Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-15-01018/USCOURTS-caDC-15-01018-0/pdf.json

Parties Involved:
GameFly, Inc.
Intervenor for Respondent
Netflix, Inc.
Intervenor for Respondent
Postal Regulatory Commission
Respondent
United States Postal Service
Petitioner

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 20, 2015 Decided March 22, 2016

No. 15-1018

UNITED STATES POSTAL SERVICE,

PETITIONER

v.

POSTAL REGULATORY COMMISSION,

RESPONDENT

GAMEFLY, INC. AND NETFLIX, INC.,

INTERVENORS

On Petition for Review of an Order

 of the Postal Regulatory Commission

David C. Belt, Attorney, U.S. Postal Service, argued the

cause and filed the briefs for petitioner. Stephan J. Boardman,

Chief Counsel, entered an appearance.

Henry C. Whitaker, Attorney, U.S. Department of Justice,

argued the cause for respondent. With him on the brief were

Benjamin C. Mizer, Principal Deputy Assistant Attorney

General, Michael S. Raab, Attorney, David A. Trissell, General

Counsel, Postal Regulatory Commission, Christopher J. Laver

and Anne J. Siarnacki, Deputy General Counsels, and Richard

A. Oliver, Attorney.

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Joy M. Leong, David M. Levy, and John F. Cooney were on

the brief for intervenors GameFly, Inc. and Netflix, Inc. in

support of respondent. Matthew D. Field entered an appearance.

Before: PILLARD, Circuit Judge, SILBERMAN and SENTELLE,

Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge

SILBERMAN.

SILBERMAN,Senior Circuit Judge:The Postal Service offers

a host of different products for consumers and businesses. By

statute, the Postal Service’s products are divided into

“competitive” products, which are subject to a statutory price

floor, and “market-dominant” products, which are subject to a

statutory price ceiling. In this case, the Postal Service applied to

the Postal Regulatory Commission to have one of the Service’s

products, the “round-trip mailer,” used in the DVD-by-mail

industry, classified as competitive rather than market-dominant.

The Commission denied the request, and the Postal Service

petitioned for review. We deny the petition. 

I.

The round-trip mailer is a product used by intervenors

Netflix and GameFly whereby customers receive a DVD disc by

mail that they can return with an enclosed envelope. Netflix, a

provider of movies, is the dominant purchaser of this product,

with nearly 97 percent of purchases.1

 It is provided only by the

Postal Service; Fed Ex and UPS do not offer anything similar. 

Customers, to be sure, can also rent DVDs at various physical

locations, such as storefronts and kiosks, but these alternatives

are declining. Movies can also be delivered to customers

1

GameFly provides video games on disc.

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through streaming directly to televisions or computers, and that

is a booming market in which Netflix, which also offers

streaming, meets a number of direct competitors.

Netflix customers are, in huge numbers, leaving the DVDby-mail service. After peaking in 2010, DVD-by-mail declined

14 percent, and then another 41, 21, and 22 percent, year over

year. Meanwhile, streaming service continues to expand,

growing 26, 25, and 19 percent, year over year, from 2012 to

2014. Nevertheless, a significant core continues to use the

round-trip mailer service, in part because the content available

through the round-trip mailer is more extensive than that

available through streaming and, in part, for difficulties in

reception with streaming. Indeed, nearly two-thirds of all DVDby-mail customers also subscribe to streaming. Importantly,

although the round-trip mailer is a declining product, it remains

quite profitable to Netflix, with a profit margin of nearly 50

percent. That makes it considerably more profitable than

streaming.

In 2013, the Postal Service formally requested that the

Commission remove the round-trip mailer from the marketdominant list, where it is subject to a statutory price ceiling, and

place it on the competitive product list, where it would be

subject to only a statutory price floor. The request was opposed

by intervenors Netflix and GameFly, as well as by a

Commission-appointed public representative. Market-dominant

products obviously include those that are an actual monopoly,

but the governing statute describes market-dominant products

more broadly as those “in the sale of which the Postal Service

exercises sufficient market power.” See 39 U.S.C. §3621-3634.

As noted, the Commission denied the request. Applying

antitrust concepts, it defined the relevant market as the physical

delivery of DVDs by mail, and ruled that the Postal Service, as

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the only entity producing the round-trip mailer, exercised

sufficient power within that market to justify a market-dominant

classification. 

II.

Section 39 U.S.C. § 3642(b)(1), the governing statute’s

definition of a market-dominant product, includes all products

meeting the following description: 

[E]ach product in the sale of which the Postal Service

exercises sufficient market power that it can effectively

set the price of such product substantially above costs,

raise prices significantly, decrease quality, or decrease

output, without risk of losing significant levels of

business to other firms offering similar products.

(emphasis added)

It would seem that a permissible reading of the statute

would foreclose the Postal Service’s position because arguably

there really are no products in the marketplace “similar” to the

round-trip mailer. But the Commission does not rely on that

interpretation of the language. Instead, the Commission and all

parties agree that the statute should be read as incorporating

general concepts of federal antitrust law.2

In that regard, the Postal Service contends that the

Commission erred in its definition of the market. First, it made

2

A statutory price cap, indexed to inflation, is meant to assure that

the Postal Service does not abuse a dominant position, see U.S. Postal

Serv. v. Postal Regulatory Comm’n, 785 F.3d 740, 744 (D.C. Cir.

2015). This is not unlike rate regulation for other state-granted

monopolies. The language of 39 U.S.C. § 3642 has been consistently

taken to reflect basic antitrust concerns with market power.

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too much of the difference between DVD-by-mail and streaming

services, whereas antitrust law has traditionally recognized that

even differentiated products, provided they are reasonable

substitutes for one another, may be included in the same market.

In this case, the precipitous drop in DVD-by-mail customers,

which has attended the concurrent rise in streaming services,

strongly suggests, argues the Postal Service, that a substantial

substitution is taking place, at the consumer level, between the

two forms of delivery. That substitution is an indication that

whatever the differences between DVD-by-mail and streaming,

customers see them as similar enough that they ought be

considered in the same market. And as DVD-by-mail service is

in the same market as streaming services downstream, the

Service argues that streaming services have the effect of

disciplining the price the Postal Service can charge for DVD-bymail service upstream, thus mitigating any market power. 

Secondly, the Postal Service argues that the Commission

relied too heavily on the “core” group of DVD-by-mail

consumers who do not use streaming services. While any

product will have core consumers who refuse to switch products

even in the face of price increases, the Commission, we are told, 

overemphasized their numbers or loyalty. This misconception

led to an unduly narrow definition of the downstream market,

failing to take account of the constraints faced by the Postal

Service upstream in setting its price for the round-trip mailer. 

In the alternative, the Postal Service offers two arguments

apart from market definition. Even if the definition of the

relevant market was not unreasonable, the Commission still

failed to consider that Netflix, as a near-monopsonist in

purchasing the round-trip mailer upstream, can exercise strong

countervailing buyer power. As such, it would limit the Postal

Service’s pricing discretion. And the Commission did not

consider that the market, defined as either DVD-by-mail or

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distribution of content generally, is in a constant state of

technological evolution. Such change provides an intrinsic

limitation on the exercise of market power.

The Commission’s arguments dovetail with its

considerations set forth in its order. In defending its definition

of the relevant market as limited to DVD-by-mail, the

Commission emphasizes evidence that DVD-by-mail provides

a different range of material, and services a different base of

consumers, than streaming and other distribution channels. 

Regarding substitutability, it is noteworthy that many customers

subscribe to both DVD-by-mail and streaming services. It

further disputes the Postal Service’s assertion that the

simultaneous decline in DVD-by-mail subscriptions and

increase in streaming subscriptions suggests a high enough

substitutability to justify a unified market, because the shift

toward streaming may have nothing to do with price sensitivity

of DVD-by-mail customers; it may just as well result from

broader market trends unrelated to price-based substitution. 

The Commission stresses that the Postal Service bore the

burden in the present case. It was obliged to present evidence

demonstrating that, despite the fact that the Postal Service is the

only entity providing the round-trip mailer for DVD-by-mail

services, it nevertheless lacked market power. That evidence,

particularly in the form of price elasticity data, was lacking. 

Thus, the Commission argues it was reasonable to conclude that

the Postal Service did not meet its burden. 

Finally, the Commission contends that even if there is

downstream competition between delivery by mail and delivery

by other means (such as streaming and kiosks), the Postal

Service still failed to show that it would not be in a position to

simply capture more of Neflix and GameFly’s profits upstream.

Even if increased prices resulting from a new classification

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could not be passed on by Netflix and GameFly because of

rugged downstream competition, the removal of a price ceiling

would allow the Postal Service to use its position as the sole

provider of the round-trip mailer to capture a larger portion of

the intervenors’ profits. 

* * *

Petitioner’s case essentially rests on the proposition that the

proliferation of competitors in the downstream market (direct

sales to consumers) restricts the capacity of the Postal Service

to raise prices to Netflix and GameFly. Therefore, the Postal

Service contends, streaming services and DVD-by-mail services

compete with each other and, under antitrust law, should be

treated as a single market. We should note at the outset of our

analysis that we do not sit as an appellate court reviewing an

antitrust case from the district court. Rather we are reviewing

an administrative agency decision under the APA – which

means the agency is entitled to deference. Even if we were to

disagree with the Commission’s economic analysis, we are

obliged to affirm if the agency was at least reasonable.3 See City

of Los Angeles v. Dept. of Transp., 165 F.3d 972, 977 (D.C. Cir.

1999) (“[W]e do not sit as a panel of referees on a professional

economics journal, but as a panel of generalist judges obliged to

defer to a reasonable judgment by an agency acting pursuant to

congressionally delegated authority.”).

But we think the Commission was more than just

reasonable; its decision seems rather compelling. As the

Commission found, the petitioner produced no evidence to

3

In other words, not arbitrary and capricious, see Gundersen

Lutheran Med. Ctr., Inc. v. Sebelius, 666 F.3d 1335, 1337 (D.C. Cir.

2011); Blumenthal v. FERC, 613 F.3d 1142, 1146-47 (D.C. Cir.

2010).

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establish that a significant increase in the price of DVD-by-mail

– the cost to Netflix and GameFly in the upstream market –

would result in a significant shift by Netflix or GameFly away

from purchasing DVD-by-mail services upstream. In other

words, there was no evidence presented to establish at what

point an increase in the price the Service charged would cause

Netflix and Gamefly to look elsewhere for distribution.

There is a fundamental logical flaw in the Service’s

argument. The Service enjoys market power in the (upstream)

distribution market regardless of conditions in the (downstream)

content market because it does not face any competition in the

distribution market. Whether because of economic or legal

hurdles, no other business offers or seems reasonably poised to

offer a competing distribution channel that Netflix could readily

take advantage of. If the Postal Service were to raise the price of

its round trip mailer to Netflix and GameFly, there are only two

possibilities. First, it may be the downstream market is not

sufficiently competitive, and thus Netflix and GameFly could

pass on the price increase to consumers without consequence.

Second, alternatively, it may be the downstream market is

competitive, and thus Netflix and GameFly could not pass on

the price increase to consumers without losing them. In the first

instance, the Postal Service’s market power upstream coexists

with Netflix and Gamefly’s market power downstream. They

would share in the supracompetitive price. In the second

instance, although Netflix and Gamefly lack power downstream,

the Service’s power upstream remains, and puts it in a position

to extract more of the profit margin of its captive suppliers. In

either case, the Postal Service employs market power.4

4

Court precedent, and antitrust doctrine generally, recognize that

market power may be exercised upstream, even where there is a

competitive market downstream. See Coal Exporters Association v.

United States, 745 F.2d 76, 84-85 (D.C. Cir. 1984); 2B AREEDA ET.

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There remain petitioner’s two other arguments, even

assuming it can be thought to have market power. First, that

Netflix – after all, a market behemoth – has sufficient economic

clout to counter petitioner’s market power. But that theory

simply doesn’t apply in this case because Netflix and GameFly

have no alternative means to transport DVDs by mail, so there

is no way that Netflix could exercise any bargaining leverage

vis-a-vis the Postal Service. It should be obvious that as long as

the DVD-by-mail business is quite profitable, Netflix has no

rational economic course but to pay the market-dominant piper. 

As to the second alternative argument, regarding the speed of

technological change, we have said that market power analysis

need account for only potential “substitutes that constrain

pricing in the reasonably foreseeable future.” United States v.

Microsoft Corp., 253 F.3d 34, 53-54 (D.C. Cir. 2001). The

Commission was not, therefore, unreasonable to hold that the

potential technological evolution suggested by the Service was

too speculative to condition its market power analysis here. 

For the foregoing reasons, we deny the petition for review. 

So ordered.

AL., ANTITRUST LAW ¶ 564 (4th ed. 2014). This effect is recognized

in several other antitrust inquiries that involve market power, see

Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 549

U.S. 312 (2007) (finding buyer power in upstream market for inputs,

despite lack of seller power in national downstream market for

outputs); Mandeville Island Farms v. American Crystal Sugar Co.,

334 U.S. 219 (1948) (finding market power upstream, despite lack of

power downstream); EINER ELHAUGE, UNITED STATES ANTITRUST

LAW AND ECONOMICS, 172, 263 (2d ed. 2011); HERBERT

HOVENKAMP, FEDERAL ANTITRUST POLICY, § 8.10 (4th ed. 2011).

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