The Walmart Guide to Winning by Losing Lawsuits

A settlement for a backroom deal with Netflix turns into a marketing win

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How the world has changed since 2005. That year, the respective CEOs of Walmart and Netflix sat down to dinner and allegedly negotiated a deal to divide up the DVD market. Walmart agreed to stop renting DVDs online; Netflix agreed never to sell DVDs; and Blockbuster planned to take the online movie rental world by storm. Six years later, Blockbuster is bankrupt; Netflix is pissing off their customers with higher prices and fewer movies; and Walmart owns the fastest-growing movie download site on the internet, Vudu. Thanks to some good lawyers, Walmart also stands to benefit from a class action lawsuit filed by customers angry about the retailer's shady agreement with Netflix. The company just won a suit that not only lets them pay the agreed-to settlement in the form of Walmart gift certificates but also gives them access to Netflix's customer database. This feels like a trick.

At face value, how Walmart's managed to twist their courtroom losses into market victories is a bit of a trick--and a good one at that. After consumer advocates sued Walmart and Netflix in 2009 over the alleged dinner party agreement, Walmart moved to settle before the case went to court, and settle they did. Jeff Roberts at PaidContent explains how Walmart twisted the terms of the settlement in their favor:

A new court ruling gives Walmart a major boost in its effort to muscle in on Netlix's streaming subscribers. A federal court in California late last week approved a class-action settlement that requires Walmart to pay out $27.5 million. But here's the key element of the ruling: Walmart will be allowed to pay the 40 million Netflix subscribers in the form of gift cards for there is prominent advertising for Vudu, which rents and sells movies a la carte.

The court ruling is a blow to Netflix, which had earlier blasted the settlement as "the equivalent of a marketing campaign that costs Walmart only 68 cents per potential customer."

The very premise of Walmart turning a class action lawsuit filed by customers who feel cheated into an opportunity to cheat their competitor is both abominable and brilliant. The sleazy part is pretty self-evident. Despite whether the rumored dinner party actually took place, Walmart quickly sent in their cleaning crew (also known as corporate lawyers) when consumers filed the suit and not only won the luxury of paying off their customers but also the opportunity to turn the whole affair into a marketing event that gives them the chance to promote their own web offerings to Netflix's entire customer database.

However sleazy Walmart's behavior seems, however, it's also incredibly savvy. The retailer seems to have waited for the right deal and the right market conditions during which they could expand their lucrative online video without too much destruction. As we mentioned, Netflix has been taking a beating in the press since they announced a price hike for their streaming customers, and last week, negotiations with Starz boiled over leaving Netflix with fewer movies to offer their customers. Meanwhile, Walmart and their penchant for low prices have been polishing and promoting Vudu for wider use. The site is currently the third most popular movie download service and is gaining market share fast.

So what does this all mean for consumers? Depending on how much you care about ethics and morals, not a lot. Walmart will send the more than 40 million Netflix subscribers a (perhaps Vudu branded) gift card or a check. Netflix will continue to reevaluate its business plan as their price hike very recently took effect. And consumers should inevitably see lower prices and more transparency. Then there's Blockbuster. Under a new partnership with Dish Network, Blockbuster is finally seeing its chance to break into the streaming video world, an entrance that will bring consumers even more choices and competition. And who knows, maybe they'll luck out and get sued too.

This article is from the archive of our partner The Wire.