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Ninth Circuit Affirms Dismissal of Netflix Antitrust Suit

Last Friday, the Ninth Circuit affirmed the dismissal of a multidistrict class action brought by Netflix subscribers who claimed the company conspired with Walmart to dominate the online DVD sales and rental markets. In 2005, Netflix and Walmart entered into a promotion arrangement whereby Walmart agreed to transfer its DVD-rental subscribers to Netflix in exchange for 10% of the revenue and a $36 payment for each subscriber Netflix gained through referral. Netflix also agreed to promote Walmart’s DVD sales in exchange for the referrals.

Antitrust lawsuits were subsequently filed against both companies. Walmart settled with the plaintiffs for $27 million. In a separate opinion issued on Friday, the Ninth Circuit upheld the Walmart settlement as being consistent with the Class Action Fairness Act. Netflix, on the other hand, did not enter into a settlement agreement with the plaintiffs. The plaintiffs, individuals representing a class of Netflix subscribers, contended that Netflix’s arrangement with Walmart violated Sections 1 and 2 of the Sherman Act by illegally allocating and monopolizing the online DVD-rental market. The plaintiffs alleged antitrust injury-in-fact based 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 arrangement with Walmart. The district court ultimately granted summary judgment in Netflix’s favor. The district court held that there was no per se antitrust violation and that Netflix subscribers failed to show they were injured by the promotion arrangement.

The Ninth Circuit agreed and held that the district court properly determined no reasonable juror could conclude Netflix was going to lower its subscription price in response to Walmart when: “(1) Netflix had never lowered its prices in response to Walmart at any time and (2) Netflix did not lower its price in the face of [a] price cut by Blockbuster, which was objectively a greater competitive threat.” The court also reached this conclusion by taking a close look at the evidence offered by the parties. Regarding Netflix’s evidence, the court noted that Walmart never amassed more than 60,000 subscribers to its DVD-rental business, while Netflix had two million subscribers in mid-2004. Further, Walmart gained a mere 5,000 subscribers per quarter between the time it entered the market in June 2003 and the announcement of the promotion arrangement in March 2005. Conversely, Netflix was adding 250,000 subscribers per quarter during this same time period. Walmart’s business began to decline in 2004, and by mid-2004, it was clear to Walmart that the venture was going to fail. Walmart came to this conclusion based on “an already anemic subscriber base [and] a host of factors, including [its] inability to match Netflix’s guaranteed 1- to 2-day delivery and [its] confusing, poorly designed website.” The Ninth Circuit further considered evidence that other market players, including Netflix, Blockbuster, and Amazon, knew that Walmart’s DVD-rental business was lagging and did not consider Walmart a threat.

The evidence offered by the subscribers, on the other hand, was simply insufficient. For instance, internal Walmart and Netflix documents purportedly showing that Walmart was perceived as a viable threat in the market failed to support the plaintiffs’ claims because they predated Walmart’s entry into the market and subsequent poor performance. The court was also dismissive of the plaintiffs’ reliance on Walmart documents describing its service as successful because those documents were merely “meant for promotional and motivational purposes, not performance analysis, and the memos do not contain any hard market data.” In fact, the Ninth Circuit concluded that much of the plaintiffs’ documentary evidence supported Netflix’s position. Finally, the Ninth Circuit determined that the subscribers’ expert testimony was unreliable because it was “contrary to the undisputed market facts.” The court noted that the expert “opinions are founded on speculation about Walmart’s potential to remain in the market based on its general retail strength, untethered to its actual performance in this particular market.”

Thus, the Ninth Circuit’s analysis of the parties’ evidence stresses the importance for Sherman Act litigants to support their claims of antitrust injury-in-fact with market facts, and expert testimony will not serve as a viable substitute for such data if the testimony is economically unreasonable in light of the market facts.