In Surprise Ruling, Judge Throws Out Netflix Price-Fixing Lawsuit

A week ago, millions of Netflix (NSDQ: NFLX) subscribers received an email saying they would receive a payment over price-fixing in the online movie market. They will still be paid — just not by Netflix after an unusual bit of good news for the company.

In a ruling handed down yesterday in San Francisco, a federal judge dismissed a class action suit that accused Netflix of colluding with in 2004 to divvy up the DVD market. According to the complaint, the CEO’s of the two companies struck a deal over dinner in which Netflix agreed not to sell DVD’s if Wal-Mart (NYSE: WMT) said it wouldn’t rent them. Lawyers for the plaintiffs said that the scheme resulted in Netflix subscribers overpaying for DVDs between 2005 and 2010.

The dismissal is a surprise because Netflix’s alleged co-conspirator agreed to settle the suit earlier this year. The email last week announced that Wal-Mart had set aside $27 million and provided a website that will soon announce the terms of collection.

Ordinarily, in this situation, the other member of an alleged price-fixing conspiracy would also reach a settlement but Netflix fought on and began preparing for a jury trial scheduled for early next year. The decision to dig in appears to have paid off in light of yesterday’s decision.

In her ruling, U.S. District Judge Phyllis Hamilton said the existence of a promotion agreement between the two companies coupled with Wal-Mart’s decision to exit the online DVD market shortly after, was not enough to establish an automatic antitrust violation. She added that a court would normally determine the effects of the agreement on the market — but there was no reason to do so.

The crux of the court’s decision is that Wal-Mart’s market share was simply too small to have had any effect on Netflix’s pricing strategy. The decision, which provides an interesting window into what was then a nascent online DVD business, goes on to say that the retail giant only ever achieved 1.5% of the market even at its peak. It said this simply could not have affected Netflix at a time when Blockbuster (NSDQ: DISH) had a 17% market share and Amazon (NSDQ: AMZN) was emerging as a major competitor. As the court explains:

no reasonable juror could believe that Netflix would have lowered its 3U price to $15.99 in response to continued competition from Walmart, whose 3U price was set at $17.49 – particularly when those facts demonstrate that Netflix chose not to lower its price in the face of Blockbuster’s $14.99 price cut, despite the fact that Blockbuster had a higher market share than Walmart.

The ruling is a clean sweep for Netflix which leaves the question — what was Wal-Mart thinking? Why did the retail giant, whose ferocious legal team just fought a gender discrimination case right to the Supreme Court, decide to cave in? This week’s ruling seems to provide more support to the theory that Wal-Mart used the settlement process to gain access to Netflix customers at a time when it’s making a fresh attempt to move in on the online DVD market through its recently-acquired streaming service Vudu. As we wrote about earlier, Netflix has spent months trying to keep Wal-Mart away from its email list and to portray the settlement news as a cynical marketing ploy.

As for consumers, their hope for a second pay-out is now dashed. All they have left to savor is the original $27 million — minus 25% lawyers’ fees — which will be divided among the 40 million eligible claimants who step forward. Don’t spend it all in one place.

Netflix dismissal ruling
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