Barile - NFLX Class Cert Brief

Case4:09-md-02029-PJH Document310
Filed01/20/11 Page1 of 21
1 Robert G. Abrams (pro hac vice) Thomas A. Isaacson (pro hac vice) 2 Peter A. Barile III (pro hac vice) HOWREY LLP 3 1299 Pennsylvania Avenue, N.W. Washington, DC 20004 4 Tel.: (202) 783-0800 Fax: (202) 383-6610 5 abramsr@howrey.com isaacsont@howrey.com 6 barilep@howrey.com 7 Paul Alexander (49997) HOWREY LLP 8 1950 University Avenue East Palo Alto, CA 94303 9 Tel.: (650) 798-3500 Fax: (650) 798-3600 10 alexanderp@howrey.com 11 Emily L. Maxwell (185646) HOWREY LLP 12 525 Market Street, Suite 3600 San Francisco, CA 94105 13 Tel.: (415) 848-4947 Fax: (415) 848-4999 14 maxwelle@howrey.com 15 Lead Class Counsel 16 17 18 19 20 21 22 23 24 25 26 27 28
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Guido Saveri (22349) R. Alexander Saveri (173102) Lisa Saveri (112043) Cadio Zirpoli (179108) Melissa Shapiro (242724) SAVERI & SAVERI, INC. 706 Sansome Street San Francisco, CA 94111 Tel.: (415) 217-6810 Fax: (415) 217-6813 guido@saveri.com rick@saveri.com lisa@saveri.com cadio@saveri.com melissa@saveri.com Liaison Class Counsel
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA OAKLAND DIVISION Master File No. 4:09-md-2029 PJH IN RE ONLINE DVD RENTAL ANTITRUST LITIGATION MDL No. 2029 Hon. Phyllis J. Hamilton This document relates to: ALL ACTIONS REPLY MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFFS MOTION FOR CLASS CERTIFICATION Date: September 1, 2010 Time: 9:00 a.m. Judge: Hon. Phyllis J. Hamilton Courtroom: 3, 3rd Floor DOCUMENT SUBMITTED UNDER SEAL AND CHAMBERS COPY
REPLY MEM. OF POINTS AND AUTHORITIES ISO PLTFS MOTION FOR CLASS CERTIFICATION; Master File No. 4:09-md-2029 PJH
TABLE OF CONTENTS
2 TABLE OF AUTHORITIES.....................................................................................................................ii 3 I. 4 II. 5 III. 6 7 B. 8 9 10 1. 11 2. 12 13 14 15 5. 16 6. 17 18 19 20 E. 21 22 IV. 23 24 25 26 27 28

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INTRODUCTION........................................................................................................................ 1 THE PROPOSED CLASS ACTION SATISFIES RULE 23(A) ................................................. 2 THE PROPOSED CLASS ACTION SATISFIES RULE 23(B)(3)............................................. 4 A. The Fact That The Conspiracy Involved Market Allocation Rather Than Price-Fixing Creates No Barrier To Class Certification. ........................................ 4 Defendants Arguments Regarding The Ultimate Merits Are Not Relevant. ........................................................................................................................... 6 Defendants Specific Arguments Rely On Class-wide Evidence And Are Wrong. ............................................................................................................... 7 The time period for which damages are sought.................................................... 8 The fact that Netflix did not raise prices after the conspiracy............................................................................................................. 8 Wal-Marts competitive significance ................................................................... 9 The difference between three-firm and two-firm competition ......................................................................................................... 10 The existence of multiple Netflix plans.............................................................. 12 The extent to which online DVD rental services are commodities ....................................................................................................... 12 Competition from other services ........................................................................ 13
C.
3. 4.
7. D.
Dr. Beyers Analysis Sufficiently Shows That Common Questions Predominate. ................................................................................................................... 14 The Class Representatives Experience Does Not Raise Individualized Issues. ..................................................................................................... 15
CONCLUSION .......................................................................................................................... 15
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2 CASES Allied Orthopedic Appliances, Inc. v. Tyco Healthcare Group L.P., 3 247 F.R.D. 156 (C.D. Cal. 2007)........................................................................................... 5, 6 4 In Re Apple & ATTM Antitrust Litigation, No. 5:07-cv-05152 JW, slip op. (July 8, 2010 N.D. Cal.) ...................................................... 12 5 Blue Cross & Blue Shield United v. Marshfield Clinic, 6 65 F.3d 1406 (7th Cir. 1995) ..................................................................................................... 5 7 In re Bulk (Extruded) Graphite Products Antitrust Litigation, No. 02-6030 (WHW), 2006 U.S. Dist. LEXIS 16619 (D.N.J. Apr. 4, 2006) ..................... 6, 14 8 Dukes v. Wal-Mart Stores, Inc., 9 603 F.3d 571 (9th Cir. 2010) ................................................................................................. 6, 7 10 In re eBay Seller Antitrust Litigation, No. C 07-01882 JF, 2009 U.S. Dist. LEXIS 85881 (N.D. Cal. Sept. 1, 2009) ......................... 6 11 FTC v. Arch Coal, Inc., 12 329 F. Supp. 2d 109 (D.D.C. 2004)......................................................................................... 11 13 FTC v. Staples, Inc. 970 F. Supp. 1066 (D.D.C. 1997)............................................................................................ 11 14 In re Foundry Resins Antitrust Litigation, 15 242 F.R.D. 393 (S.D. Ohio 2007)............................................................................................ 14 16 In re Graphics Processing Units (GPU) Antitrust Litigation, 253 F.R.D. 478 (N.D. Cal. 2008) .............................................................................................. 6 17 Leegin Creative Leather Products v. PSKS, Inc., 18 551 U.S. 877 (2007) .............................................................................................................. 4, 5 19 Los Angeles Memorial Coliseum Commission v. National Football League, 726 F.2d 1381 (9th Cir. 1984) ................................................................................................... 3 20 Netflix, Inc. v. Blockbuster, Inc., 21 No. C 06-02361 WHA, 2006 U.S. Dist. LEXIS 63154 (N.D. Cal. Aug. 22, 2006)................ 13 22 Northern Pacific Railway v. United States, 356 U.S. 1 (1958) ...................................................................................................................... 4 23 In re OSB Antitrust Litigation, 24 No. 06-826, 2007 U.S. Dist. LEXIS 56584 (E.D. Pa. Aug. 3, 2007)...................................... 14 25 Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (1990) ................................................................................................................ 5, 8 26 In re Polyester Staple Antitrust Litigation, 27 No. 3:03CV1516, 2007 U.S. Dist. LEXIS 52525 (W.D.N.C. July 19, 2007)................. 8, 9, 14 28
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1 In re Static Random Access (SRAM) Antitrust Litigation, No. C 07-01819 CW, 2008 U.S. Dist. LEXIS 107523 (N.D. Cal. Sept. 29, 2008)................... 6 2 In re TFT-LCD (Flat Panel) Antitrust Litigation, No. M 07-1827 SI, 2010 U.S. Dist. LEXIS 38122 (N.D. Cal. Mar. 28, 2010) ......... 6, 7, 12, 14 3 4 In re Terazosin Hydrochloride Antitrust Litigation, 220 F.R.D. 672 (S.D. Fla. 2004) ............................................................................................... 5 5 United Steel, Paper & Forestry, Rubber, Manufacturing Energy v. ConocoPhillips Co., 593 F.3d 802 (9th Cir. Cal. 2010) ......................................................................................... 3, 7 6 7 In re Urethane Antitrust Litigation, 251 F.R.D. 629 (D. Kan. 2008) ............................................................................................... 14 8 In re Vitamins Antitrust Litigation, 209 F.R.D. 251 (D.D.C. 2002) ................................................................................................ 14 9 10 RULES 11 Fed. R. Civ. P. 23(a) ........................................................................................................................ 2 12 Fed. R. Civ. P. 23(b)........................................................................................................................ 4 13 OTHER 14 Chaim Fershtman & Ariel Pakes, A dynamic oligopoly with collusion and price wars, 31 RAND J. Econ. 207 (2000) .................................................................................................. 3 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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1 I. 2
INTRODUCTION As Plaintiffs demonstrated, the proposed class is particularly appropriate for certification
3 because it involves millions of consumers who paid nationwide, non-negotiable prices to Netflix. In 4 light of Netflixs standardized pricing structure, the lower prices that would have stemmed from 5 continued competition in a three-firm market that included Wal-Mart would have benefited all Netflix 6 subscribers. There is no need to examine any issues specific to individual subscribers. Common 7 issues strongly predominate. 8 With no basis to challenge the predominance of common issues, Defendants instead argue that
9 those common issues ultimately should be decided in their favor. Like virtually every antitrust 10 defendant, they argue that the challenged agreement did not significantly change the competitive 11 landscape. Such arguments are irrelevant at this stage and Defendants cite nothing to the contrary. 12 The issue here is not whether the jury will agree with Plaintiffs or Defendants regarding the 13 competitive significance of Wal-Mart and the effects of its exit from the market. The issue here is 14 whether the case will be tried with predominately common or predominately individualized evidence. 15 As Defendants opposition brief confirms, the case will be tried with predominately common evidence. 16 Arguments regarding Wal-Marts competitive posture, its success in the marketplace, its future 17 operations (absent the challenged agreement), and how those would have affected Netflixs prices will 18 all be waged with class-wide evidence. Indeed, virtually every piece of evidence cited by Defendants 19 and their expert, Dr. Ordover, is common to the entire class. 20 Although the issue here is whether the case will be tried with predominately common evidence,
21 and not which side will prevail at trial, Defendants erroneously claim that they have the better of the 22 merits evidence. Their contention that competition from Wal-Mart would not have affected Netflixs 23 prices is directly contrary to the words and deeds of Netflixs CEO Reed Hastings. Faced with the 24 stock markets negative reaction to Netflixs October 14, 2004 price cut (which he attributed to major 25 competitors, specifically including Wal-Mart) and Blockbusters further price cut on October 15, 26 27 28
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1 Hastings quickly contacted Wal-Mart1 for the express purpose, as reflected in contemporaneous 2 Netflix e-mails, of getting Wal-Mart to exit the market. Defendants offer no explanation for Netflixs 3 eagerness to get Wal-Mart to exit the market at a time of growing price competition. With no 4 explanation of their own, and rejecting the obvious explanation that Netflix was trying to avoid further 5 price cuts, Defendants are left with an implausible position that Netflixs campaign to get Wal-Mart 6 to exit the market was undertaken for no reason whatsoever. 7 Not only was price pressure the motivation for the conspiracy, but Hastings confirmed its
8 success when, in April 2005, after reaching a handshake deal for Wal-Mart to exit, he declared that 9 with just two competitors, Netflixs profits (and prices) would be higher. If Defendants want to argue 10 that Netflix did not know what it was doing when it began the conspiracy and was wrong to declare the 11 conspiracy a financial success, they can present that story to the jury. In the meantime, their efforts to 12 disavow the conspiracys purpose and effect are no basis to deny class certification. Rather, the fact 13 that they make these arguments with class-wide evidence confirms that class certification is warranted. 14 II. 15 THE PROPOSED CLASS ACTION SATISFIES RULE 23(a) Defendants concede that three of Rule 23(a)s requirements numerosity, commonality and
16 typicality are satisfied. They argue that Rule 23(a)(4)s adequacy requirement is not met because of 17 unidentified individualized defenses. (Defs. Br. at 23.) Each class representative paid Netflix during 18 the class period. Had Netflixs prices been lower, each class representative would have paid less. 19 Defendants assert that an argument made on behalf of the Blockbuster class, i.e., that Netflix
20 and Wal-Mart began communicating in October 2004, somehow conflicts with the interests of the 21 Netflix class. The fact that communications began on October 17, 2004 is beyond dispute and could 22 not be avoided regardless of whether it hurt or helped the Netflix class. But, that fact actually helps the 23
1 Defendants represent, with a sworn declaration, that Blockbuster did not announce its price cut until October 18, 2004, the day after Netflix began communicating with Wal-Mart. (Defs. Br. at 5) 25 (citing Walsh Decl. Ex. 5.) That is wrong. Reuters reported the news on Friday, October 15, 2004. (Ex. 44.) Documents produced by Netflix show that on Saturday, October 16, 2004, at 12:34 am, 26 Netflix CEO Reed Hastings e-mailed his senior staff regarding Blockbusters price cut. (Ex. 45.) By Sunday, October 17, 2004, Hastings was already in touch with Wal-Mart. (Ex. 46.) [Citations to Ex. __ refer to exhibits attached to the Second Declaration of Peter A. Barile III in 27 Support of Plaintiffs Motion for Class Certification (July 12, 2010), filed herewith.] 28 2 HOWREY LLP
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1 Netflix class and was cited on page 4 of Plaintiffs moving brief. The close connection between the 2 increased price competition and the start of communications with Wal-Mart underscores the fact that 3 the communications at the heart of this case stemmed directly from Netflixs desire to avoid further 4 price cuts.2 In any event, the fact that communications began in the Fall of 2004 does not create a 5 statute of limitations defense. Wal-Mart began its exit on May 19, 2005 and the Resnick complaint 6 was filed January 2, 2009, well within the four-year limitations period. Far from having conflicting 7 interests, the two classes benefit from sharing counsel who can more efficiently and effectively 8 prosecute this case, given the overlapping facts and discovery in the two classes claims. 9 Separately, Dr. Ordover argues that Netflix subscribers might like higher prices to help fund
10 improvements in Netflixs service. First, the lawsuit will not undo any such improvements; they have 11 already been made. The lawsuit seeks monetary damages, which may well be paid by Wal-Mart. 12 Second, since every antitrust defendant could argue that it plowed some of its ill-gotten gains
13 back into the business; this argument is an attack on the Sherman Act itself. Indeed, Dr. Ordover relies 14 on an article that concludes that we may well be better off encouraging collusion than deterring it. 15 Chaim Fershtman & Ariel Pakes, A dynamic oligopoly with collusion and price wars, 31 RAND J. 16 Econ. 207, 234 (2000). Contrary to such academic musing, the Supreme Court has long rejected the 17 notion that ruinous competition can be a defense to a restraint of trade. Los Angeles Memorial 18 Coliseum Commn v. National Football League, 726 F.2d 1381, 1395 (9th Cir. 1984). 19 Third, Dr. Ordover has no evidence regarding how much less investment Netflix would have
20 made given greater competition; he merely says there could be a conflict. (Ex. 47 at 157-64.) But 21 this circuit does not favor denial of class certification on the basis of speculative conflicts. United 22 Steel, Paper & Forestry, Rubber, Mfg. Energy v. ConocoPhillips Co., 593 F.3d 802, 809 (9th Cir. 23 2010). Moreover, Netflix has access to credit and capital markets to finance service improvements. It 24 recently spent $300 million to buy back its own stock on top of the $300 million buyback it had last 25
2 This Court recognized that these allegations support the claim that Netflixs $17.99 price was supra-competitive. Order Denying Motion to Dismiss Second Amended Complaint, Dkt. No. 168, slip 27 op. at 8 (July 6, 2010). 28 3 HOWREY LLP
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1 year. (Ex. 48.) Finally, competition often spurs innovation and improvements in service. The 2 Sherman Act rests on the premise that the unrestrained interaction of competitive forces will yield the 3 best allocation of our economic resources, the lowest prices, the highest quality and the greatest 4 material progress. Northern Pacific Railway v. United States, 356 U.S. 1, 4 (1958). 5 6 III. THE PROPOSED CLASS ACTION SATISFIES RULE 23(b)(3) Defendants do not deny that Rule 23(b)(3)s superiority requirement is met. Thus, the only
7 issue is whether common issues predominate over individual issues. As Plaintiffs demonstrated, proof 8 of the conspiracy itself is a critical and entirely common issue. Proof of the fact of injury also will be 9 predominately, if not entirely, common to the class because of the nature of Netflixs pricing, which is 10 standardized, nationwide, non-negotiable, and month-to-month (thus allowing rapid changes in price 11 across all subscribers). Defendants cite no case denying class certification where the product or 12 service had such standardized pricing. 13 Instead, because there is nothing individualized about Netflixs pricing, Defendants argue that
14 eliminating one of only three competitors might not have affected Netflixs pricing at all. Before 15 responding to Defendants version of the facts, it is noteworthy that Defendants ignore virtually every 16 class-wide fact identified in Plaintiffs moving brief, including: (1) Netflix instigated the conspiracy at 17 a time of growing price competition; (2) Netflix studied a price of $14.99 (a price cut of 17%) prior to 18 Wal-Marts exit; (3) Netflix predicted that a two-firm market would yield higher profits (due to higher 19 prices); (4) with Wal-Mart out of the market, competition between Netflix and Blockbuster diminished 20 and the two firms engaged in substantial tacit, if not actual, collusion; (5) in contrast to the back-and21 forth price cuts during the brief period of three-firm competition, once Wal-Mart exited the market, 22 Blockbuster raised its prices and Netflix and Blockbuster have had stable and matching prices ever 23 since; (6) there has been no new entry since Blockbuster entered in 2004; and (7) all of Plaintiffs 24 monopolization theories involve common evidence. 25 26 Defendants argument that this is not a price fixing case ignores the fact that [t]he same 27 legal standard (per se unlawfulness) applies to horizontal market division and horizontal price fixing 28
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A.
The Fact That The Conspiracy Involved Market Allocation Rather Than PriceFixing Creates No Barrier To Class Certification.
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1 because both have similar economic effect. Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 2 877, 904 (2007). Judge Posner has observed: 3 4 5 Blue Cross & Blue Shield United v. Marshfield Clinic, 65 F.3d 1406, 1415 (7th Cir. 1995). See also 6 Palmer v. BRG of Georgia, Inc., 498 U.S. 46, 49 (1990) (market allocation agreements among 7 potential competitors are just as pernicious as price fixing agreements). Thus, courts repeatedly have 8 held that the existence of a conspiracy is the predominant issue, in market allocation cases no less 9 than it is in price fixing cases. In re Terazosin Hydrochloride Antitrust Litig., 220 F.R.D. 672, 695 10 (S.D. Fla. 2004) (emphasis added). 11 In price-fixing cases, issues can arise regarding whether the conspirators deviated from the 12 agreed scheme and priced competitively to some class members. Here, Wal-Mart entirely exited the 13 market. While defendants accused of price-fixing might argue that some class members did not pay a 14 fixed price, Defendants here cannot argue that any class member enjoyed competition from Wal-Mart. 15 Contrary to Defendants contention, proof of impact in market allocation cases is no stricter 16 than in price-fixing cases. Rather, impact and damages are assessed by constructing a but for world 17 free of collusion (whether price-fixing or market division), and measuring the difference between the 18 actual and but-for prices. That is Dr. Beyers approach in this case and Dr. Ordover agrees with this 19 basic formulation. (Ordover Rep., 137.) The two cases on which Defendants rely do not support a 20 stricter standard for market allocation cases. In the first case, Allied Orthopedic Appliances, Inc. v. 21 Tyco Healthcare Group L.P., 247 F.R.D. 156 (C.D. Cal. 2007), the conduct bore no resemblance to 22 this case: 23 24 25 26 27 28
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The analogy between price-fixing and division of markets is compelling. It would be a strange interpretation of antitrust law that forbade competitors to agree on what price to charge, thus eliminating price competition among them, but allowed them to divide markets, thus eliminating all competition among them.
Plaintiffs challenge three categories of predatory conduct that they claim led every direct purchaser of Tyco consumables to pay excessive prices in the class period: (1) market-share discounts, through which purchasers can access lower prices by committing to buy a specified percentage of their pulse oximetry needs from Tyco; (2) sole-source contracts, through which members of group purchasing organizations (GPOs) can obtain favorable pricing in return for the GPOs agreement not to contract with other vendors for the same class of product; and (3) the introduction of Tyco's OxiMax product line. 5
1 247 F.R.D. at 157. In the second case, In re Graphics Processing Units (GPU) Antitrust Litig., 253 2 F.R.D. 478 (N.D. Cal. 2008), while certification was denied to larger business purchasers who 3 negotiated individual deals, Judge Alsup actually did certify a class of individual consumers who made 4 purchases over the internet at standard prices (a fact Defendants do not disclose in their brief). That is 5 the situation here and the courts comments are on-point: 6 7 8 253 F.R.D. at 497. Thus, what matters is what defendants did, rather than what plaintiffs did. In re 9 TFT-LCD (Flat Panel) Antitrust Litig., No. M 07-1827 SI, 2010 U.S. Dist. LEXIS 38122, at *91 (N.D. 10 Cal. Mar. 28, 2010) (Illston, J.), permission for interlocutory appeal denied, Case No. 10-80087 (9th 11 Cir. June 14, 2010). 12 B. 13 The operative question here is not whether the plaintiffs can establish class-wide impact, but 14 whether class-wide impact may be proven by evidence common to all class members. In re Bulk 15 (Extruded) Graphite Prods. Antitrust Litig., No. 02-6030, 2006 U.S. Dist. LEXIS 16619, at *30 16 (D.N.J. Apr. 4, 2006). Ultimately, the Court must leave disputes over the results reached and 17 assumptions made with respect to competing methodologies to the trier of fact, and discern only 18 whether the plaintiffs have advanced a plausible methodology to demonstrate that antitrust injury can 19 be proved on a class-wide basis. In re eBay Seller Antitrust Litig., No. C 07-01882 JF, 2009 U.S. 20 Dist. LEXIS 85881, at *5 (N.D. Cal. Sept. 1, 2009) (Fogel, J.). Dueling expert opinions are properly 21 adjudicated at trial, where, as here, they are based upon economic theory, data sources, and 22 statistical techniques that are entirely common to the class. In re Static Random Access (SRAM) 23 Antitrust Litig., No. C 07-01819 CW, 2008 U.S. Dist. LEXIS 107523, at *48 (N.D. Cal. Sept. 29, 24 2008) (Wilken, J). 25 In Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (9th Cir. 2010), the Ninth Circuit, in accord 26 with the law of other Circuits, held that the class certification analysis only investigates the merits 27 where necessary to decide class certification. That is, where facts relevant to class certification overlap 28
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[P]roblems of commonality and predominance evaporate when the more limited class of individual consumers who directly purchased graphics cards from defendants is examined. The complex chain of distribution, the diversity of products, and any purchaser-specific considerations could be ignored.
Defendants Arguments Regarding The Ultimate Merits Are Not Relevant.
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1 with facts relevant to the merits, the court will examine those merits facts for the purpose of deciding 2 class certification. 603 F.3d at 583-84. But neither Dukes nor any other case has endorsed 3 Defendants argument that the Court should examine and decide merits questions even where they do 4 not overlap with class certification issues. To the contrary, district courts may not analyze any 5 portion of the merits of a claim that do not overlap with the Rule 23 requirements. Id. at 594. Indeed, 6 the Ninth Circuit continues to admonish that a full inquiry into the merits of a putative classs legal 7 claims is precisely what both the Supreme Court and we have cautioned is not appropriate for a Rule 8 23 certification inquiry. Id. at 590 (quoting United Steel Workers, 593 F. 3d at 808-09). See also 9 LCD, 2010 U.S. Dist. LEXIS 38122, at *101 (on class certification the court need not plunge into the 10 weeds of an expert dispute). Given that: (1) discovery is far from complete, (2) Rule 23 calls for class 11 certification to be decided at an early practicable time, and (3) there are other procedures, such as 12 summary judgment and trial, for addressing the merits later in the case, nothing in the law supports 13 Defendants request for a premature resolution of merits questions that do not overlap with the 14 pertinent class certification issues. 15 In deciding whether common issues predominate over individual issues, however, the Court
16 may consider whether the evidence used to assess the impact of the conspiracy will be predominately 17 common or predominately individualized. In attacking Dr. Beyer and offering their own version of 18 events, Defendants do not seek to show that such evidence will be individualized. On the contrary, 19 their expert, Dr. Ordover, uses the same type of class-wide common evidence as Dr. Beyer uses. Not 20 surprisingly, the experts disagree regarding what conclusions to draw from that evidence. For 21 example, Dr. Beyer concludes that Wal-Mart had sufficient competitive force to affect Netflixs prices. 22 Dr. Ordover disagrees. The crucial fact here is that both experts use class-wide, common evidence to 23 address that question. 24 25 C. Defendants Specific Arguments Rely On Class-wide Evidence And Are Wrong.
The following sections demonstrate that Defendants specific arguments confirm that class-
26 wide evidence will govern this case and, though not necessary to decide at this stage, the class-wide 27 28
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1 evidence strongly supports Plaintiffs allegations. These sections also confirm that there is an ample 2 record of facts, data and expert opinion to permit the required rigorous analysis. 3 4 1. The time period for which damages are sought
Defendants question whether Wal-Mart would have remained an effective competitor for many
5 years in the but-for world, but cite no way in which the answer will vary among the class members.3 6 Determining the time period in which Wal-Mart (or another firm that bought its online rental business) 7 would have stayed in the market will turn on evidence of Wal-Marts online rental business and plans 8 as a whole. For example, Wal-Marts projection of more than 40-fold growth through 2008 was for its 9 entire online rental business. (Ex. 49 at 5623.) Defendants do not argue that Wal-Mart would have 10 competed only in part of the country. For whatever period it would have operated, including to the 11 present, it would have provided a competitive alternative for all class members. 12 13 2. The fact that Netflix did not raise prices after the conspiracy
There is no legal support for Defendants argument that class certification should be denied
14 because the conspiracy involved a market in which Netflix did not raise its prices. The antitrust laws 15 prohibit agreements whose effect is to stabilize prices and an injury from a failure to lower prices is 16 just as actionable as one where prices were actually raised. Some anti-competitive agreements are 17 motivated by a desire to avoid price cuts. In markets for rapidly evolving technologies such as 18 computers, televisions, etc. it is commonplace for prices to fall as the technology is refined and 19 economies of scale are realized. Yet, as shown by the decisions in DRAM, LCD, SRAM, and GPU, 20 among others, this Court and other courts in this District frequently certify direct purchaser cases 21 involving such technologies. See also In re Polyester Staple Antitrust Litig., No. 3:03CV1516, 2007 22 U.S. Dist. LEXIS 52525, at **92-93 (W.D.N.C. July 19, 2007) (certifying class and recognizing that 23
3 Determining the time period in which competition was adversely affected is equally an issue in price-fixing and market allocation cases. Palmer, 498 U.S. at 50 n.7. Antitrust defendants may argue 25 that the alleged conspiracy began later or ended sooner than the class period. The possibility that the jury will find a shorter conspiracy period by itself is no barrier to class certification. It just means that 26 some class members may receive no damages if the jury determines that those class members purchases were outside the effective period of the conspiracy. Here, too, the possibility that the jury 27 will determine that Wal-Marts influence on prices would have ended before 2010 presents no barrier to class certification. 28 8 HOWREY LLP
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1 market allocation conspiracy may inflate prices even though the actual price did not increase during 2 conspiracy period; crediting Dr. Beyers opinion). Given that Blockbuster charged $14.99 and Netflix 3 expected Amazon to enter at that same price, it is reasonable to conclude that competition, had it 4 continued, could have driven Netflixs prices significantly lower. Dr. Beyers analysis of Netflixs 5 costs and profit margins confirms this conclusion. Here, too, the economics of further price reductions 6 raise class-wide issues. 7 8 3. Wal-Marts competitive significance
The competitive significance of Wal-Mart is a class-wide issue. Wal-Marts actual and
9 potential competitive presence, subscriber counts, financial projections, and strategic decisions on 10 entry, exit, and investment all concern what Wal-Mart did, not what individual Netflix subscribers did. 11 Accordingly, the evidence offered by Defendants and Dr. Ordover is class-wide. For example, they 12 focus on Wal-Marts market share, which they base on the entire online DVD rental market. 13 Defendants focus on Wal-Marts short term performance from June 2003 to March 2005
14 misses the actual and potential market impact of Wal-Mart, the worlds largest retailer, and, in 15 particular, the largest retailer of DVDs in the United States. (Ex. 50.) Wal-Marts actual and potential 16 presence in any market, including in the online DVD rental market, has a price disciplining effect, a 17 fact which Netflix CEO Reed Hastings has often acknowledged. For instance, Hastings told the New 18 York Times that not only does Wal-Mart have enough resources to send a man to the moon, but also 19 to mount a steady, relentless tortoise attack with its nearly identical service. (Ex. 51 at 043320 34.) Another time he told the Wall Street Journal: Anybody who is not scared by [competition from 21 Wal-Mart] is foolish. (Ex. 52 at 2858.) Analysts and others also reported that Wal-Mart would be a 22 formidable challenge to Netflix, with one remarking I wouldnt want to be Netflix with a 500 lb 23 gorilla chasing after it. (Ex. 53 at 2860.) 24 In addition, although they tell a different story now, Wal-Mart leadership consistently boasted
25 about the success of their online DVD rental business. In May 2004, for instance, Wal-Mart told its 26 shareholders that its online DVD rental business had experienced phenomenal growth and customer 27 response in this service since its official launch in 2003. (Ex. 54 at 1740.) At its Holiday 2004 28
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1 meeting, Wal-Mart Stores CEO made the same statement. (Ex. 55 at 2262.) This message was 2 continued in 2005. (Ex. 56 at 0371.) 3 Regardless of comparisons to Netflixs growth, Wal-Mart favorably viewed its own
4 performance. Within two months of launching, its online DVD rental service was able provide 2-day 5 service to 97% of the United States. (Ex. 57 at 0170.) Within three months, it had doubled its market 6 share, prompting Walmart.com CEO John Fleming to exclaim nothing but opportunity ahead! (Ex. 7 58.) On October 24, 2004, a Wal-Mart executive said in a news article that Wal-Mart DVD Rentals 8 had grown beyond our expectations, and that [w]ere really bullish about this service . . . and our 9 customers are enthusiastic. (Ex. 59 at 0733.) As to that article, another Wal-Mart executive said: 10 Couldnt have written it better ourselves. (Ex. 60 at 0916.) 11 Moreover, online DVD rentals was an important venture for Wal Mart Inc. and not just .com.
12 (sic) (Ex. 61.) Wal-Mart was determined to be the low price leader and, as a matter of corporate 13 policy, was keeping ready to react to price reductions and stay beneath our competitors. (Ex. 62 at 14 4404.) Netflix feared that Wal-Mart might introduce a $14.95 program and advertise the online rental 15 service with stickers on every movie sold. (Ex. 63 at 4351.) Given Wal-Marts reputation and 16 ability to undercut Netflix on price, Netflix rejected a price increase proposal in 2003 while Wal-Mart 17 was still in beta testing, with its presentation slides warning: Price increase: Dont want to risk it 18 while Wal-Mart still lurking . . . If they get momentum, they will be thorn in our side forever. (Ex. 64 19 at 5104.) 20 21 4. The difference between three-firm and two-firm competition
Whether the online DVD rental market would be more competitive with three firms Netflix,
22 Blockbuster, and Wal-Mart than just two firms Netflix and Blockbuster is a class-wide issue. 23 Nothing about the individual plaintiffs has any bearing on the market structure as it concerns pricing. 24 The competitive dynamics that arise in three-firm and two-firm competition depend on those firms as a 25 whole and not on the characteristics of individual subscribers. That said, there was a major difference 26 between having two and three competitors in this market. First, at the time of Blockbusters entry in 27 August 2004, Netflixs price was $21.99. Blockbusters entry then changed the competitive 28
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1 dynamic. (Ex. 47 at 73.) Indeed, Blockbusters entry was a material threat to Netflixs continued 2 growth. (Id. at 131-32.) During the time period while there were three firms actively competing, 3 prices plummeted: Blockbuster from $19.99 to $14.99, Wal-Mart from $15.54 to $12.97 (for its 2-out 4 plan), and Netflix from $21.99 to $17.99. 5 Second, since Wal-Mart was a maverick in the three firm market,4 after Wal-Mart exited
6 pursuant to its deal with Netflix, the slide stopped: Netflix was able to maintain its price at $17.99, and 7 Blockbuster was able to raise its price to $17.99. (Ex. 65 at 0922.) When Blockbuster did so, it also 8 raised prices to match Netflixs 5-out and 8-out prices to the penny. (Compare Ex. 66 at 2808-09, 9 with Ex. 67, Appendix at 6, lines 20 & 26, column AT.) 10 Third, Blockbuster and Netflix have priced in parallel to this day, with only a one dollar price
11 change in June-July 2007, for the firms 1-U, 2-U, and 3-U basic subscription plans. (See Ex. 68; Ex. 12 69; Ex. 70 at 9375; and compare Ex. 71, with Ex. 67, Appendix at 12, lines 10, 14 & 16, column CR.) 13 Fourth, it is much easier to engage in tacit or actual collusion with only two firms. That played
14 out here. Following Wal-Marts exit, Netflix and Blockbuster engaged in numerous in-person 15 meetings, phone calls, emails, and otherwise communicated competitively sensitive information to 16 each other, including at least one late night meeting between the companies CEOs in a hotel room.5 17 18 19 20 21 22 23 24 25 26 27 28
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4 Eliminating a competitor from a market can result in higher prices to all customers. (Ex. 47 at 6162.) This is especially so if the exiting firm is a maverick. FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 146 (D.D.C. 2004) (citing FTC and DOJ Merger Guidelines 2.12); see also FTC v. Staples, Inc. 970 F. Supp. 1066, 1092 (D.D.C. 1997). A maverick, by its presence and despite its size, acts to impede tacit collusion and higher parallel pricing by other firms in a concentrated market, and, therefore, the elimination of a maverick facilitates tacit collusion and higher pricing. (Ex. 47 at 25660.) This what happened here. (Beyer Rebuttal Decl., 21). 5 See, e.g., Ex. 72 (2/14/06 email from Blockbuster GC Ed Stead to Hastings introducing Blockbuster CEO John Antioco); Ex. 73 (8/24/06 discussions concerning potential merger; Antitrust issues will need to be addressed with the FTC); Ex. 74 (9/8/06 phone call between Hastings and Antioco rejecting merger but remaining open to a deal re Blockbusters online rental business); Ex. 75 (1/21/07 Hastings proposing Sunday afternoon meeting to Antioco); Ex. 76 (3/11/2007 call between Hastings and Antioco re another potential deal); Ex. 77 (3/13/07 same); Ex. 78 (3/16/2007 same); Ex. 79 (4/11/07 same); Ex. 80 (8/22/07 email setting up meeting with newly hired Blockbuster CEO Jim Keyes, Hastings, and Sarandos in Los Angeles); Ex. 81 (8/29/07 email exchange between Hastings and Keyes re meeting); Ex. 82 (11/30/07 planning meeting between Hastings and Keyes); Ex. 83 (Hastings and Keyes meet in hotel room in Los Angeles in the middle of the night on December 4, 2007).
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5.
The existence of multiple Netflix plans
Virtually every product comes in different sizes or with different features. No case suggests
3 that class certification requires literal uniformity in the product. On the contrary, differences in the 4 relevant product frequently present no barrier to class certification. (See Pls. Br. at 20-21.) See also 5 LCD, 2010 U.S. Dist. LEXIS 38122, at **75-77 (There is ample support in the antitrust case law for 6 certifying classes in which there are some variations between products, customers, marketing and 7 distribution channels.) (collecting cases). Accord In Re Apple & ATTM Antitrust Litigation, No. 5:078 cv-05152 JW, Dkt. 466, slip op. at 24 (N.D. Cal. July 8, 2010) (Rule 23(b)(3) satisfied where core 9 questions relevant to resolving the claims on the merits predominate, even where there is possibility 10 of some variation in damages amongst class members). Here, Netflix routinely viewed competition 11 on a common basis across all plans (or used one plan as representative of all plans). (Pls. Br. at 20.) 12 Defendants cite nothing to show an unusually high degree of variation between Netflixs plans. For 13 example, Netflix and Blockbuster have matched prices across a wide range of plans. Moreover, as 14 Defendants do not deny, even if there is a need to consider some aspects of a given plan separately, 15 common issues still predominate over individual issues. (Id. at 20-21.) Within each plan, all 16 subscribers (often numbering in the millions) pay the same price and there is no need to consider 17 individual subscriber issues.6 18 19 6. The extent to which online DVD rental services are commodities
Defendants engage in a semantic debate over whether online DVD rental services are
20 substantially commoditized, as Dr. Beyer finds, or have some lesser degree of commoditization, as 21 Defendants prefer. Regardless of the label, the facts show that competition in this market is primarily 22 based on price. Even Dr. Ordover acknowledges that price is an important component of online 23 DVD rental competition. (Ex. 47 at 127.) Accordingly, Wal-Marts continued presence would have 24 meant greater price competition. When competitor prices fell in October 2004, Netflix responded with 25
6 Dr. Ordover focuses on perceived differences in Netflixs 5-out through 8-out plans. Even if those present problems for class certification, which they should not, the class can be narrowed to the 27 1-out through 4-out plans. For each of those plans, there is at least one (and often two or three) class representatives who paid to subscribe to that plan. 28 12 HOWREY LLP
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1 price cuts. When competitor prices fell again in June 2007, Netflix again responded with price cuts. 2 The only time that Netflix did not respond, but rather maintained its pricing, was during its 3 conspiratorial communications with Wal-Mart. 4 Moreover, online DVD rental services are far less differentiated than Defendants maintain.
5 When Wal-Mart started beta-testing its service, Netflix CEO Reed Hastings observed its similarity to 6 Netflixs service. He criticized the Wal-Mart online rental service for being unimaginative in its 7 slavish imitation of Netflix, down to the dotted lines on the packaging. (Ex. 84 at 2863.) Hastings 8 isnt alone: Reuters has reported that Wal-Marts rental service mirrors that offered by Netflix, (Ex. 9 85 at 2864), and, likewise, that Blockbusters online service mirrors that of Netflix, (Ex. 86 at 2867.) 10 The New York Times has called the services nearly identical. (Ex. 51 at 0433.) In January 2005, 11 USA Today called both Wal-Mart DVD Rentals and Blockbuster Online copycat programs. (Ex. 87 12 at 0129.) Indeed, Netflix thought Blockbusters product so similar that it filed a patent suit alleging 13 that Blockbuster infringed Netflixs online DVD rental business method patents. See Netflix, Inc. v. 14 Blockbuster, Inc., No. C 06-02361 WHA, 2006 U.S. Dist. LEXIS 63154 (N.D. Cal. Aug. 22, 2006). 15 16 7. Competition from other services
Defendants argue that Netflix faces competition from other forms of video entertainment. That
17 question is common to all class members. Netflix does not charge lower prices to customers who 18 might switch to cable TV and higher prices to Netflix loyalists. They all pay standardized prices. 19 Moreover, such competition is minimal at best. Every price move made by Netflix was a
20 reaction to developments in the online DVD rental market, such as Blockbusters entry. Defendants do 21 not identify a single price reduction by Netflix that was caused by a drop in prices for an alternative 22 such as HBO or DirectTV. Netflixs position on the breadth of competition also contrasts with its 23 sworn statement in March 2005 to the Federal Trade Commission that we do not directly take into 24 account rental store prices in our pricing decisions. We do not monitor closely Blockbusters rental 25 store prices . . . . Netflix competes more directly against other on-line subscription services. (Ex. 88, 26 6-7, at 7458.) It also swore that it did not see pay-per-view (PPV) and video-on-demand 27 28
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1 (VOD) or other similar services as reasonable alternatives . . . . At best, they are distant 2 competitors. (Id., 8, at 7458-59.) 3 4 D. Dr. Beyers Analysis Sufficiently Shows That Common Questions Predominate.
Dr. Beyers detailed analysis of prices and documents demonstrates the relevant competitive
5 dynamics in the market, which would allow common proof of injury and a common formula for 6 damages. Like Dr. Ordover and virtually every economist with substantial testifying experience, Dr. 7 Beyers views have not always prevailed.7 But that is no reason to engage in ad hominem attacks 8 rather than focus on the substance of Dr. Beyers opinion here. Defendants call Dr. Beyer a 9 professional expert witness. (Defs. Br. at 7 n.2.) This is clearly not the case; over his long career 10 Dr. Beyer has taught economics at the university level, worked with respected organizations such as 11 the Ford Foundation and the Brookings Institute, and advised more than 20 nations on economic 12 development. Dr. Ordover, who charges $900 per hour for his frequent testimony, is hardly 13 performing a public service. 14 Dr. Beyers rebuttal report responds in detail to the criticisms from Dr. Ordover. A few
15 specific points warrant discussion here. First, Dr. Beyers central point that Netflixs standardized 16 pricing eliminates any issues specific to individual class members is simply ignored by Defendants 17 and Dr. Ordover. Although their 25-page brief and Dr. Ordovers 64-page report hurl plenty of 18 invective at Dr. Beyer, they never even attempt to offer a reason why the impact of competition from 19 Wal-Mart would require an analysis of any individual class members situation, preferences or 20 negotiating strategy. Netflixs standardized pricing renders all of those irrelevant. 21 22 23 24 25 26 27 28
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7 Defendants gratuitous portrayal of Dr. Beyer ignores the many cases in which courts have found his opinions persuasive on class certification. See, e.g., In re Urethane Antitrust Litig., 251 F.R.D. 629, 635 (D. Kan. 2008); In re Foundry Resins Antitrust Litig., 242 F.R.D. 393, 401 (S.D. Ohio 2007); In re OSB Antitrust Litig., No. 06-826, 2007 U.S. Dist. LEXIS 56584, at *17 (E.D. Pa. Aug. 3, 2007); Polyester Staple, 2007 U.S. Dist. LEXIS 52525, at **120-21; Bulk Graphite, 2006 U.S. Dist. LEXIS 16619, at **48-49; In re Vitamins Antitrust Litig., 209 F.R.D. 251, 266-67 (D.D.C. 2002). Professor Ordover is not infallible when it comes to class certification. Judge Illston recently rejected his arguments, which are similar to those he makes here. See LCD, 2010 U.S. Dist. LEXIS 38122, at **99-101.
14
Second, while Defendants and Dr. Ordover disagree with Dr. Beyers assessment of the
2 competitive significance of Wal-Marts exit, they do so with class-wide evidence. In so doing, they 3 prove Dr. Beyers point: the issues of impact and damages can be decided with common evidence. 4 Third, they do not deny that Dr. Beyers two proposed damages methodologies the price-cost
5 margin approach and the benchmark approach are well-accepted. (See Ex. 47 at 204-05.) The case 6 law agrees. (Pls. Br. at 21-22.) Dr. Ordover observes that these methodologies need to be used with 7 care so as to separate the effects of Wal-Marts exit from other factors. (E.g., Ordover Rep., 135.) 8 The same could be said of virtually every damages methodology. 9 10 E. The Class Representatives Experience Does Not Raise Individualized Issues.
By definition, the eight class representatives subscribed to Netflix, not Wal-Mart. Defendants
11 contend that this somehow indicates that Wal-Marts business was not viable. The fact that some 12 drivers are loyal to Ford and others are loyal to Chevy does not change the fact that Ford and Chevy 13 compete on price. Thus, the issue is not the preference of these eight individuals; rather, the issue is 14 the competitive dynamic of the market as a whole. The fact that these eight individuals had little 15 awareness of Wal-Marts service is hardly surprising given that the service shut down five years ago. 16 It would have benefitted all Netflix subscribers, regardless of whether they were loyal to Netflix or 17 were among those who might have used Wal-Mart, had Wal-Mart remained on the market. 18 IV. 19 CONCLUSION For the foregoing reasons and the reasons stated in their moving papers, the reports of Dr.
20 Beyer, and the evidence submitted herewith, Plaintiffs respectfully submit that the Proposed Class 21 should be certified and that Plaintiffs Counsel be appointed to continue to serve as Class Counsel. 22 23 24 25 26 27 28
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DATED: July 12, 2010 Respectfully Submitted, /s/ Robert G. Abrams Robert G. Abrams Thomas A. Isaacson Peter A. Barile III HOWREY LLP 1299 Pennsylvania Avenue, N.W. Washington, DC 20004 Tel.: (202) 783-0800 Fax: (202) 383-6610 15
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Paul Alexander HOWREY LLP 1950 University Avenue East Palo Alto, CA 94303 Tel.: (650) 798-3500 Fax: (650) 798-3600 Emily L. Maxwell HOWREY LLP 525 Market Street, Suite 3600 San Francisco, CA 94105 Tel.: (415) 848-4947 Fax: (415) 848-4999 Lead Class Counsel and Members of the Steering Committee Guido Saveri R. Alexander Saveri Lisa Saveri Cadio Zirpoli Melissa Shapiro SAVERI & SAVERI, INC. 706 Sansome Street San Francisco, CA 94111 Tel.: (415) 217-6810 Fax: (415) 217-6813 Liaison Class Counsel and Member of the Steering Committee Joseph J. Tabacco, Jr. Christopher T. Heffelfinger Todd A. Seaver BERMAN DEVALERIO 425 California Street, Suite 2100 San Francisco, CA 94104 Tel.: (415) 433-3200 Fax: (415) 433-6382 Manuel J. Dominguez BERMAN DEVALERIO 4280 Professional Center Drive, Suite 350 Palm Beach Gardens, FL 33410 Tel: (561) 835-9400 Fax: (561) 835-0322 Eugene A. Spector Jeffrey J. Corrigan William G. Caldes Theodore M. Lieverman Jay S. Cohen Jonathan M. Jagher SPECTOR ROSEMAN KODROFF & WILLIS, P.C. 1818 Market Street, Suite 2500 16
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Philadelphia, PA 19103 Tel.: (215) 496-0300 Fax: (215) 496-6611 H. Laddie Montague, Jr. Merrill G. Davidoff David F. Sorensen BERGER & MONTAGUE, P.C. 1622 Locust Street Philadelphia, PA 19103 Tel.: (215) 875-3010 Fax: (215) 875-4604 Members of the Steering Committee
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Barile - NFLX Class Cert Brief

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Case4:09-md-02029-PJH Document310

2 TABLE OF AUTHORITIES.....................................................................................................................ii 3 I. 4 II. 5 III. 6 7 B. 8 9 10 1. 11 2. 12 13 14 15 5. 16 6. 17 18 19 20 E. 21 22 IV. 23 24 25 26 27 28

Defendants Arguments Regarding The Ultimate Merits Are Not Relevant.

The competitive significance of Wal-Mart is a class-wide issue. Wal-Marts actual and

The existence of multiple Netflix plans

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