Netflix Faces Class Action in Subscriber DVD Lawsuit

A federal judge granted class-action certification to Netflix Inc. subscribers in their lawsuit against the company and Wal-Mart Stores Inc. for an alleged agreement to monopolize the DVD market.

U.S. District Judge Phyllis Hamilton said that the subscribers bringing suit against the companies in 2009 were “united by common and overlapping issues of fact and law,” in an order dated Dec. 23 and filed in federal court in Oakland, California.

Wal-Mart and the plaintiffs reached a preliminary settlement of the lawsuit that could pay them as much as $40 million in cash or equivalents, according to a motion filed in federal court in Oakland Dec. 14. A hearing on that motion will be Feb. 9. The settlement doesn’t include Netflix.

The plaintiffs charged that Netflix and Wal-Mart conspired in 2005 to divide the market for selling and renting DVDs in order to reduce competition. The companies formed an agreement in which Wal-Mart.com would stop renting DVDs online and Netflix wouldn’t offer them for sale. The agreement came after Blockbuster Inc. began offering DVD rentals online, according to the lawsuits.

“As a result, millions of Netflix subscribers allegedly paid supracompetitive prices,” Hamilton said in her order.

Steve Swasey, a Netflix spokesman, said in a telephone interview that “the case has no merit and we’re going to continue to defend it.” He declined to comment on the Wal-Mart settlement.

‘Fair and Reasonable’

“The plaintiffs believe this settlement is fair and reasonable and they are pleased they were able to reach this resolution with Wal-Mart,” Robert Abrams, one of their attorneys, said in an e-mailed message.

Abrams, who is with Howrey LLP in Washington, said his clients “are pleased with Judge Hamilton’s class certification decision. Plaintiffs also look forward to proceeding with the case against Netflix and resolving it through trial or settlement.”

The trial is set for January 2012, Abrams said.

David Tovar, a Wal-Mart spokesman, didn’t immediately return messages for comment.

According to the lawsuit, the alleged conspiracy began when Reed Hastings, the chief executive officer of Netflix, met John Fleming, then the CEO of Wal-Mart.com, for dinner in January 2005 to discuss how to reduce competition in the DVD market in the U.S. At that time Netflix, based in Los Gatos, California, and Wal-Mart.com were competitors in online DVD rentals.

Netflix fell $3.15, or 1.8 percent, to $176.65 at 1:35 p.m. New York time in Nasdaq Stock Market trading. Wal-Mart, based in Bentonville, Arkansas, dropped 17 cents to $53.90 in New York Stock Exchange composite trading.

The case is In re Online DVD Rental Antitrust Litigation, 09-02029, U.S. District Court, Northern District of California (Oakland).

To contact the reporter on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net

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