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GameFly and Netflix are both in the business of mailing DVDs to customers. GameFly rents and sells video games. Netflix rents movies.
Netflix, however, has been getting better rates for postal service from the Postal Service. GameFly sued, arguing that the preferential treatment wasn't fair. Last week, the D.C. Circuit Court of Appeals agreed with GameFly, and ordered the USPS to either level the playing field, or offer a darn good reason for continued discrimination, Reuters reports.
If you've ever wondered how most of your Netflix DVDs survive the postal journey, it's because USPS diverts Netflix mail from the automated letter stream, shifting it to specially designated trays and containers, hand culling it, and hand processing it. All those fancy extras cost the USPS, but they don't pass the charges along to Netflix, which is the USPS's biggest DVD mailer customer.
GameFly requested that the Postal Service extend to its mailings the same sweetheart deal that Netflix receives. USPS refused, which means that Gamefly can't use the 44-cent machinable letter rates for its DVDs.
Instead, GameFly mails its inbound and outbound DVD mailers as First-Class "flats" -- a more expensive rate -- which prevents much of the DVD breakage associated with automated letter processing. GameFly also 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.
The Postal Service charges $0.44 for a DVD mailer entered as a one-ounce First-Class letter, but $0.88 for the same piece entered as a one-ounce First-Class flat. That means that GameFly spends millions annually to avoid the Postal Service's automated letter processing stream -- money that Netflix isn't forced to spend.
So you can see why GameFly would file a discrimination complaint. And you can see why the D.C. Circuit would want an explanation.
Upon reviewing GameFly's complaint, the Postal Regulatory Commission issued an order finding that the Postal Service was indeed discriminating against GameFly, but essentially leaving the discriminatory treatment in place. Last week, the D.C. Circuit Court of Appeals concluded that the Commission's order was arbitrary and capricious, and ordered the Commission either remedy all discrimination or explain why any residual discrimination is due or reasonable under federal law.