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Media Alerts - Resnick v. Netflix - Ninth Circuit
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March 31, 2015
  Resnick v. Netflix - Ninth Circuit
Headline: The panel held that Netflix online DVD-rental subscribers "did not raise a triable issue of fact as to whether they suffered antitrust injury-in-fact on a theory that they paid supracompetitive prices for one of Netflix's subscription plans because Netflix would have reduced the price of that plan but for its allegedly anticompetitive conduct. The panel further "affirmed in part and reversed in part the district court's taxable cost award" holding "that certain charges for "data upload" and "keywording" were not recoverable as costs for making copies under § 1920(4)."

Area of Law: Antitrust

Issues Presented: (1) Whether Netflix's promotion agreement with Walmart violated antitrust laws; (2) Whether the district court's award of taxable costs was proper

Brief Summary: Defendant Netflix, founded in 1997, was the first internet-based DVD rental service and faced no serious competition until Walmart entered the market in 2003, followed by Blockbuster in 2004. Despite the emergence of serious competitors, Netflix did not change its monthly subscription plan for a full year, and then actually increased its monthly fee. In October 2004, due to fears of Amazon entering the market, Netflix reduced its price. By this time, however, it was clear to Netflix and its competitors that Walmart was not doing well in the market and Netflix's CEO approached Walmart in an attempt to form a partnership. While initially unsuccessful, a verbal agreement was reached by March 17, 2005 whereby Walmart's subscribers could transfer to Netflix free of charge and maintain the same monthly rate and Walmart would receive both a bounty and revenue for any referrals that came from Walmart's transferred customers. The terms, however, did not include a covenant not to compete.

Plaintiffs (the "Subscribers"), representing a class of people who subscribed to Netflix over a five year period, alleged antitrust violations by Netflix and Walmart centering around a theory that the Subscribers paid a higher monthly fee for Netflix's service than they would have but for Netflix's allegedly anticompetitive conduct. The district court granted Netflix's motion for summary judgment on the basis that the Subscribers had failed to raise a triable issue as to antitrust injury-in-fact since Netflix never reduced its prices in response to Walmart. Furthermore, at the time of the agreement all competitors, including Walmart itself, knew that Walmart was no longer a serious competitor in the online-DVD rental market.

The district court then awarded Netflix $710,194.23 in costs; $317,616.69 for electronic discovery costs and $245,471.31 in consulting fees, file conversions, and copying costs. The Subscribers appealed this award and Netflix cross appealed for the denial of $21,000 of requested costs. These matters were reviewed under an abuse of discretion standard.

Generally, costs and fees should be awarded to the prevailing party, but such costs are limited to those listed in 28 U.S.C. section 1920. In making its initial costs award, the district court relied on a broad interpretation of § 1920; however, the Supreme Court has since ruled that § 1920 should be narrowly interpreted. With this in mind the 9th Circuit ("the panel") reviewed five categories of charges challenged by the Subscribers and found that while some of the charges were taxable, many were not. The panel ultimately held that of the $317,616.69 challenged by the Subscribers, only costs attributable to optical character recognition, conversion to TIFF, and "endorsing" activities were taxable since these activities were explicitly required by the Subscribers. Therefore, the panel affirmed the cost award in part, vacated it in part, and remanded for taxing of costs in accordance with the opinion. The panel then ruled that the district court did not abuse its discretion when awarding $245,471.31 for consulting fees, TIFF images, and copying costs, as the evidence was sufficient to justify the court's rulings and insufficiently persuasive to overcome the presumption in favor of an award.

Lastly, the panel found that the district court did not abuse its discretion in denying to award Netflix $21,000 for producing black and white PowerPoint documents as they were not in compliance with the Subscribers' specific request and Netflix was to blame for the duplicative work that followed.

In conclusion, the panel affirmed the district court's grant of summary judgment on the antitrust claims due to a lack of antitrust injury in fact and affirmed the cost award in part and reversed it in part and remanded to the district court for further proceedings consistent with the opinion.

Extended Summary: Defendant, Netflix, was founded in 1997 as the first internet-based DVD rental service and offered customers to rent or buy DVDs by mail. In 2000, Netflix discontinued its DVD sales business and focused on DVD rentals instead. While initially DVD rentals were offered on a pay-per rental basis, Netflix quickly switched to a monthly subscription model where customers could rent three DVDs ("3U" plan) at once for $19.95 per month or four DVDs ("4U" plan) at a time for $24.95 per month. Netflix thrived under this business model and by 2005 controlled 77.8% of the online DVD-rental market and 92.3% by 2010.

While initially Netflix faced no serious competition, in 2003 Walmart launched its own online DVD-rental service where it offered a 3U plan for $18.76 a month. Netflix did not change its pricing for a full year, and then the price change was to increase Netflix's 3U plan to $21.99 per month. Two months later, in August 2004, Blockbuster launched its own online DVD rental service with a 3U plan for $19.99 a month. In October 2004, in response to rumors that Amazon was planning to enter the online DVD-rental market, Netflix announced that it would reduce its 3U plan from $21.99 to $17.99 per month. The next day Blockbuster reduced its price to $17.49 per month. In November 2004, Walmart reduced its price to $17.36 per month. In December 2004 Blockbuster announced another price reduction, down to $14.99 per month. Netflix maintained its $17.99 price until August 2007, at which point it lowered the price to $16.99. In the interim, Walmart's online-DVD rental business did very poorly. Walmart peaked at 60,000 subscribers whereas in 2004 Netflix had over 2 million subscribers and Blockbuster had 400,000. Walmart gained an average of 4,000 subscribers per quarter whereas Netflix gained 250,000 subscribers per quarter. By February 2005, Walmart only had a 1.4% market share and Netflix had a 77.8% market share.

In October 2004, Netflix's CEO requested a meeting with Walmart's CEO in hopes to form a partnership to strengthen Netflix's position before Amazon entered the market. Walmart's CEO was uninterested at the time and no agreement was reached at the meeting. During this time, however, Walmart was considering alternatives to its online DVD-rental business, including potential partnerships with Yahoo! or Microsoft, but ultimately decided that none of its options would be profitable and would likely all lead to multi-million dollar losses. As such, in January 2005, Walmart decided to exit the market, began making preparations to cover losses incurred from the closure, and stopped accepting new subscribers. By March 2005, Netflix had 3 million subscribers and Walmart only had 52,000. At this time Netflix's CEO was aware of Walmart's declining market share, but not of Walmart's plan to exit the market, and Netflix's CEO made additional attempts to form a partnership. The two CEOs met on February 9, 2005, and while no agreement was reached at the meeting the two CEOs had reached a verbal agreement by March 17, 2005. The key terms of the agreement were: (1) Walmart's subscribers who so chose would be transferred to Netflix free of charge and would keep their monthly rate for one year, (2) Walmart would promote on its website Netflix's DVD rentals, (3) Walmart would receive a 10% revenue share for each subscriber who transferred plus a $36 bounty for each new Netflix subscriber gained from Walmart's referrals, and (4) Netflix would promote Walmart's DVD sales business. These terms were incorporated into a Promotion Agreement; however, the Promotion agreement did not include a covenant not to compete, nor did it prohibit Netflix from selling DVDs and explicitly permitted Walmart to offer an online DVD rental service.

Amazon never entered the online DVD-rental market, resulting in Blockbuster being Netflix's only major competitor until Blockbuster filed for bankruptcy in 2010. Netflix was then left as the sole major competitor with over 90% of the online DVD-rental market. Netflix's 3U price stayed at $17.99 from November 2004 to August 2007, was then reduced to $16.99, and remained at that price through the end of the class action period.

The Subscribers alleged antitrust violations by Netflix and Walmart and sought to represent a class of Netflix subscribers. The Subscribers asserted four cases of action that essentially allege that the Promotion Agreement illegally allocated the online DVD-rental market: (1) a §1 Sherman Act violation for unlawful market allocation of the online DVD-rental market (against all defendants); (2) a §2 Sherman Act claim for monopolization of the online DVD-rental market (against Netflix); (3) a §2 Sherman Act claim for attempted monopolization of the online DVD-rental market (against Netflix); and (4) a §2 Sherman Act claim for conspiracy to monopolize the online DVD-rental market (against all defendants).

The district court granted the Subscriber's motion for certification of a litigation class, defining the class as those who subscribed to Netflix between May 19, 2005 through December 23, 2010, and subsequently approved Walmart's settlement with the class. Netflix moved for summary judgment, pursuant to Federal Rule of Civil Procedure 56, which the district court granted on the basis that there was no per se antitrust violation and that the Subscribers had failed to raise a triable issue as to antitrust injury-in-fact. Netflix filed a bill of costs seeking $744,740.11 in discovery costs, of which the district court awarded Netflix $710,194.23 in costs. The Subscribers filed a timely notice of appeal and Netflix cross-appealed.

The panel reviewed de novo the district court's ruling. Summary judgment is appropriate if there is no genuine dispute as to any material fact. A genuine issue of material facts exists if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. While until recently summary judgment was disfavored in antitrust cases, that presumption has now disappeared.

Under Article III, antitrust plaintiffs establish injury-in-fact when they suffer an injury which bears a causal connection to the alleged antitrust violation. In addition, private antitrust plaintiffs must also demonstrate antitrust injury, which is defined as (1) injury of the type the antitrust laws were intended to prevent that (2) flow from that which makes defendants' acts unlawful. One way this can be proven is by showing that consumers paid higher prices for a product due to the anticompetitive actions of a defendant. The Subscribers alleged Netflix would have reduced its 3U subscription price to $15.99 per month if Netflix's efforts had not freed the company from Walmart's competitive threat, thereby forcing the Subscribers to pay a higher monthly fee than they would absent Netflix's allegedly anticompetitive conduct.

However, there was no evidence that Netflix would have raised its prices if Walmart had remained in the market. When Walmart initially entered the market as a competitor, Netflix not only failed to reduce its prices but actually raised them. Even when Blockbuster, who controlled a larger market share than Walmart, entered the market Netflix did not reduce its prices. The Subscribers' evidence consisted of a number of documents that referenced the potential impact of Walmart entering the market as a competitor to Netflix; however, these documents predated Walmart's actual entry and subsequent poor performance. While some of Netflix's internal documents did refer to a potential price cut to $15.99 they were in response to Blockbuster, not Walmart, and were merely a potential that never occurred. Ultimately, the Subscribers' evidence supported that neither Walmart nor its competitors viewed Walmart as a threat in late 2004. Furthermore, the expert testimony offered by the Subscribers was contrary to the market facts. As such, no reasonable juror could conclude that Netflix would have lowered its 3U price to $15.99 in response to Walmart and the panel affirmed the district court's summary judgment as to the four Sherman Act claims.

The panel then reviewed the district court's cost award under an abuse of discretion standard.

During discovery the Subscribers sought electronically stored information and required it to be provided in a specific file type, searchable, numbered sequentially, and include identifying information. Netflix in turn employed electronic discovery vendors to assist and produced nearly 15 million pages of discovery, resulting in their claim of $744,740.11 as discovery costs of which $710,194.23 was awarded. The Subscribers argue the district court erred by broadly construing § 1920(4) in its taxing of electronic discovery costs for $317,616.69 and abused its discretion in taxing consulting fees, file conversions, and copying costs of $245,471.31. Netflix cross appealed arguing the district court abused its discretion in disallowing $21,000 in costs to copy various PowerPoint files.

Regarding electronic discovery production costs, the district court relied on a broad reading of section 1920 founded in a prior circuit opinion. However, the Supreme Court has since ruled that § 1920 should be more narrowly interpreted to limit taxable costs to relatively minor incidental expenses. While costs and fees should generally be awarded to the prevailing party, a district court's discretion to do so is limited to the specific types of costs listed in 28 U.S.C. § 1920. Analyzing the phrase "costs of making copies...obtained for use in the case," the panel noted that narrow construction of the statute requires that any tasks and services for which an award of costs is being determined must be described and proven with sufficient specificity, particularity, and clarity to permit a determination that said costs are being awarded for making copies. As such, invoices for general statements like "document production" are unhelpful in determining whether the invoices are taxable.

The panel reviewed five categories of charges challenged by the Subscribers: (1) data upload, (2) endorsing, (3) keyword, (4) professional services, and (5) electronic data discovery.

"Data upload" refers to the reproduction of documents for potential production into a database for review after all the processes necessary to prepare the documents in the required formats and labeling are completed. The Subscribers challenge these costs on the basis that uploading information is merely transmitting it from one location to another, which is analogous to moving boxes from one room to another in a law firm for review. Netflix argues that the transmission necessarily involves making copies from the original location to the new location. The panel examined the issue by making a comparison with the paper-document analogue. The transmissions taking place here were similar to faxing a document to a law firm, causing both data to be transferred and a facsimile copy to be created. Such costs are not un-taxable simply because it was a fax machine making the copy and not a photocopier. However, taxable costs under § 1920(4) are not determined by merely whether a copy was made, but whether the copy was necessarily obtained for use in the case.

What is deemed to have "necessarily obtained" for use in a case is extremely limited. If the copy was made to be produced in discovery then it would be taxable, but if made merely for convenience of counsel it would not be. Here, testimony indicated that the copies were made as a step in the production process in order to allow a selection of documents for production from the documents for potential production. The panel ruled that this was similar to copies being made for a lawyer to review on his own computer instead of the original file, and not necessarily for use in the case, and as such the charges were not taxable.

"Endorsing" activities referred to Netflix's branding of image files with unique sequential production numbers and confidentiality designations. While the Subscribers technically challenged the taxing of such activities, they did so only via a cursory mention in their statement of facts and did not specifically and distinctly argue them in the open briefing. As a result, the panel did not consider this challenge.

"Keywording" refers to automated software used to filter what documents needed to be copied based on a set of supplied criteria. While Netflix argues that this is a mechanical process of making copies of all documents that fit the criteria, the panel held this charge was for two separate tasks: (a) identifying what documents fit the criteria and (b) making copies of those documents. The act of identifying the documents is similar to having a person review the documents based on supplied criteria and sorting them into the appropriate pile to copy or not copy. Since this filtering process was applied both to copied documents and documents that were not to be copied, this charge was not taxable.

"Professional services" as referenced by the Subscribers, includes a broad range of activities including processing, native review, data analysis, project management, and production services. Netflix's response was essentially a mere claim that all referenced activities were similar to those performed by copy center employees and as such should be recoverable. Lacking more detailed information on such activities, the panel was unable to determine which specific charges were taxable and remanded the issue to the district court.

The "electronic discovery task" challenged by the Subscribers was for one specific item of an invoice in which Netflix was charged a $10,000 flat rate for a variety of tasks such as native review processing, optical character recognition, exporting document, converting documents to TIFF, populating custom fields, and prepping for further processing. While some of those tasks are taxable, not all of them are, and the panel limited recovery to those charges associated with taxable costs.

In sum, the panel ruled that of the $317,616.69 challenged by the Subscribers as nontaxable, only costs attributable to optical character recognition, conversion to TIFF, and "endorsing" activities were taxable since these activities were explicitly required by Subscribers. Therefore, the panel affirmed the cost award in part, vacated it in part, and remanded for taxing of costs in accordance with the opinion.

Regarding the Subscribers' challenge of the $245,471.31 awarded by the district court for consulting fees, TIFF images, and copying costs, the panel ruled that there was not an abuse of discretion.

While the Subscribers complained that the district court failed to give affirmative reasons for awarding costs, the district court was only required to find the reasons for denying costs were insufficiently persuasive to overcome the presumption in favor of an award. Given the combination of the deferential standard for review, that the court explained that it had read the parties' papers and considered their arguments, and that the district court specifically identified the Subscribers' arguments on these costs, the district court's explanation was sufficient. Similarly, the Subscribers challenged costs claimed for preparing visual aids but did so based on invoice descriptions of the title of the person performing the work. In light of the evidence that the vendors were only paid for production costs, and not for creating the substantive content, the district court did not abuse its discretion in awarding $14,355.50 for preparing visual aids.

Regarding the $167,399.70 for TIFF conversions, plus an additional $46,773.71 for alleged unnecessarily produced documents, the district court heard testimony from experts on both sides prior to making the award. Given the deferential standard of review, there is no reason for the panel to overrule the district court's award on that matter. Lastly, the Subscribers challenged an award of $16,942.40 for copying paper documents. The panel, however, upheld the award given that the bill contained the purpose of each charge, the dates the work was done, and a declaration from one of Netflix's attorneys that various documents were produced as exhibits to depositions and as part of formal discovery documents. Since there was sufficient information to determine which costs were taxable, the district court did not abuse its discretion in awarding these costs.

Finally, the panel found that the district court did not abuse its discretion in declining to award Netflix $21,000 for producing various black and white PowerPoint documents. The Subscribers had requested specific files and specified that they be produced in the same manner they were kept in the ordinary course of business. Despite that Netflix ordinarily kept the slides in color, it proceeded to only provide black and white slides to the Subscribers until ordered to comply with the discovery request by the court. Although production of the color slides was duplicative of the black and white slides, Netflix could have avoided the problem by producing the color documents as per the original request. Based on this, the district court's denial of Netflix's cost award was not an abuse of discretion.

In conclusion, the panel affirmed the district court's grant of summary judgment on the antitrust claims due to a lack of antitrust injury in fact and affirmed the cost award in part and reversed it in part and remanded to the district court for further proceedings consistent with the opinion.

Panel: Judges Thomas, Reinhardt, and Senior District Judge L.D. George by designation

Date of Issued Opinion: February 27, 2015

Docket Number: 4:09-md-02029-PJH

Decided: Affirmed in part, vacated in part, and remanded

Case Alert Author: Seth DuMouchel

Author of Opinion: Judge Thomas

Case Alert Circuit Supervisor: Professor Glenn Koppel

    Posted By: Glenn Koppel @ 03/31/2015 01:57 PM     9th Circuit  

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