Wal-Mart antitrust class action settlement gets preliminary okay

Posted on: September 20th, 2011 by Steve Larson
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Wal-Mart recently surged into third place in the movie-download business, barely a year after buying the startup Vudu.  Now, the giant internet retailer may have scored another coup.

A new court ruling gives Wal-Mart a major boost in its effort to muscle in on Netflix’s streaming subscribers.  A federal court in California late last week approved a class-action settlement that requires Wal-Mart to pay out $27.5 million.  But here’s the key element of the ruling: Wal-Mart will be allowed to pay the 40 million Netflix subscribers in the form of gift cards for Wal-Mart.com — where there is prominent advertising for Vudu, which rents and sells movies a la carte.

The class action came in response to a dinner meeting in 2005 at which the CEOs of Netflix and Wal-Mart.com allegedly agreed to divvy up the DVD market.  Consumer advocates say that under the pact, Wal-Mart agreed not to rent DVDs if Netflix agreed not to sell them.  Class action suits were filed against both companies in 2009.

The court ruling is a blow to Netflix, which had earlier blasted the settlement as “the equivalent of a marketing campaign that costs Wal-Mart only 68 cents per potential customer.”

In what now appears to be a shrewd move by Wal-Mart, the company reached a settlement with the plaintiffs in July.  The court ruling last week gave tentative approval to the settlement.  Under its terms, approximately 40 million past and current Netflix subscribers in the U.S. and Puerto Rico will be notified by e-mail that they are entitled to redeem an online settlement card at Wal-Mart.com.  Members of the class action can also choose to receive a check in the mail.  The settlement states that claimants will receive their share of the $27 million, minus 25% legal fees.

In court filings, Netflix argued that the settlement effectively hands over its customer list to Wal-Mart at a time when the retail giant is trying to expand its online video offerings.  In response, the court approved an arrangement that will see a third party, not Wal-Mart, manage the payouts.  The procedures also say that Wal-Mart cannot keep track of which people that register their gift cards on the site are class action claimants.

Still, the way the settlement is being carried out will likely increase awareness of Vudu as a potential alternative to Netflix at a time when Netflix is facing some new challenges.  In recent months, Netflix has failed to renew a key agreement with major content provider, Starz, and announced a controversial plan that will significantly increase costs for subscribers who elect to receive movies both in the mail and a streaming service.

For the first half of the year, Vudu had 5.3% of the online rental-and-purchase movie market, behind only Apple’s iTunes, with a 65.8% share, and Microsoft Corp.’s Zune Video Marketplace, with 16.2%.  Vudu was more popular than comparable offerings from both Amazon and Sony.

“Netflix continues to believe the lawsuit is without merit and the settlement changes nothing,” said spokesman Steve Swasey by e-mail.  Wal-Mart didn’t reply to phone requests for comment.

The Wal-Mart settlement is slated to receive final approval next February.  Meanwhile, Netflix says it will continue to fight ongoing court claims that it is also liable for the same antitrust allegations.