Video Game Rental Company Says U.S. Postal Service Playing Favorites

A federal appeals court in Washington today revived a company’s challenge of the alleged preferential treatment that the U.S. Postal Service gives to Netflix for rates and service terms.

netflixThe challenger, GameFly, which rents and sells video games to customers, asked the Postal Service for the same treatment that it provides Netflix, the movie rental company, when it comes to rates and service terms for sending DVDs through the mail.

DVD mailers, the U.S. Court of Appeals for the D.C. Circuit said today, tend to jam the Postal Service’s automated, high-speed letter-sorting equipment. The machines, the court said, sometime break DVDs. That’s a problem for GameFly, however, and not Netflix, whose DVD mailers are manually handled. Netflix isn’t charged extra for the service, the court said.

“The Postal Service has saved Netflix—apparently its biggest DVD mailer customer—from this crippling otherwise industry-wide problem by diverting Netflix mail from the automated letter stream, shifting it to specially designated trays and containers, hand culling it, and hand processing it,” Chief Judge David Sentelle wrote today in the D.C. Circuit ruling. The opinion is here.

A three-judge panel today remanded GameFly’s gripes to the Postal Regulatory Commission for further proceedings. The commission earlier concluded that the Postal Service discriminated against GameFly, represented by a team from Venable. But the commission, according to the appeals court, “left much of the discrimination in place.”

At the commission level, GameFly asked the Postal Service to provide the company and other DVD rental outfits with the same manual treatment that’s given to Netflix, which wasn’t a party in the appeal. GameFly also requested reduced rates for flat-shaped DVD mailers. The commission, the appeals court said, didn’t take up either remedy, choosing instead to fashion its own solution.

The commission, the D.C. Circuit said today, “was required either to remedy all discrimination or to explain why any discrimination it left in place was reasonable.” Without manual processing, the court said, “switching to letter mail could subject GameFly to an epidemic of cracked and shattered DVDs.”

The appeals court didn’t dictate how the Postal Service should end the discrimination against GameFly. The court left it up to the commission to solve that problem. Sentelle said “there may be a range of other possible remedies which would withstand appellate review.”

Venable partner David Levy in Washington, who represented GameFly in the D.C. Circuit, declined to comment.

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