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Judge Hears Arguments for Class Certification in California Suit

14 Dec, 2001 By: Joan Villa

It was a matter of class in the first major showdown in the California price-fixing case filed by independent retailers against seven studios and Blockbuster.

While retail attorneys urged class certification for independent store owners who say they paid too much for movies as a result of alleged price fixing between the defendants, defendants' attorneys countered that purchase decisions and prices were individual and varied too widely to justify class treatment.

"The price paid depends on the choices made—which title, which market, which program, which retailer," said Warner Home Video attorney Linda Smith, one of three studio lawyers who argued against class certification before Judge Victoria Chaney in California Superior Court in Los Angeles last week.

But retailer attorney Stephen Hackerman argued Blockbuster's prices have come down across the board since negotiating direct deals with studios beginning in 1997, while independents' prices did not drop in concert. He cited testimony from Viacom chief Sumner Redstone acknowledging that Blockbuster sought revenue-sharing deals to gain "a significant reduction in price." Hackerman also submitted an internal Blockbuster pricing analysis that revealed the chain's average per-unit costs had dropped 56 percent under studio-direct agreements—from the low $60 range in 1997 to $27.09 in 1998 and $25.64 in 1999.

Chaney is expected to rule next month whether 200 plaintiff retailers will be certified as a class and joined by thousands of other independent store owners who, according to law, would automatically have been financially injured if the studios and Blockbuster are found guilty of price fixing.

Plaintiffs are seeking $1.1 billion in damages over the three years of alleged price discrimination from 1998 through 2000, attorney Kevin Leyendecker told the court. It was during that period that Blockbuster initiated direct-purchasing and revenue-sharing deals with the studios that excluded independents, the plaintiffs charge. A retailer's individual share of that award would amount to some 10 percent of his gross sales during the three years as indicated on tax returns, he said.

Plaintiff attorneys are seeking a "fluid recovery" method of determining damages based on the assertion that higher prices "fixed" to wholesalers were then entirely passed on to retailers. This "overcharge" is calculated by dividing the total number of units sold in the three-year period into the total sales of all distributors, resulting in a $46.57 per-unit average cost. Plaintiffs then calculated, based on expert testimony, a "competitive market" price of approximately $16 per tape that would have been charged if alleged price-fixing did not alter free market forces.

From there, determining retailers' "relative share of the pot is simple," asserts Leyendecker.

But Universal Studios Home Video lawyer Glenn Pomerantz countered that there is "no feasible way to carve a simple overcharge case" out of the plaintiffs' claim. "You can't show in such a common way that each plaintiff was hurt."

The studios' lawyers argued that pricing varied by studio; each retailer's choice of pricing programs including revenue-sharing; and individual market-by-market decisions. Smith gave several examples in which independent retailers' pricing was "all over the map" and at times, lower than both Blockbuster's actual per-unit cost and the "competitive" price established by plaintiffs.

In closing arguments, Hackerman contended retailers elected revenue-sharing options available from distribution—the only revenue-sharing avenue available to independent retailers at the time—on only 6 percent of all tapes sold.

"The best price available under 94 percent of sales are all higher than the competitive price and that means all retailers in this class were injured," he stated. "It doesn't make any difference if independent retailers could do Blockbuster revenue-sharing—Blockbuster-equivalent revenue-sharing was not offered to them and as a result of that they had no option to do it. What was their option? The price-fixed tapes [through distributors]."

Pomerantz insisted much of the retailers' own testimony taken during depositions boiled down to the argument that studios didn't give them equal pricing terms to Blockbuster's. As a result, he said, this case "is nothing more than a refusal to deal."

If the judge accepts that price fixing is not the basis for the claim, then financial injury would not be assumed and a class should not be certified, he argued.

"At the end of the day we believe revenue-sharing doesn't involve price and if it doesn't involve price it's hard to prove how it could be a price-fixing case," he said. Defendants have defined revenue-sharing as a "collection of terms" with a price that is variable and unknown until after the 26-week rental period that determines the final share paid back to the studio.

During the daylong hearing packed with some 30 studio attorneys and eight plaintiff lawyers, Chaney asked both sides to clarify their complicated arguments.

"You want class certification," she told Hackerman. "I have to deal with 12 jurors and a couple of alternates, and I have to know what they're going to be presented with and are they going to understand it."

Hackerman insists retailers will pursue their case even without class certification, but attorneys won't be able to help all of the estimated 15,000 to 25,000 retailers left out of lower pricing deals.

"If we don't certify what I believe is a certifiable class case, we'll spend more time, more money and more effort getting fewer people their day in court," Hackerman said. "What really matters is does our system work to allow us to get maximum justice?"

Plaintiffs were denied class certification last March in a concurrent case in U.S. District Court in San Antonio. The three plaintiffs that remain in that case are seeking damages of $190,000 for Ronald Cleveland of Lone Star Video, $404,000 for David Stevenson of The Big Picture Video, and $3.17 million for John Merchant of 49er Video.

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