FAYETTEVILLE, Ark. – A recently filed class action alleges a conspiracy between Netflix and Wal-Mart allowed Netflix to create a monopoly in the DVD rental market.
The class action claims the two companies entered into an agreement to divide the markets for sales and online rentals of DVDs, forcing consumers to pay higher subscription rates for rental services.
Chicago resident Marci Badgerow, individually and on behalf of others similarly situated, filed the class action against Wal-Mart Stores Inc., Walmart.com USA LLC and Netflix Inc. on Jan. 26 in federal court in the Fayetteville Division of the Western District of Arkansas.
According to the complaint, CEOs Reed Hastings of Netflix and John Fleming of Walmart.com had a series of meetings to discuss online DVD rental and DVD sales markets.
The agreement, formally announced by the companies on May 19, 2005, provided for Walmart.com to stop competing with Netflix in the online DVD rental business and in return, Netflix would stop selling new DVDS and would promote the sales of Wal-Mart's new DVDs.
According to the complaint, Netflix maintains a 75 percent market share of the online DVD rental market with no direct competition from in-store rentals or other methods of DVD distribution.
"Very recently, a Netflix executive told the Wall Street Journal that other types of rental services, such as kiosk and in-store rentals, do not present a direct competitive threat to Netflix," the court document states.
This puts Netflix in the position to control prices and exclude competitors, the complaint argues.
To demonstrate the argument, the suit states Netflix was charging $21.99 in 2004 but reduced its prices to $17.99 when it had competition from Wal-Mart and Blockbuster. In 2005, Wal-Mart dropped its rental plan to $12.97 further pressuring Netflix to reduce its DVD rental prices.
Faced with this competition, Netflix arranged the meetings which led to the rental market agreement with Wal-Mart.
The complaint maintains that Wal-Mart stores actively participated in negotiations with Netflix, and that John Fleming was promoted to Wal-Mart's chief marketing office shortly before the agreement was announced.
"Fleming was responsible for deciding, what the largest, most powerful retailer in history will stock on its shelves, and how much those products will costs. Such decisions, when made at Wal-Mart, can help make or break entire industries," the complaint states.
After announcing the agreement, Wal-Mart discontinued its online DVD rental business and told its subscribers they could be transferred to Netflix. Walmart.com included a link to the Netflix Web site to encourage that transfer.
In addition, the plaintiff argues that the rental market agreement allowed Netflix to raise its subscription rate from $14.99 to $17.99 per month, an "artificially high" price.
The proposed class will include all persons in the United States who paid a subscription fee to Netflix to rent DVDS, on or after May 19, 2005, up to the present.
Questions of law include whether defendants engaged in a contract or conspiracy to allocate markets, unreasonably restrained trade, had the intent for Netflix to create a monopoly and whether the actions by the defendants violated the Sherman Act.
Causes of actions filed against the defendants include illegal market division in violation of Section 1 of the Sherman Antitrust Act and creating, attempting or conspiring to monopolize the online DVD rental market in violation of Section 2 of the Act.
The class action is asking the court to declare the market agreement unlawful, null and void. The class action also seeks three times the amount of damages sustained by the plaintiff and the proposed class, with attorneys' fees and costs.
The proposed class is represented by Fayetteville attorneys Charles M. Kester and Dawn C. Egan of the Kester Law Firm; Chicago attorneys Paul M. Weiss, Jeffrey A. Leon, George K. Lang and Michael J. Lotus of Freed and Weiss LLC; Philadelphia attorneys Stephen A. Weiss and Jonathon Shub of Seeger Weiss LLP; Roseland, N.J., attorneys James E. Cecchi and Lindsey Taylor of Carella, Bryne, Bain, Gilfillan, Cecchi, Stewart and Olstein; and St. Louis attorney Richard J. Burke.
U.S. District Judge Robert T. Dawson will preside over the litigation.
Case No 5:2009cv05023