The U.S. Postal Service must come up with a better solution to a questionable pricing structure affecting Gamefly's video game DVDs and Netflix's movie DVDs, a federal appeals court said Friday.
Gamefly, which sends rental video games DVDS, must pay extra to mail its rental DVDs because they can be damaged by automatic mail sorting systems for first-class mail. But DVDs sent by Netflix Inc., which rents movie, TV shows and documentary DVDs by mail, don't go through the automated sorting process and it doesn't pay extra for hand-sorting. The court also said Blockbuster Inc., which rents video games and movies by mail, also seems to have received some of the favorable treatment that Netflix — apparently the post office's biggest DVD mailer customer — did.
Gamefly was denied the same treatment, forcing it to pay millions to keep out of the automated mail sorting system.
The Postal Regulatory Commission agreed that the practice was wrong, and it came up with a scheme to make it cheaper for Gamefly but still force it to pay more than Netflix. The U.S. Court of Appeals for the District of Columbia Circuit overturned the commission Friday and sent the case back.
"The commission cannot justify the terms of service discrimination its remedy leaves in place (providing manual letter processing to Netflix but not to Gamefly)," Chief Judge David Sentelle said.
The commission must either remedy all discrimination or explain why the residual discrimination is due or reasonable, Sentelle said.
In a statement, the Postal Service said it was analyzing the court's decision but contended that the different treatment of its customers was "fully justified and reasonable, and consistent with the law."