Netflix gets unfair postal advantage, court finds

The headquarters of Netflix is shown in Los Gatos, California September 20, 2011.

WASHINGTON (Reuters) - A federal appeals court ruled on Friday that Netflix Inc received an unfair advantage from the U.S. Postal Service's special handling of its DVDs, and ordered postal regulators to remedy the discrimination or offer a good explanation.

The unanimous decision, by the U.S. Court of Appeals for the District of Columbia Circuit, is a victory for GameFly Inc, which said the postal service should treat the games it ships similarly to Netflix DVDs.

The court did not order a specific change in how the postal service handles digital disks, instead leaving it up to the Postal Regulatory Commission to determine an equitable solution.

"The commission must either remedy all discrimination or explain why any residual discrimination is due or reasonable," wrote Judge David Sentelle.

The case now heads back to the commission, which regulates the independent postal service.

"We trust that the commission will take the court's decision to heart, and require the postal service to be compliant with the law by offering the same price and quality of service to all DVD rental companies," GameFly Chief Executive Dave Hodess said in a statement.

A postal service spokesman said on Friday that its position has not changed. "The different treatment that we provided to our customers was fully justified and reasonable, and consistent with the law," spokesman David Partenheimer said in an email.

A Netflix spokesman declined to comment.

Movie rental service Netflix appears to be the postal service's biggest DVD mailer customer, the court said. The service processes Netflix DVDs by hand and with specially designated containers.

"Rather obviously, this is not without cost to the postal service. Nonetheless, the service provides it to Netflix free of charge," Sentelle wrote.

GameFly, which mails primarily video games for rent, asked for the same treatment, but the postal service refused, forcing GameFly to make adjustments that cost millions of dollars each year, the court said.

The Postal Regulatory Commission sided with GameFly in 2011 but failed to put the two companies on the same footing, the court said.

The case is GameFly Inc v. Postal Regulatory Commission, U.S. Court of Appeals for the D.C. Circuit, No. 11-1179.

(Reporting by David Ingram; Editing by Lisa Von Ahn, David Gregorio and Steve Orlofsky)