Netflix Improperly Favored by Post Office, Court Says

Netflix Inc. (NFLX), the largest U.S. mail- order movie-rental service, got special treatment from the U.S. Postal Service, which improperly discriminated against other mail-order companies, a federal appeals court ruled.

In a challenge filed by GameFly Inc. (GFLY), the video-game rent- by-mail service, a three-judge panel in Washington today ordered the Postal Regulatory Commission to cure “all discrimination” against the company or explain why treating GameFly different from Netflix is reasonable. The ruling may lead to changes in the way Netflix movies are handled by the postal service.

GameFly sued the postal commission in May 2011, challenging its response to allegations that the post office was giving Netflix special treatment by manually sorting its DVDs free of charge. Without similar handling, Los Angeles-based GameFly could be subject to an “epidemic” of broken discs, the appeals court said today.

“The Postal Service has saved Netflix -- apparently its biggest DVD mailer customer -- from this crippling otherwise industrywide problem by diverting Netflix mail from the automated letter stream, shifting it to specially designated trays and containers, hand culling it and hand processing it,” U.S. Circuit Judge David Sentelle wrote. “Rather obviously, this is not without cost to the Postal Service.”

Jonathan Friedman, a spokesman for Los Gatos, California- based Netflix, declined to comment on the ruling.

The U.S. Postal Service is analyzing the decision and its implications, David Partenheimer, a spokesman for the service, said in an e-mail.

“The Postal Service believes that the different treatment that we provided to our customers was fully justified and reasonable, and consistent with the law,” he said.

The case is GameFly Inc. v. Postal Regulatory Commission, 11-1179, U.S. Court of Appeals for the District of Columbia (Washington).

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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