively building the business, (3) partnering with Yahoo!, and (4) exiting the online DVD-rental business. After carefully analyzing each option, Walmart concluded that none would be profitable and that, in fact, it would probably suffer multi-million dollar financial losses under all four scenarios.

Walmart made the final decision to exit the market by early January 2005. It established an impairment reserve to cover any losses incurred from the closure and stopped accepting new subscribers for its 3U and 4U plans. By February 2005, Walmart had incurred $3 million of costs associated with shuttering its online DVD-rental business. By March 2005, Netflix had 3 million subscribers. Walmart had 52,000. Walmart employees speculated that Walmart's online DVD-rental business did not succeed because Walmart devoted insufficient resources to marketing, could not match Netflix's guaranteed one- to two-day delivery, had a poorly designed website, and offered a relatively limited selection of DVDs.

Aware of Walmart's market share decline, but unaware of its plan to discontinue its online DVD-rental business, Hastings renewed his efforts to meet with Fleming. The two CEOs met on February 9, 2005. Fleming did not inform Hastings that Walmart had decided to leave the online DVD-rental business. Although no agreement was reached at the meeting, Hastings's efforts did eventually bear fruit. By March 17, 2005, Hastings and Fleming had reached a verbal agreement, the key terms of which were that: (1) Walmart DVD-rental subscribers and their rental queues would be transferred to Netflix, for those customers who so chose, free of charge, and customers would be offered the same subscription price for one year; (2) Walmart would promote on its website Netflix's online DVD-rental business; (3) Netflix would pay Walmart a 10% revenue share for each subscriber who transferred, as well as a $36 bounty for each new Netflix subscriber gained from Walmart's referrals; and (4) Netflix would promote Walmart's DVD sales business.

These key terms were incorporated into the Promotion Agreement. The Promotion Agreement did not include a covenant not to compete, did not prohibit Netflix from selling new DVDs, and explicitly permitted Walmart to offer an online DVD-rental service.[2] The Promotion Agreement was publically announced May 19, 2005.

Despite the earlier rumors, Amazon did not initiate an online DVD-rental service. Thus, after Walmart's exit in mid-2005, Netflix and Blockbuster remained as the two major competitors in the market. Blockbuster eventually filed for bankruptcy in September 2010, leaving Netflix as the sole major competitor, with over 90% of the online DVD-rental market.

Netflix kept its 3U price at $17.99 from November 2004 to August 2007, when it

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reduced the price to $16.99, which is where it remained through the end of the class period. During the class period, Netflix began offering video streaming over the Internet, and Netflix has since focused on developing that aspect of its business.

The Subscribers filed several actions, alleging antitrust violations by Netflix, Walmart Stores, and Walmart.com, and seeking to represent a class of Netflix subscribers. The actions were consolidated and an amended complaint filed. The thrust of the Subscribers' complaint is that the Promotion Agreement reflected an illegal allocation of the online DVD-rental market. The Subscribers assert four causes of action: (1) a § 1 Sherman Act violation for unlawful market allocation of the online DVD-rental market (against all defendants); (2) a § 2 Sherman Act claim for monopolization of the online DVD-rental market (against Netflix); (3) a § 2 Sherman Act claim for attempted monopolization of the online DVD-rental market (against Netflix); and (4) a § 2 Sherman Act claim for conspiracy to monopolize the online DVD-rental market (against all defendants).

The district court granted the Subscribers' motion for certification of a litigation class, defining the class as " [a]ny person or entity in the United States that paid a subscription fee to Netflix on or after May 19, 2005 up to and including [December 23, 2010,] the date of class certification." The district court subsequently approved Walmart's settlement with the class.

Netflix moved for summary judgment pursuant to Federal Rule of Civil Procedure 56 as to all claims asserted against it. The district court granted the motion, concluding that there was no per se antitrust violation, and that the Subscribers had failed to raise a triable issue as to antitrust injury-in-fact. The district court also excluded tendered evidence of agreements Netflix had with Amazon, Best Buy, and ...


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