(CN) - The U.S. Postal Service, which processes Netflix mail by hand, free of charge, must end its bias against other DVD-mailing services like Gamefly, the D.C. Circuit ruled.
Whereas Netflix uses the mail to rent DVD films to customers, GameFly offers a similar service with video games.
But the Postal Regulatory Commission found in 2011 that the Postal Service discriminates against Gamefly by giving Netflix, its biggest DVD mailer customer, preferential rates and service terms.
The Postal Service's automated mail processing often damages the Gamefly DVDs, particulary when a customer has sent it in a return envelope. Gamefly's DVD mailers also tend to jam mail-sorting equipment.
Netflix does not incur this problem, however, since the Postal Service diverts "Netflix mail from the automated letter stream, shifting it to specially designated trays and containers, hand culling it, and hand processing it," the D.C. Circuit explained. "Rather obviously, this is not without cost to the Postal Service. Nonetheless, the service provides it to Netflix free of charge."
Since the service has refused to offer Gamefly the same perks, Gamefly pays 88 cents a pop to send its rentals as 1-ounce, first-class flats - twice as much as it costs to mail 1-ounce, first-class letters. Gamefly also must use a protective cardboard insert to cushion the DVDs, but that makes the mailer heavier, triggering a second ounce charge of 20 cents per piece.
"All told, it costs GameFly millions annually to avoid the Postal Service's automated letter processing stream," Chief Judge David Sentelle wrote for a three-member panel.
Though the service's Office of Inspector General recommended that Netflix pay more for its special treatment in 2007, the service ignored this advice, and Gamefly filed its discrimination complaint two years later. Netflix is not a party to the action.
Though the Postal Regulatory Commission agreed in 2011 that Gamefly does face discrimination, Gamefly took issue with the ordered "remedies."
The commission had ruled that USPS should waive the 20-cent second-ounce charge and refrain from imposing a nonmachinable surcharge on DVD mailers sent as letter mail that weigh 1 ounce or less.
It acknowledged, however, that the order could still require GameFly to "continue to generate more than double the contribution per piece than Netflix mail."
Nevertheless it called the remaining rate disparity "reasonable in light of the differences between the letter-shaped and flat-shaped roundtrip DVD mailers."
The D.C. Circuit vacated the order Friday and remanded the case.
"The unstated assumption of this explanation is that GameFly has a free choice in whether to use flats or letters," Sentelle wrote. "But the commission's findings establish that the Postal Service's terms of service discrimination against GameFly, not GameFly's free choice, led to the companies' use of different mailers. The commission cannot justify the terms of service discrimination its remedy leaves in place (providing manual letter processing to Netflix but not to GameFly) based on the companies' use of different mailers when the use of different mailers is itself the product of the service discrimination." (Parentheses in original.)
The commission must either remedy all discrimination or explain why any residual discrimination is due, according to the ruling.
"Even if the commission's rejection of GameFly's proposed remedies was reasonable, its order is still arbitrary and capricious because it left discrimination in place without reasonable explanation," Sentelle wrote. "Therefore, we must vacate the commission's order and remand this case for an adequate remedy."
The nine-page opinion notes that Blockbuster Inc. may have benefitted from some of the same favorable treatment extended to Netflix.
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