Netflix Wins Summary Judgment Dismissal Of Consumer Class Antitrust Claims

Plaintiff Netflix subscribers alleged that Netflix and Wal-Mart violated Sections 1 and 2 of the Sherman Act by entering into to a horizontal market allocation agreement. In re: Online DVD Rental Antitrust Litigation, No. M 09-2029 PJH, Order Granting Motion For Summary Judgment (N.D. Cal. Nov. 22, 2011). Netflix and Walmart entered into a Promotion Agreement under which Netflix would rent but not sell DVDs online, and Walmart would sell but not rent DVDs online. Walmart would promote DVD rentals by Netflix, and Netflix would promote the sale of DVDs by Walmart. The Promotion Agreement stated that Walmart had previously decided to exit the online rental business, which it did after entering into the Agreement. Netflix paid to acquire Walmart rental customers. Netflix had stopped selling DVDs online prior to the creation of the Agreement. The Agreement also stated that Wal-Mart could reenter the online rental business if it chose to do so. Plaintiffs claimed that their injury arose from Walmart's exit from the rental business, which allegedly left Netflix free to charge supracompetitive prices to consumers for DVD rentals, which it allegedly did. After the court certified a plaintiff class of Netflix subscribers and after Walmart had settled out, Netflix sought summary judgment on a number of grounds. The District Court, Phyllis J. Hamilton, J., found against plaintiffs in a 29 page opinion. The court held that plaintiffs could not establish the essential element of fact of injury, and accordingly granted defendant's motion for summary judgment. In the course of its analysis, the court held that the per se rule could not be applied to the Promotion Agreement. Slip opinion at 9-16. The court did not make a definitive ruling under the rule of reason because of its holding that plaintiffs could not establish causal injury-in-fact. Slip op. at 16-19.

Per Se Rule

In rejecting application of the per se rule, the court held that the Agreement was not one "that facially appears to be one that would always or almost always tend to restrict competition and decrease output." Slip op. at 9 quoting National Society of Prof'l Engineers v. United States, 435 U.S. 679, 692 (1978) (test for per se illegality); accord State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). The per se rule applies to "'[c]lassic' horizontal market division agreements [which] are ones in which 'competitors at the same level agree to divide up the market for a given product.'" Slip op. at...