Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-11-01179/USCOURTS-caDC-11-01179-0/pdf.json

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

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 22, 2012 Decided January 11, 2013 

No. 11-1179 

GAMEFLY, INC., 

PETITIONER

v. 

POSTAL REGULATORY COMMISSION, 

RESPONDENT

UNITED STATES POSTAL SERVICE, 

INTERVENOR

On Petition for Review of an Order 

of the Postal Regulatory Commission 

 David M. Levy argued the cause for petitioner. With him 

on the briefs was Matthew D. Field. 

 Jeffrey Clair, Attorney, U.S. Department of Justice, 

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

Tony West, Assistant Attorney General, Michael S. Raab, 

Attorney, and Stephen L. Sharfman, General Counsel, Postal 

Regulatory Commission, R. Brian Corcoran, Deputy General 

USCA Case #11-1179 Document #1414643 Filed: 01/11/2013 Page 1 of 9
2 

Counsel, and Richard A. Oliver, Attorney. Sarang V. Damle, 

Attorney, U.S. Department of Justice, entered an appearance. 

 Michael J. Elston, Chief Counsel, and Morgan E. Rehrig, 

Attorney, U.S. Postal Service, were on the brief for intervenor 

United States Postal Service. 

 Before: SENTELLE, Chief Judge, GRIFFITH and 

KAVANAUGH, Circuit Judges. 

 Opinion for the Court filed by Chief Judge SENTELLE. 

SENTELLE, Chief Judge: GameFly, Inc. (“GameFly”) and 

Netflix, Inc. (“Netflix”) use the United States Postal Service 

(the “Postal Service”) to mail DVDs to their customers. 

GameFly filed a complaint under 39 U.S.C. § 3662(a) with 

the Postal Regulatory Commission (the “Commission”) 

accusing the Postal Service of providing preferential rates and 

terms of service to Netflix in violation of 39 U.S.C. § 403(c). 

The Commission issued an order finding that the Postal 

Service was indeed discriminating against GameFly, but its 

remedy left much of the discrimination in place. GameFly 

appealed. Because we conclude that the Commission’s 

explanation of the residual discrimination its remedy left in 

place is unreasonable, we vacate the Commission’s order and 

remand for further proceedings. 

I. BACKGROUND 

GameFly is in the business of renting and selling video 

games to customers. Netflix, not a party to this litigation but 

much a part of the subject of it, is in the business of renting 

DVDs of movies and other similar content. While the 

companies are not direct competitors, Netflix being 

principally in the movie business and GameFly dealing in 

USCA Case #11-1179 Document #1414643 Filed: 01/11/2013 Page 2 of 9
3 

games, they use the same medium for the transmission of 

their product.1

 The DVD medium (an acronym for “digital 

versatile disk” or “digital video disk”) is an optical storage 

media format used for the recording of movies, video games, 

and other content. The physical nature of the DVD does not 

change according to the content. In their rental businesses, 

GameFly and Netflix mail DVDs to customers, who later 

return the disks to the company, typically in a pre-supplied 

envelope or container. 

Because the disks are small and light, they qualify for 

mailing in one ounce letters through the Postal Service. 

Unfortunately for GameFly, but as it develops not Netflix, the 

Postal Service’s automated mail processing often damages the 

DVDs—particularly on the return trip. Conversely, DVD 

mailers tend to jam the Postal Service’s automated letter 

sorting equipment. Again, this has been to the detriment of 

GameFly but not Netflix. 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. Rather obviously, this is not without cost 

to the Postal Service. Nonetheless, the Service provides it to 

Netflix free of charge. 

GameFly has requested that the Postal Service extend to 

its mailings the same treatment afforded Netflix. The Postal 

Service has refused, making it impossible for GameFly to use 

 

1

 While the record is not totally clear, it appears that a third company, 

Blockbuster, Inc., may have benefitted from some of the same favorable 

treatment allegedly extended to Netflix. Blockbuster is predominantly a 

movie renter, but also competes with GameFly in the provision of video 

games. 

USCA Case #11-1179 Document #1414643 Filed: 01/11/2013 Page 3 of 9
4 

First-Class machinable letter rates for its DVDs. Instead, 

GameFly must resort to workarounds to get its DVDs to its 

customers. First, GameFly mails its inbound and outbound 

DVD mailers as First-Class “flats”—a more expensive rate 

category intended for larger envelopes—which prevents much 

of the DVD breakage associated with automated letter 

processing. Second, GameFly places a protective cardboard 

insert in its DVD mailers to cushion the DVDs against shock 

and to ensure that the Postal Service’s machines recognize the 

mailer as a flat and not a letter. 

These workarounds are expensive. The Postal Service 

charges $0.44 for a DVD mailer entered as a one-ounce FirstClass letter, but $0.88 for the same piece entered as a oneounce First-Class flat. The protective cardboard insert pushes 

GameFly’s mailer above the one-ounce mark, triggering a 

second-ounce charge of $0.20 per piece as well. All told, it 

costs GameFly millions annually to avoid the Postal Service’s 

automated letter processing stream. 

The Postal Service also normally charges a 

nonmachinability surcharge on mailers that cannot be 

processed in its automated sorting equipment, but does not 

require Netflix to pay that surcharge even though its mailers 

are nonmachinable. For years, some Postal Service staff have 

expressed concern about the cost, operational problems, 

unfairness, and potential legal exposure Netflix’s preferential 

treatment creates. In 2007 an investigative report from the 

Postal Service’s Office of Inspector General recommended 

that the Postal Service charge extra for the special manual 

processing given to Netflix. The Postal Service did not act on 

that recommendation. 

 

GameFly filed a discrimination complaint with the 

Commission on April 23, 2009. The Commission issued its 

USCA Case #11-1179 Document #1414643 Filed: 01/11/2013 Page 4 of 9
5 

decision on April 20, 2011, and ruled in favor of GameFly on 

nearly every significant issue in dispute. It found that the 

Postal Service had discriminated against GameFly in rates and 

terms of service. It rejected each of the Postal Service’s 

arguments that the discrimination was reasonable. While 

GameFly was victorious in the merits of its discrimination 

claim, it was not satisfied with the Commission’s remedial 

order. GameFly had sought two remedies which the 

Commission rejected. First, GameFly had requested a 

Commission order requiring the Postal Service to offer 

GameFly and other DVD rental companies manual culling 

and processing at machinable letter rates to the same extent as 

Netflix. Second, it requested a reduced automation rate for 

flat-shaped DVD mailers (the rate could be set at a level 

slightly above the automation letter rate for DVD mailers to 

produce equal contributions per piece for the two shapes). 

The Commission rejected both of GameFly’s proposed 

remedies and fashioned one of its own instead. First, it 

ordered the Postal Service to waive the 20-cent second-ounce 

charge for DVDs mailed as flats. Second, it ordered the 

Postal Service to refrain from imposing a nonmachinable 

surcharge on any qualifying round-trip DVD mailer that is 

sent as letter mail and that weighs one ounce or less. The 

Commission acknowledged that its order could still require 

GameFly to “continue to generate more than double the 

contribution per piece than Netflix mail,” but it explained that 

“the remaining rate disparity is reasonable in light of the 

differences between the letter-shaped and flat-shaped roundtrip DVD mailers.” GameFly petitioned for review of the 

Commission’s order. 

USCA Case #11-1179 Document #1414643 Filed: 01/11/2013 Page 5 of 9
6 

II. DISCUSSION 

We have jurisdiction for this appellate review under 39 

U.S.C. § 3663, which provides for petitions for review in this 

court. The standard of review by incorporation of section 706 

of title 5 is drawn from the Administrative Procedure Act. 

Under APA review, we may set aside an agency action that is 

“arbitrary, capricious, an abuse of discretion, or otherwise not 

in accordance with law.” 5 U.S.C. § 706(2)(A). In reviewing 

agency action under that standard, “a court is not to substitute 

its judgment for that of the agency. Nevertheless, the agency 

must examine the relevant data and articulate a satisfactory 

explanation for its action including a rational connection 

between the facts found and the choice made.” Motor Vehicle 

Mfrs. Ass’n of the U.S., Inc. v. State Farm Mut. Auto. Ins., 463 

U.S. 29, 43 (1983) (internal quotation marks omitted). 

“Certainly, if the result reached is illogical on its own terms, 

the Authority’s order is arbitrary and capricious.” Am. Fed’n 

of Gov’t Emps. v. FLRA, 470 F.3d 375, 380 (D.C. Cir. 2006) 

(internal quotation marks omitted). As to the substantive law 

applicable to this specific matter under review, we look to 39 

U.S.C. § 403(c). That section provides: 

In providing services and in establishing 

classifications, rates, and fees under this title, the 

Postal Service shall not, except as specifically 

authorized in this title, make any undue or 

unreasonable discrimination among users of the mails, 

nor shall it grant any undue or unreasonable 

preferences to any such user. 

39 U.S.C. § 3662 provides administrative remedy for the 

breach of the standards set forth in section 403(c). 

Specifically, § 3662(a) authorizes complaints by “[a]ny 

interested person . . . who believes the Postal Service is not 

USCA Case #11-1179 Document #1414643 Filed: 01/11/2013 Page 6 of 9
7 

operating in conformance with” § 403(c). Subsection 3662(c) 

provides: 

If the Postal Regulatory Commission finds the 

complaint to be justified, it shall order that the Postal 

Service take such action as the Commission considers 

appropriate in order to achieve compliance with the 

applicable requirements and to remedy the effects of 

any noncompliance . . . . 

Subsection 403(c) only prohibits “undue” or 

“unreasonable” discrimination. Where the Commission 

allows discrimination to exist in the postal rate structure, it 

must explain why that discrimination is due or reasonable 

under § 403(c). See Nat’l Easter Seal Soc’y v. USPS, 656 

F.2d 754, 760-62 (D.C. Cir. 1981). GameFly asks us to 

review the reasonableness of the Commission’s rejection of 

its proposed remedies. But regardless of whether it adopted 

the precise remedy sought by the complainant, the 

Commission was required either to remedy all discrimination 

or to explain why any discrimination it left in place was due 

or reasonable under § 403(c). Therefore, we begin by 

examining the Commission’s explanation for the residual 

discrimination its order left in place. 

Here is that explanation in its entirety: 

The difference in the rates that will be paid by Netflix 

and GameFly under the remedy is justified by cost 

differences and by general pricing differences between 

the First-Class Mail flat and letter products. 

Additional rate differences may arise between users 

depending on whether a given mailer presorts its 

outbound pieces. Such differences are the result of 

reasonable pricing differences that exist between the 

USCA Case #11-1179 Document #1414643 Filed: 01/11/2013 Page 7 of 9
8 

various single-piece and presort rates applicable to 

First-Class Mail letters and flats. 

The price granted by the remedy is not as low as the 

alternative remedy sought by GameFly, and even at 

this rate, GameFly mail may continue to generate 

more than double the contribution per piece than 

Netflix mail. However, the remaining rate disparity is 

reasonable in light of the differences between lettershaped and flat-shaped round-trip DVD mailers. By 

making the letter-shaped and flat-shaped round-trip 

DVD mailer rates available to all qualifying mailers, 

any potential discrimination against other similarly 

situated mailers is also remedied. 

(footnote omitted). 

The unstated assumption of this explanation is that 

GameFly has a free choice in whether to use flats or letters. 

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 found that GameFly 

would switch to letter mail if the Postal Service would 

provide the same service on the same terms it provides to 

Netflix. The Postal Service refuses to do so. Without special 

manual processing like that afforded to Netflix, switching to 

letter mail could subject GameFly to an epidemic of cracked 

and shattered DVDs. 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. 

USCA Case #11-1179 Document #1414643 Filed: 01/11/2013 Page 8 of 9
9 

In short, we conclude that the Commission’s order is 

arbitrary and capricious. Am. Fed’n of Gov’t Emps., 470 F.3d 

at 380 (“Certainly, if the result reached is illogical on its own 

terms, the Authority’s order is arbitrary and capricious.” 

(internal quotation marks omitted)). We need not, and do not, 

address GameFly’s argument that its proposed remedies 

should have been adopted by the Commission. Upon 

rehearing, the Commission will surely consider those 

remedies, but there may be a range of other possible remedies 

which would withstand appellate review. 

III. CONCLUSION 

 When, as in this case, the Commission properly finds that 

discrimination has occurred, it is obligated to remedy that 

discrimination, even if it concludes that none of the parties’ 

proposed remedies is appropriate. Here, 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. 

Therefore, we must vacate the Commission’s order and 

remand this case for an adequate remedy. The Commission 

must either remedy all discrimination or explain why any 

residual discrimination is due or reasonable under § 403. 

* * * 

 GameFly’s petition for review is granted, the 

Commission’s order is vacated, and the case is remanded. 

So ordered.

USCA Case #11-1179 Document #1414643 Filed: 01/11/2013 Page 9 of 9