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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 10, quoting California v. Safeway, Inc., 651 F.3d 1118, 1133 (9^th Cir. 2011) (citation omitted).

Evidence supported Netflix’s contention that Walmart considered its rental business to be a failure and determined on its own to withdraw from that business, rather than withdrawing from the rental market as a quid pro quo in exchange for Netflix’s agreement not to sell DVDs in competition with Walmart. The court noted that Walmart had 1.5 percent of the DVD rental business, while Netflix had seventy percent and Blockbuster had the balance. Walmart’s minimal market presence made it unlikely that its withdrawal would restrict competition, particularly when Blockbuster would continue to provide competition. Slip op. at 15. Netflix adduced credible evidence to show that the Agreement resulted in “increased output in rentals,” and to support its contention that “the eventual agreement between the parties reflected Netflix’s desire to capitalize on Walmart’s independent realization that its online DVD rental service was not profitable, and to profit from such realization by negotiating terms upon which Netflix could acquire Walmart’s existing subscriber base and then improve upon this acquisition with cross-promotional efforts.” Slip op. at 14. There was no legal authority “clearly establishing the manifestly anticompetitive nature of joint promotion agreements such as the one in question.”  Id. at 16. The court refused to treat the Agreement as a “naked” market allocation agreement, and therefore declined to apply the per se rule of illegality.

Rule Of Reason

When arguing for liability under the rule of reason, plaintiffs continued to maintain that Walmart’s withdrawal from the rental market was a quid pro quo for Netflix agreeing not to compete in the DVD sales market. They also adduced evidence that assertedly supported their contention that the online DVD rental market was negatively impacted as a result of the Agreement, as measured by lower output and unresponsiveness to consumer preference. They claimed that “Walmart was poised to rapidly grow its subscriber base via a major deal with Yahoo! and gain traction in the DVD rental market.” Slip op. at 18. Netflix countered with evidence assertedly showing that it had lowered prices and improved service since entering into the Agreement, together with showing that consumers benefitted from the Agreement and that “Walmart’s significance to the market and ability to impact the market was minimal.” Slip op. at 17.

The court did not reach the issue of whether the Promotion Agreement and the defendants’ conduct violated the rule of reason. This was because “plaintiffs have not, and cannot demonstrate, a triable issue as to competitive injury.” Id. at 18. 

Fact Of Injury

Plaintiffs claimed that Netflix would have lowered prices had Walmart remained in the rental market. Netflix argued that Walmart was an insignificant competitor in the rental market, and that neither its exit nor its participation on the market had any impact on Netflix’s pricing.

Plaintiffs provided internal Netflix documents reflecting concern that Walmart’s presence had prevented Netflix from raising prices. E.g., Slip op. at 20 (Netflix memo discussing potential price increase and saying that Netflix “didn’t want to risk it while Walmart [was] still lurking”). Internal emails from both “Netflix and Walmart purportedly demonstrate[ed] that both companies viewed Walmart as a significant competitor to Netflix.” Slip op. at 21. Plaintiffs also adduced expert testimony to show that Walmart exhibited downward pricing pressure on Netflix that would have forced Netflix to reduce prices. Id. at 21-22.

Netflix provided evidence to show that, among other things:  no one in the online DVD rental business based pricing decisions on what Walmart did; that objective evidence showed that Walmart failed to exert any pricing pressure on Netflix; that Walmart’s share of the online DVD rental business was de minimus; that Netflix did not lower its prices when Walmart had entered the market; and that Netflix did not lower prices in the face of a price cut by Blockbuster. Slip op. at 22-24. Further, plaintiffs’ expert “concedes that no competitors responded competitively to Walmart in online DVD rental in pricing terms.” Id. at 24.

The named plaintiffs in Wal-Mart alleged that Wal-Mart’s local store managers exercised their discretion over pay and promotion matters in a way that disproportionately favored men over women. Plaintiffs alleged that Wal-Mart itself was liable under Title VII because Wal-Mart knew its managers were treating men and women differently but refused to do anything about it. According to plaintiffs, Wal-Mart’s inaction gave rise to a “corporate culture” of bias against women that affected each and every female Wal-Mart employee. (Slip Op. at 4).

The District Court and Ninth Circuit both held that the prerequisites to class certification under Federal Rule of Civil Procedure 23(a) — numerosity, commonality, typicality, and adequacy — were satisfied. The Supreme Court reversed, holding that commonality was lacking because plaintiffs failed to prove the existence of common “questions of law or fact.” Plaintiffs had presented three types of evidence to establish commonality: (1) “statistical evidence about pay and promotion disparities between men and women” at Wal-Mart; (2) “anecdotal reports of discrimination from about 120 of Wal-Mart’s female employees”; and (3) expert testimony from sociologist Dr. William Bielby, who conducted a “social framework analysis” of Wal-Mart’s culture and practices. (Slip Op. at 5-6). The Court held that none of this evidence constituted “significant proof” of a “general policy of discrimination” at Wal-Mart, as required to establish commonality in Title VII cases. (Slip Op. at 12-13) (the other method of establishing commonality in a Title VII case, showing a “biased testing procedure,” had no application to the case). The Court held that plaintiffs’ anecdotal and statistical evidence regarding disparities between men and women at the national and regional level could not establish “the uniform, store-by-store disparity upon which the plaintiffs’ theory of commonality depends.” (Slip Op. at 16-17). Moreover, plaintiffs’ anecdotal evidence was “too weak to raise any inference that all the individual, discretionary personnel decisions are discriminatory,” because the number of anecdotes was simply too small. (Slip Op. at 17-18). Dr. Bielby testified, based on his social framework analysis, that Wal-Mart had a strong corporate culture and was vulnerable to gender bias, but this evidence also failed to establish commonality because he could not determine to what extent specific employment decisions were actually guided by gender bias. (Slip Op. at 13-14).

The Supreme Court also held that plaintiffs’ claims for backpay could not be certified under Rule 23(b)(2), again reversing the District Court and Ninth Circuit. Rule 23(b)(2) authorizes class actions where “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” The Court explained that “Rule 23(b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class.” (Slip Op. at 20). In contrast, the Court held that “individualized monetary claims belong in Rule 23(b)(3),” and a court must make findings regarding predominance and superiority before such a class can be certified. (Slip Op. at 22-23).

Wal-Mart Definitively Explains The Court’s Obligation To Conduct A “Rigorous Analysis” At The Class Certification Stage

In holding that commonality was lacking under Rule 23(a), the Court clarified the standards applicable at the class certification stage. It reaffirmed the holding of General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 156 (1982) that a court must conduct a “rigorous analysis” to satisfy itself that the prerequisites of Rule 23(a) have been satisfied. The Court held that under the “rigorous analysis” standard, an inquiry into the merits of plaintiff’s underlying claims is necessary to the extent merits issues overlap with class issues. (Slip Op. at 10-11). Indeed, the Court held that such overlap would occur “frequently.” (Slip Op. at 10). The Court also noted that Rule 23 “does not set forth a mere pleading standard,” and that a party seeking class certification “must affirmatively demonstrate his compliance with the Rule.” (Id.).

This decision solidifies what had been an emerging trend among the Courts of Appeal, including the First, Second, Third, Fourth, Fifth, Seventh, Eighth, Tenth and Eleventh Circuits, and adopted by the Ninth Circuit in Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (9th Cir. 2010). As the Ninth Circuit noted, arguments in favor of a less rigorous analysis at the class certification stage were often based on a “misunderstanding” (see Dukes, 603 F.3d at 582) of the following statement in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 (1974): “We find nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.” The Supreme Court agreed, and explained that Eisen was distinguishable because the district court there had conducted a preliminary inquiry into the merits in order to shift the cost of class notice under Rule 23(c)(2), and “not in order to determine the propriety of certification under Rules 23(a) and (b).” (Slip Op. at 10 n.6). The Court then eliminated any doubts regarding Eisen with the following statement: “To the extent the quoted statement goes beyond the permissibility of a merits inquiry for any other pretrial purpose, it is the purest dictum and is contradicted by our other cases.” (Id.).

The implications for antitrust cases are significant and evident from decisions such as In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2009), In re New Motor Vehicles Canadian Export Antitrust Litig., 522 F.3d 6 (1st Cir. 2008), and Blades v. Monsanto Co., 400 F.3d 562 (8th Cir. 2005). In determining whether a plaintiff class should be certified, courts cannot take the allegations in an antitrust plaintiff’s complaint at face value if defendants have presented contrary evidence. Arguments for and against class certification in antitrust cases are often based on expert testimony that overlaps with the merits of plaintiff’s antitrust claims, and Wal-Mart leaves no doubt that a federal court in such a case should consider this evidence regardless whether it comes from a plaintiff or defendant, if it is necessary for the court to satisfy itself that the prerequisites of Rule 23 have been met.

Wal-Mart Holds That The Rules Enabling Act “Forbids” Courts From Using Class Procedures To Change Substantive Rights

In holding that plaintiffs’ claims for backpay could not be certified under Rule 23(b)(2), the Court rejected the argument that plaintiffs’ backpay claims were merely “incidental” to plaintiffs’ claim for injunctive relief, because they were subject to individualized defenses by Wal-Mart. (Slip Op. at 26-27). Specifically, under Title VII’s “detailed remedial scheme,” if Wal-Mart could “show that it took an adverse employment action against an employee for any reason other than discrimination,” Wal-Mart could avoid liability. (Slip Op. at 26). The Ninth Circuit had held that individualized defenses could be avoided if the trial court implemented a trial plan based on sampling and extrapolation. 603 F.3d at 625-27. The Supreme Court disagreed, holding that because the Rules Enabling Act, 28 U.S.C. section 2072(b), “forbids interpreting Rule 23 to ‘abridge, enlarge or modify any substantive right,’” the trial court had no power to certify a class “on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims.” (Slip Op. at 27).

The implications of the Court’s interpretation and application of the Rules Enabling Act has major potential consequences for antitrust class actions, which typically seek monetary relief and are usually certified under Rule 23(b)(3). The heart of the Rules Enabling Act portion of the decision seems to suggest that a federal statute containing a specific method for calculating damages upon the finding of a violation arguably requires a defendant to have an opportunity to see the damage calculation in the damage statute applied one plaintiff at a time. In the antitrust context this has particular application to the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (“ACPERA”), H.R. 1086, 108th Cong., 150 Cong.Rec. H3656, Title II, Section 201, et seq. (recently extended until 2020 pursuant to H.R. 5330), which provides a detailed remedial scheme applicable to cooperative civil antitrust defendants who have successfully applied for criminal amnesty under the U.S. Department of Justice’s antitrust leniency program. ACPERA limits the damages recoverable against such a defendant to the actual damages caused by its own conduct, instead of the joint and several liability and treble damages typically available in antitrust conspiracy cases. Wal-Mart may bar antitrust plaintiffs from obtaining class certification against an ACPERA defendant using a common expert formula if doing so would deny an antitrust defendant’s statutory right under ACPERA to present individualized evidence as to whether particular class members were actually affected by that defendant’s own conduct. Also, even if an ACPERA defendant could be permitted to present individualized evidence regarding ACPERA damages within the context of a class action, a court would be faced with the tough question as to whether common issues can predominate over individualized questions under Rule 23(b)(3) if hundreds or thousands of mini-trials regarding ACPERA damages are planned.

Wal-Mart’s Rules Enabling Act analysis may have even broader implications. If the Rules Enabling Act “forbids interpreting Rule 23 to ‘abridge, enlarge or modify any substantive right’” (Slip Op. at 27), then applying Rule 23 to enlarge a plaintiff’s antitrust claim should be just as forbidden as applying Rule 23 to abridge an affirmative defense, as was the case in Wal-Mart. If so, then class certification for many antitrust lawsuits may be difficult to obtain. For instance, state law indirect purchaser antitrust class actions, which are often removed to federal court pursuant to the Class Action Fairness Act, 28 U.S.C. sec. 1332(d) (“CAFA”), would be barred to the extent that defendants are not permitted to present individualized evidence to establish that any alleged overcharge was not “passed on” through a specific distribution channel to a particular plaintiff. And if defendants are permitted to disprove pass-on, for instance, by showing that individual retailers absorbed an alleged overcharge by offering coupons or a sale price to consumers, and thereby prevented the overcharge from being passed on to certain plaintiff consumers, certifying such a class may be barred by the predominance and superiority requirements under Rule 23(b)(3). The same problem likely arises in many direct purchaser class actions brought under federal antitrust law where prices are individually negotiated between defendants and each direct purchaser. Defendants should have the right to present individualized evidence to establish that prices were based on factors unique to each purchaser and each transaction.

On the other hand, oppositions to class certification based on the Rules Enabling Act are arguably nothing new in antitrust cases. Wal-Mart may be viewed as simply reaffirming the Supreme Court’s earlier holdings that Rule 23 must be interpreted in conjunction with the Rules Enabling Act. See, e.g., Ortiz v. Fibreboard Corp., 527 U.S. 815, 845 (1999); Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 612-13, 629 (1997). If so limited, it may provide little help to antitrust defendants.

For 2012, this site introduces the thought of Zhiwei Tong (???),one of the most innovative scholars of constitutional law in China.  Professor Tong has been developing his thought in part in a essay site that wasstarted in 2010.  See, Larry Catá Backer, Introducing a New Essay Site on Chinese Law by Zhiwei Tong,Law at the End of the Day, Oct. 16,2010.  Professor Tong is on the faculty of law at EastChina University of Political Science and Law. He is the Chairman of the Constitution Branch of the Shanghai Law Society andthe Vice Chairman of the Constitution Branch of the ChinaLaw Society.

The  Zhiwei Tong (???) Series focuses on translating some ofProfessor Tong’s work on issues of criminal law and justice in China, mattersthat touch on core constitutional issues.  Each of the posting willinclude an English translation from the original Chinese, the Chinese originaland a link to the original essay site. Many of the essays will includeannotations that may also be of interest.  I hope those of you who areinterested in Chinese legal issues will find these materials, hard to get inEnglish, of use.  I am grateful to my research assistants, YiYang Cao and Zhichao Yi fortheir able work in translating these essays.

Part XXV—Zhiwei Tong (???) Series: Petitioning System and the Constitution of China (Part III)
First Published March 19, 2011
Part I of this essay was published at Part XV—Zhiwei Tong (???) Series: The Petitioning System and the Constitution of China):
Part II of this essay was published at Part XXIV—Zhiwei Tong (???) Series: Petitioning System and the Constitution of China (Part II).

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