GAMEFLY vs PRC and USPS- 2012

8/3/2019 GAMEFLY vs PRC and USPS- 2012

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[NOT YET SCHEDULED FOR ORAL ARGUMENT]

No. 11-1179

IN THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT_________________________________

GAMEFLY, INC.,

Petitioner,

v.

POSTAL REGULATORY COMMISSION,

Respondent,and

UNITED STATES POSTAL SERVICE,

Intervenor.______________________________

BRIEF FOR RESPONDENT POSTAL REGULATORY COMMISSION

______________________________

Of Counsel:

STEPHEN L. SHARFMANGeneral Counsel

R. BRIAN CORCORANDeputy General Counsel

RICHARD A. OLIVERAttorney

Postal Regulatory CommissionWashington, DC 20268

TONY WESTAssistant Attorney General

MICHAEL S. RAAB(202) 514-4053

JEFFREY CLAIR

(202) [email protected]

Attorneys, Civil DivisionRoom 7243, Department of Justice950 Pennsylvania Ave., N.W.Washington, D.C. 20530

USCA Case #11-1179 Document #1359184 Filed: 02/17/2012 Page 1 of 64
mailto:[email protected]:[email protected]


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CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES

A. Parties and Amici.

All parties and amici appearing in this Court and before the Postal

Regulatory Commission are listed in the Brief for the Petitioner.

B. Rulings under Review.

References to the ruling at issue appear in the Brief for the Petitioner.

C. Related Cases.

This case has not previously been before this Court. Counsel for the

respondent are unaware of any related cases.

/s/ Jeffrey ClairRoom 7243, Civil Division

Department of Justice950 Pennsylvania Ave., NW

Washington, D.C. [email protected](202) 514-4028

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mailto:[email protected]:[email protected]


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TABLE OF CONTENTS

Page

CERTIFICATE AS TO PARTIES, RULINGS,AND RELATED CASES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

GLOSSARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii

STATEMENT OF JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

STATEMENT OF THE ISSUE PRESENTED FOR REVIEW. . . . . . . . . . . . . . . . 2

STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

A. Nature of the Case and Course of ProceedingsBelow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

B. Statutory Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1. The Postal Reorganization Act of 1970. . . . . . . . . . . . . . . . . . . 3

2. The Postal Accountability and

Enhancement Act of 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

C. Statement of Facts: GameFlys DiscriminationComplaint. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

D. Commission Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

SUMMARY OF THE ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

ARGUMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

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I. The Commission Has Broad Discretion To FashionRemedial Orders That Avoid Undue InterferenceWith Postal Service Operations, That AvoidImposing Significant New Costs, And That Take

Account Of Limitations On The CommissionsEnforcement Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

A. The Court Must Accord SubstantialDeference To The Commissions ExerciseOf Its Discretion To Determine AnAppropriate Remedy For UnreasonableDiscrimination Among Users of the Mail. . . . . . . . . . . . . . . . 19

B. The Commission Reasonably Rejected

GameFlys Proposed Operational Remedy. . . . . . . . . . . . . . . 24

1. The Commission Has Authority ToConsider, and Reasonably TookAccount Of, The ProposedRemedys Potential Interference

With The Postal ServicesManagerial Discretion. . . . . . . . . . . . . . . . . . . . . . . . . . 26

2. The Commission ReasonablyConsidered Practical LimitationsOn Its Ability to Enforce AnOperational Remedy.. . . . . . . . . . . . . . . . . . . . . . . . . . . 33

C. The Commission Reasonably RejectedGameFlys Proposed, Rate-Based Remedy. . . . . . . . . . . . . . . 39

D. The Commissions Mandated Reductions

In Postal Rates and Surcharges On DVDMail Are A Reasonable And Appropriate

Remedy For The Postal ServicesDiscriminatory Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

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CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

FRAP 32(a)(7) CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Cases:

American Federation of Labor and Congress of Indus.

Organizations v. Chao, 409 F.3d 377 (D.C. Cir. 2005). . . . . . . . . . . . . . . . 22

*Butz v. Glover Livestock Comm'n Co., Inc.,

411 U.S. 182 (1973). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Consolidated Edison Co. of N.Y. v. FERC, 510 F.3d 333(D.C. Cir. 2007).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Consumer Federation of America v. Consumer ProductSafety Comm'n, 990 F.2d 1298 (D.C. Cir. 1993). . . . . . . . . . . . . . . . . . . . . 34

Director, Office of Workers Compensation Programs,

Dep't of Labor v. Greenwhich Collieries,512 U.S. 267 (1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Dunlop v. Bachowski, 421 U.S. 560 (1975). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

*Heckler v. Chaney, 470 U.S. 821 (1985). . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 33

Kreis v. Sec'y of the Air Force, 866 F.2d 1508(D.C. Cir. 1989).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

____________________

* Authorities chiefly relied upon are marked with an asterisk.

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*Mail Order Ass'n of America v. USPS,2 F.3d 408 (D.C. Cir. 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 27, 48, 49

Milk Train, Inc. v. Veneman, 310 F.3d 747 (D.C. Cir. 2002). . . . . . . . . . . . . . . . 42

Nat. Ass'n of Greeting Card Publishers v. USPS,462 U.S. 810 (1983). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 41

Time, Inc. v. USPS, 710 F.2d 34 (2d Cir. 1983). . . . . . . . . . . . . . . . . . . . . . . . . . 49

Towns of Concord, Norwood, & Wellesley, Mass. v. FERC,955 F.2d 67 (D.C. Cir. 1992). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

UPS Worldwide Forwarding, Inc. v. USPS,

66 F.3d 621 (3d Cir. 1995). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

U.S. Postal Service v. Postal Regulatory Comm'n,640 F.3d 1263 (D.C. Cir. 2011). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Village of Bensenville v. FAA, 376 F.3d 1114 (D.C. Cir. 2004).. . . . . . . . . . . . . 42

West Virginia v. EPA, 362 F.3d 861 (D.C. Cir. 2004). . . . . . . . . . . . . . . . . . . . 42

Statutes:

Postal Accountability and Enhancement Act of 2006,Pub. L. No. 109-435, 120 Stat. 3198 (2006). . . . . . . . . . . . . . . . . . . . . . . . . 5

5 U.S.C. 556(d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38, 43

39 U.S.C. 201. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 U.S.C. 403. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

39 U.S.C. 403(a).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 U.S.C. 403(c).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 4, 1039 U.S.C. 404. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2739 U.S.C. 404(a)(1) & (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 U.S.C. 501. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

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39 U.S.C. 504(g). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

39 U.S.C. 3601 (2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 U.S.C. 3621-29 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

39 U.S.C. 3622 (2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 U.S.C. 3622(a).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 104139 U.S.C. 3622(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

39 U.S.C. 3622(b)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539 U.S.C. 3622(b)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4839 U.S.C. 3622(b)(6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4839 U.S.C. 3622(b)(7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4839 U.S.C. 3622(b)(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 4839 U.S.C. 3622(c).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539 U.S.C. 3622(c)(6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 48

39 U.S.C. 3622(c)(7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 4839 U.S.C. 3622(d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 839 U.S.C. 3623 (2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 U.S.C. 3624 (2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 U.S.C. 3631-34 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 639 U.S.C. 3652(a).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

39 U.S.C. 3662 (2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 4, 23, 4139 U.S.C. 3662(a).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1039 U.S.C. 3662(c).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 7, 21, 43

39 U.S.C. 3663. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Regulations:

39 C.F.R. Part 3007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Legislative Materials:

H. R Rep. No. 109-66 Pt. 1, 109th Cong.,

1st Sess. 52 (2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Pub. L. No. 91-375, 84 Stat. 719 (1970). . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 4, 23

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Miscellaneous:

Domestic Mail Manual Part 101, 1.1, 2.1 . . . . . . . . . . . . . . . . . . . . 8, 46, 47

Domestic Mail Manual, Part 333, 3.1.1 . . . . . . . . . . . . . . . . . . . . . . . . . 46

Domestic Mail Manual Part 343, 3.2 . . . . . . . . . . . . . . . . . . . . . . . . . 47

Domestic Mail Manual -Notice123 Price List . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Red Tag Proceeding, No. MC79-3(Postal Rate Commission May 18, 1980). . . . . . . . . . . . . . . . . . . . . . . . . . . 28

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http://pe.usps.com/text/dmm300/101.htmhttp://pe.usps.com/http://pe.usps.com/http://pe.usps.com/text/dmm300/101.htm


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GLOSSARY

App. Appendix

Commission Postal Regulatory Commission

CRA Cost and Revenue Analysis

Rate Commission Postal Rate Commission

Supp. App. Supplemental Appendix

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IN THE UNITED STATES COURT OF APPEALSFOR THE DISTRICT OF COLUMBIA CIRCUIT

_________________________________

No. 11-1179_________________________________

GAMEFLY, INC.,

Petitioner,

v.

POSTAL REGULATORY COMMISSION,

Respondent,and

UNITED STATES POSTAL SERVICE,

Intervenor.______________________________

BRIEF FOR RESPONDENT POSTAL REGULATORY COMMISSION

______________________________

STATEMENT OF JURISDICTION

The Postal Regulatory Commission issued a final order resolving petitioner

GameFlys administrative complaint on April 20, 2011. App. 265. GameFly filed

a timely petition for judicial review of the Commissions order on May 20, 2011.

This Court has appellate jurisdiction pursuant to 39 U.S.C. 3663.



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STATEMENT OF THE ISSUE PRESENTED FOR REVIEW

Whether the Postal Regulatory Commission abused its statutory discretion

under 39 U.S.C. 3662(c) to take such action as the Commission considers

appropriate in determining a remedy for unreasonable discrimination among

users of the mails.

STATEMENT

A. Nature of the Case and Course of Proceedings Below.

Petitioner GameFly is a company engaged in the online rental of video

games. It distributes its rental games by mailing DVDs to customers, who then

return the DVDs to GameFly in pre-addressed reply mailers. In 2009, it filed a

complaint with the Commission under 39 U.S.C. 3662, alleging that the Postal

Service had unlawfully discriminated against GameFly by according preferential

treatment to Netflix, another company that uses the mails to distribute rental

DVDs.

After lengthy evidentiary hearings, the Commission sustained GameFlys

allegations. It found that the Postal Service had failed to establish reasonable and

legitimate reasons for providing GameFly less favorable treatment than Netflix,

and that the Postal Service had unduly discriminated against GameFly, in violation

of 39 U.S.C. 403(c).

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To remedy the discrimination, the Commission ordered the Postal Service to

make certain changes in the rates and surcharges imposed on DVD mailers. The

Commission, however, did not adopt the remedies sought by GameFly. GameFly

now appeals, essentially contending that the remedies ordered by the Commission

do not adequately redress the Postal Services discriminatory conduct and are

therefore arbitrary and capricious.

B. Statutory Background.

1. The Postal Reorganization Act of 1970.

In 1970, Congress abolished the old Post Office Department of the

Executive Branch and created in its place the United States Postal Service. Pub.

L. No. 91-375, 84 Stat. 719 (1970). The statute establishes the Postal Service as a

government-owned corporation, 39 U.S.C. 201, and directs the Postal Service to

plan, develop, promote, and provide adequate and efficient postal services at fair

and reasonable rates and fees. 39 U.S.C. 403(a). To that end, the Postal

Service is specifically empowered to provide for the collection, handling,

transportation, delivery, forwarding, returning, and holding of mail * * *, and to

prescribe, in accordance with this title, the amount of postage and the manner in

which it is to be paid. 39 U.S.C. 404(a)(1) & (2);see generally Nat. Assn of

Greeting Card Publishers v. USPS, 462 U.S. 810 (1983).

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Congress further provided that the Postal Service may not unreasonably

discriminate among users of the mail. The statute thus provides that:

In providing services and in establishing classifications,rates, and fees under this title, the Postal Service shallnot, except as specifically authorized in this title, make

any undue or unreasonable discrimination among usersof the mails, nor shall it grant any undue or unreasonable

preferences to any such user.

39 U.S.C. 403(c).

The 1970 statute also established the Postal Rate Commission the

forerunner of the respondent here, the Postal Regulatory Commission. The Rate

Commission was created as an independent establishment and directed to make

recommendations to the Governors of the Postal Service with respect to rate, fee,

and mail classification matters. 39 U.S.C. 3601, 3622, 3623, and 3624 (2000).

The Rate Commission was also vested with authority to review and make

findings on complaints of discrimination by the Postal Service. The 1970 statute,

however, did not authorize the Rate Commission to impose specific remedies for

discrimination. It instead provided that if the Commission after hearing finds the

complaint to be justified, it shall render a public report thereon to the Postal

Service which shall take such action as it deems appropriate. 84 Stat. 764 (1970),

formerly codified at 39 U.S.C. 3662 (2000).

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2. The Postal Accountability and Enhancement Act of 2006.

The Postal Accountability and Enhancement Act of 2006, Pub. L. No. 109-

435, 120 Stat. 3198 (2006), established the Postal Regulatory Commission in lieu

of the Postal Rate Commission,see 39 U.S.C. 501, and substantially revised the

Commissions powers to review postal rates and complaints of discrimination.

With respect to rates, the 2006 Act sets out separate processes for pricing

market-dominant products like first-class mail, as to which the Postal Service

enjoys a statutory or effective monopoly, and competitive products like priority

mail, as to which the Postal Service faces direct competition from other carriers

such as Federal Express. See 39 U.S.C. 3621-29 (market-dominant); id.

3631-34 (competitive).

For market-dominant products (which are at issue here), the statute directs

the Commission to establish a modern system for regulating rates and classes.

Id. 3622(a). The statute sets out nine objectives for the Commission to appl[y]

in conjunction with [each other] as well as fourteen additional [f]actors * * *

[to] take into account. id. 3622(b) & (c). These include creating predictability

and stability in rates (id. 3622(b)(2)), allow[ing] the Postal Service pricing

flexibility to increase mail volume and operational efficiency (id. 3622(c)(7)),

promoting simplicity of the rate structure (id. 3622(c)(6)), and affording the

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Postal Service authority to mak[e] changes of unequal magnitude within,

between, or among classes of mail (id. 3622(b)(8). The statute further provides

that annual rate increases must generally be limited to the increase in an index of

inflation unless the Postal Service demonstrates that extraordinary or exceptional

circumstances warrant a higher increase. Id. 3622(d). And it provides that if the

Postal Service requests a rate increase, it must provide advance public notice,

afford the Commission an opportunity to review whether the proposed increase

complies with statutory requirements, and describe the actions the Postal Service

will take to remedy any noncompliance identified by the Commission. Ibid;see

generally U.S. Postal Service v.Postal Regulatory Commn, 640 F.3d 1263, 1264-

65 (D.C. Cir. 2011).

Congress also revised the Commissions powers to remedy unlawful

discrimination among users of the mail. Under the prior law, the Commission was

only authorized to issue a report of its findings to the Postal Service. The revised

statute vests the Commission with the discretion to order the implementation of

such remedies as the Commission deems appropriate. Thus, the statute now

provides that if the Commission finds a complaint of unreasonable discrimination

to be justified:

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it shall order that the Postal Service take such action asthe Commission considers appropriate in order toachieve compliance with the applicable requirements andto remedy the effects of any noncompliance (such as

ordering unlawful rates to be adjusted to lawful levels,ordering the cancellation of market tests, ordering thePostal Service to discontinue providing loss-making

products, or requiring the Postal Service to make up forrevenue shortfalls in competitive products).

39 U.S.C. 3662(c).

C. Statement of Facts: GameFlys Discrimination Complaint.

GameFlys complaint of discrimination centers on the Postal Services

methods for processing round-trip DVDs sent through the mail. A movie or

game DVD is small enough to be sent as a one-ounce letter if enclosed in a

lightweight mailer. App. 8. Letter-shaped mailpieces, however, are generally

processed on automated sorter equipment, which subjects the letters to a variety of

physical stresses as they are bent around the machines rollers and forced through

the machines gates and chutes at high speed. App. 270-71; Pet. Br. 4-5. This

automatic processing can damage an enclosed DVD and is particularly

problematic on the return trip, when DVDs are mixed with First-Class mail of

varying shapes. GameFly and other businesses that rely on distributing and

collecting rental DVDs through the mail have accordingly sought to have their

return mail processed manually. Ibid.

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GameFly alleges that the Postal Service has unreasonably discriminated

among DVD mailers in making such manual processing available. It asserts, in

particular, that DVDs mailed as letters by two of the largest businesses in the

field Netflix and Blockbuster routinely receive special manual handling. On

the return trip, their DVD letters are frequently removed from the automated

processing stream. This manual processing, however, has been denied GameFly

and other, similarly situated DVD mailers. App. 269, 1002. GameFly further

alleges that, although an additional surcharge is ordinarily imposed on letters that

are not amenable to machine processing, the Postal Service has selectively

refrained from imposing the surcharge on Netflix. Ibid.

In the absence of a commitment from the Postal Service to process its

returning DVDs manually, Gamefly took several alternative measures to ensure

that its DVD mail would avoid the automated letter processing stream. First, it

mailed its DVDs in flat-shaped envelopes. App. 6, 15. Flats are larger than

letter shaped envelopes, and they are subject to higher postage rates as well. Like1

letter-shaped mail, flats are processed automatically. But the machines for

See Domestic Mail Manual Part 101, 1.1, 2.1


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processing flats subject the envelope to less severe physical stresses and are

therefore less apt to damage an enclosed DVD. App. 12, 50; Pet. Br. 8.

Second, GameFly inserted a cardboard protective insert in its DVD mailers.

App. 11, 48. The insert provides some additional cushioning against shock.

More to the point here, it helps ensure that the flat is not mistakenly routed to the

automated letter processing stream. Pet. Br. 8-9. The process for determining

whether to route mail to the letter processing stream or flat processing stream is

also automated. The selection process, however, does not reliably distinguish

between a letter-shaped envelope and a relatively thin, flat-shaped envelope.

Envelopes entered into the mail as thin flats may therefore be inadvertently

diverted to the automated letter processing stream even though the mailer has

paid the additional postage applicable to flats and employed a flat-shaped

mailpiece. App. 381-82, 5023.

This problem can be avoided if the mailpiece is made thicker, because flats

of a certain thickness can be automatically culled with greater reliability and

routed through the flat processing stream rather than the letter processing stream.

Ibid. GameFlys cardboard inserts thicken its mailpieces and serve this purpose.

The inserts, however, also increase the weight of each mailer above one ounce.

And because postal rates for flats are determined by weight in addition to shape,

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the cardboard inserts necessary to ensure that the flats are properly routed through

the flat processing stream cause GameFly to incur additional postage costs.

GameFly alleges that these circumstances amount to unreasonable

discrimination among users of the mail, in part because the Postal Service has

denied it the manual processing of DVDs mailed as letters accorded Netflix, and

in part because the lack of manual processing compels GameFly to use more

expensive flat mail in order to achieve the same result avoidance of the

automated letter processing stream. It accordingly filed a complaint with the

Commission under 39 U.S.C. 3662(a), alleging that the Postal Service violated

39 U.S.C. 403(c) by unreasonably discriminating among users of the mail.

D. Commission Decision.

The Commission sustained Gameflys allegations and concluded that the

Postal Service had unduly discriminated against GameFly, in violation of 39

U.S.C. 403(c). App. 376, 5005. It found that GameFly and Netflix were

similarly situated, and that the Postal Service had afforded GameFly less favorable

rates and terms and conditions of service than Netflix. App. 376, 5502, 5003.

The Commission further found that the Postal Service had failed to establish

reasonable and legitimate reasons for these differences in treatment. The Postal

Service had argued that Netflix mails high volumes of DVDs in readily-

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of manual processing of DVD mailers sent as First-Class letters at levels at least

equal to that now accorded Netflix. GameFly requested that these operational

changes be ordered through a directive of national scope and effectiveness, and

that the Postal Service be directed to report to the Commission data sufficient to

measure and ensure compliance with these mandated levels of manual processing.

App. 378-79, 5012; App. 247-48.

The Commission concluded, however, that this operational remedy is

inappropriate. It reasoned that GameFlys proposed remedy would require the

Postal Service to achieve very high percentages of manual processing for a variety

of DVD mailers in addition to Netflix, and that enforcement of such a remedy

would require the Commission to exercise the kind of day-to-day oversight of

postal operations that has heretofore been almost exclusively the prerogative of the

Postal Service. App. 379, 5014. The Commission further reasoned that

GameFlys proposed operational remedy would require the collection and

reporting of a significant amount of data pertaining to the processing of DVD

mail, that it was unclear whether this was feasible, and that such reporting

requirements would in any event impose significant administrative costs on both

the Postal Service and the Commission itself. App. 379, 5015.

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GameFly further requested that the Commission, either in conjunction with

or as an alternative to this proposed operational remedy, reduce the postal rates

imposed on DVDs mailed as flats. GameFly recognized that it costs more per

piece to process flat mail than letter mail. But it argued that, in the case of round-

trip DVD mail, the difference in postal rates far exceeds the difference in

processing costs. It accordingly proposed that the Postal Service reduce the postal

rates on DVD mail to the point where the additional postage due on a DVD flat

would be no greater than the additional cost of processing a DVD flat. App. 248.

To support this request, GameFly offered expert testimony intended to establish

the pertinent difference in processing costs. See App. 27-39.

The Commission declined to impose this remedy as well. It reasoned that

GameFlys cost estimates were not sufficiently accurate to be used as a basis for

determining new postal rates. App. 380, 5020. It further concluded that it would

be inappropriate on this record to interfere with the Postal Services statutory

authority to determine prices in the first instance, and to consider multiple

policies, objectives, and factors other than cost when pricing mail products. App.

380-81, 5020.

The Commission instead fashioned two complementary remedies in lieu of

those proposed by GameFly. First, the Commission directed the Postal Service to

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refrain from imposing a non-machinable surcharge on any qualifying round-trip

DVD mailer that is sent as letter mail and that weighs one ounce or less. App.2

382, 5026. It thereby ordered relief that would end the Postal Services selective

enforcement of non-machinable surcharge on DVD mailers and the preferential

treatment of Netflix with respect to these charges.

Second, the Commission directed the Postal Service to offer a base rate for

mailing a two ounce, round-trip DVD flat that would be equal to the rate

previously imposed on a one ounce flat. App. 382, 5027. In practical effect, this

means that the extra weight GameFly or other DVD mailers must add to a flat

mailpiece in order to ensure that the flat is thicker and avoids the automatic letter

processing stream will not result in additional postal charges. The Commission

recognized that GameFly would still be required to pay higher rates for mailing a

round-trip DVD flat than Netflix would be required to pay for mailing a round-trip

DVD letter. But it concluded that the difference is justified by cost differences

and by general pricing differences between the First-Class Mail flat and letter

products. App. 383, 5029.

GameFly now appeals.

Qualifying mailers must contain a standard 12 centimeter or smaller disc,2

and return pieces must be picked up by the mailer at designated Postal Servicefacilities. App. 392.

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SUMMARY OF THE ARGUMENT

The Commissions choice of remedies strikes a reasonable balance between

ensuring fair and equitable treatment of mailers, avoiding undue interference with

the Postal Services day-to-day management of the mail, and managing practical

constraints on the Commissions limited enforcement resources. The statute

makes plain that the Commission has wide latitude to take all these considerations

into account when determining what measures are an appropriate remedy for

unreasonable discrimination among users of the mail. Firmly established

principles of judicial review hold that the Commissions exercise of this broad

remedial discretion must be accorded substantial deference and sustained unless

demonstrably irrational.

The Commissions remedial order readily satisfies this highly deferential

standard of review. First, the record affords ample basis for the Commissions

rejection of the operational remedy proposed by GameFly. GameFly, though

itself arguing that manual processing of DVD mail is inefficient and more costly

than automated processing, demanded that the Commission order the Postal

Service to maintain high levels of manual processing forallDVD letter mail. It

further demanded that the Commission take on an indefinitely continuing

responsibility to monitor and enforce these processing requirements. The

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Commission, however, reasonably concluded that such measures would

substantially intrude on the discretion of local Postal Services to determine how

best to process the mail, potentially impose significant additional costs on the

Postal Service, and overburden the Commissions limited enforcement resources.

Those are rational choices that are fully within the Commissions broad remedial

discretion.

Second, the Commission reasonably rejected GameFlys alternative rate-

based remedy. GameFly had requested that the Commission equalize the postal

rates applicable to DVD letter mail and DVD flat mail by reducing the rate

differential to the point where the additional postage charged for mailing a flat

would be no greater than the additional cost of processing a flat. The Commission

reasonably rejected this proposal as well.

Though GameFlys rate-based remedy depends on establishing the

difference in relative processing costs, the Commission concluded that GameFlys

cost estimates did not afford a sufficiently reliable basis for ordering a change in

applicable rates. GameFly takes issue with the Commissions technical analysis of

the cost data in the record. Ratemaking questions, however, are at the heart of the

Commissions statutory authority and expertise, and its expert evaluation of the

adequacy of cost data is therefore entitled to substantial deference on judicial

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review. Here, the Commission concluded that GameFlys cost estimates depended

on dubious modeling assumptions and an inappropriate decision to use as a proxy

for key cost determinants cost factors developed for modeling the costs of a

fundamentally different type of mail product. That, standing alone, is a sufficient

basis for the Commissions rejection of GameFlys rate-based remedy.

The Commission, moreover, consistent with prior decisions recognizing that

letter mail and flat mail are different products, reasonably concluded that the

Postal Service may base rates on factors other than each mail products respective

processing costs. The statute specifically provides that the Postal Service has

pricing flexibility, and that rate regulation may properly take account of the need

for a clear and readily understandable rate structure as well as the Postal Services

authority to draw reasonable distinctions among and between mailers and classes

of mail. The Commission concluded that mandating strict equality between DVD

flat mail and DVD letter mail would be inappropriate in light of these statutory

interests. That, too, is a reasonable exercise of the Commissions broad remedial

discretion.

Finally, the remedies the Commission did impose reasonably address the

multiple statutory interests at stake in remedying discrimination. GameFlys

argument is premised on the assumption that, having found discrimination, the

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Commission is obligated to impose complete equality, without regard to the

impact of a remedy on other statutory objectives and without regard to practical

limitations on the Commissions enforcement resources. The statute, however,

directs the Commission to adopt only such remedies as it deems appropriate, and

that affords the Commission broad authority to take the objectives of the statute as

a whole into account.

Here, the Commissions remedial order eliminates patent discrimination in

the Postal Services imposition of surcharges on manual processing of DVD letter

mail. It directs a substantial, 16 percent reduction on the rates paid by GameFly to

mail a DVD flat a reduction that would translate into $2.4 million in annual

postage savings at the rates and mail volumes prevailing when GameFly filed its

complaint. And it mandates a measure of parity between DVD letter mailers and

DVD flat mailers by providing that the Postal Service must dispense with the

additional charges that either type of mailer would otherwise be obligated to pay

to ensure that their mail avoids the automated letter processing stream.

GameFly argues that this relief is incomplete and that the Commission acted

unreasonably in not going further. But the Commission is not obligated to

subordinate all other statutory interests to the interest in ensuring equality in the

treatment of similarly situated mailers. Nor is it obligated to ignore practical

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limitations on its own remedial powers. The Commission may instead

appropriately consider the extent to which a remedy would intrude on the Postal

Services managerial discretion, or the burden the remedy would place on the

limited resources of the Postal Service as well as the Commission itself. The

remedy imposed by the Commission strikes a reasonable balance among these

competing factors and is an eminently rational exercise of the Commissions broad

remedial authority. The Commissions order should therefore be affirmed.

ARGUMENT

I. The Commission Has Broad Discretion To Fashion

Remedial Orders That Avoid Undue Interference

With Postal Service Operations, That Avoid Imposing

Significant New Costs, And That Take Account Of

Limitations On The Commissions Enforcement

Resources.

A. The Court Must Accord Substantial Deference ToThe Commissions Exercise Of Its Discretion To

Determine An Appropriate Remedy For

Unreasonable Discrimination Among Users of the

Mail.

The statute and its legislative history reflect a clear congressional intent to

vest the Commission with broad discretion to determine what measures should be

imposed on the Postal Service to remedy discrimination among users of the mail.

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The Commissions exercise of this remedial discretion is entitled to substantial

deference.

As a general matter, judicial review is particularly deferential when a

challenge relates to the fashioning of remedies, where [a]gency discretion is

often at its zenith * * *. Towns of Concord, Norwood, & Wellesley, Mass. v.

FERC, 955 F.2d 67, 76 (D.C. Cir. 1992) (citations omitted). [W]here Congress

has entrusted an administrative agency with the responsibility of selecting the

means of achieving the statutory policy the relation of remedy to policy is

peculiarly a matter for administrative competence. Butzv. Glover Livestock

Commn Co., Inc., 411 U.S. 182, 185 (1973), quoting American Power Co. v.

SEC, 329 U.S. 80, 112 (1946). Consequently, the agencys choice of remedies

may not be overturned unless unwarranted in law * * * or without justification in

fact. Butz, 411 U.S. at 185-86 (internal quotation and citations omitted); cf.

Hecklerv. Chaney, 470 U.S. 821 (1985) (agency's decision against undertaking an

enforcement action is presumptively committed by law to agency discretion).

Deference to the agencys remedial choices is particularly warranted where

as here, the governing statute expressly provides that the agency is to determine

what remedies are appropriate in light of a whole constellation of factors defining

the agencys role with respect to a regulated entity. GameFly essentially argues

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that, having found discriminatory conduct, the Commission must direct the Postal

Service to undertake whatever measures are necessary to eradicate all distinctions

among similarly situated mailers, without regard to any other congressional policy

or objective, and without regard to practical limitations on the Commissions

enforcement resources.

The statute, however, empowers the Commission to take account of the

interests of the statute as a whole when determining an appropriate remedy. The

plain language of the statute accordingly places the authority to fashion a remedy

for discrimination among users of the mails squarely within the Commissions

discretion. It states, not that the Commission shall take whatever steps are

necessary to eradicate discriminatory conduct, but rather that the Commission

shall order that the Postal Service take such action as the Commission considers

appropriate in order to achieve compliance with the applicable requirements and

to remedy the effects of any noncompliance * * *. 39 U.S.C. 3662(c)

(emphasis added).

This grant of authority vests the Commission with great latitude to balance

the interest in rectifying discrimination against other statutory policies and

interests. The Court has recognized that statutes which make remedial action

hinge on an administrative officials judgment are intended to vest the agency with

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broad discretion. As then Judge (now Chief Justice) Roberts observed, We have

noted in the past the distinction between the objective existence of certain

conditions and the Secretary's determination that such conditions are present,

stressing that a statute phrased in the latter terms fairly exudes deference' to the

Secretary.American Federation of Labor and Congress of Indus. Organizations

v. Chao, 409 F.3d 377, 393 (D.C. Cir. 2005) (Roberts, J., concurring in part and

dissenting in part), quotingKreis v. Sec'y of the Air Force, 866 F.2d 1508, 1513

(D.C. Cir. 1989). Here, the statute similarly makes the selection of a remedy a

matter of the Commissions informed judgment as to what is appropriate and

thus, by its plain terms, similarly exudes deference to the Commissions

determination.

The legislative history to the 2006 amendments confirms Congress intent to

vest the Commission with extremely broad remedial discretion. The pertinent

House committee report thus explains that, in expanding the Commissions

remedial power, Congress intended to afford the Commission authority to take

whatever steps the Commission considers appropriate in remedying

discrimination. H. R Rep. No. 109-66, Pt. 1, 109th Cong., 1st Sess. 52 (2005).

GameFly reads this as a mandate to enforce nondiscriminatory treatment at

any and all costs. But in context, it is clear that Congress meant only that the

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Commission would now have the authority to impose a remedy, not that it is

obligated to do so in every case. As noted above, the statutory scheme preceding

the 2006 amendments gave the Commission no authority to impose on the Postal

Service any remedy for discriminatory conduct. Rather, the Commission could

only issue a report of its findings to the Postal Service, which was in turn

authorized to undertake whatever action or inaction itdeemed appropriate.

See 84 Stat. 764 (1970), formerly codified at 39 U.S.C. 3662 (2000). The

legislative history makes clear that under the 2006 amendments the Commission

would now have the authority to fashion and impose a remedy for discriminatory

conduct. But it stops far short of mandating that a remedy be imposed without

regard to the impact on Postal Service operations or the limited enforcement

resources of the Commission.

The Court, in addressing the Federal Energy Regulatory Commissions

remedial discretion under what GameFly itself characterizes as a cognate

regulatory scheme (see Pet. Br. at 37) has reasoned that:

Petitioners incorrectly imply that this court shouldenforce some absolute requirement of action on the part

of FERC. FERC ordinarily has remedial discretion, evenin the face of an undoubted statutory violation, unless the

statute itself mandates a particular remedy. Under the[Federal Power Act], the court has authority to affirm,modify, or set aside a FERC order. However, where

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FERC possesses but is not required to use certainpowers, our review is limited to ensuring that inexplaining its decisions, FERC examines the relevantdata and articulates a rational connection between the

facts found and the choice made.

Consolidated Edison Co. of N.Y. v.FERC, 510 F.3d 333, 339 (D.C. Cir. 2007)

(internal citations and quotations omitted).

The same standard of review applies here, and it mandates substantial

judicial deference to the Commissions choice of appropriate remedies.

B. The Commission Reasonably Rejected GameFlys

Proposed Operational Remedy.

The Commission reasonably rejected proposed remedies that would, in its

judgment, unduly interfere with the Postal Services day-to-day managerial

decisions over how to efficiently process the mail, potentially impose significant

additional costs, burden the Commissions limited enforcement resources, and be

difficult to enforce in practice.

Many of these practical impediments stem from GameFlys determination to

seek remedies that would perpetuate and enlarge manual processing of DVDs

rather than end it. GameFly did not seek remedies that would merely compel the

Postal Service to cease extending manual processing to Netflix. Nor did it have a

clear business reason to do so. Unlike GameFly, Netflix principally rents DVD

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movies, not DVD games. App. 271, 2002; App. 167-68. Netflix does not

directly compete with GameFly for the rental game market, and GameFly has not

argued that the preferential processing treatment accorded Netflix places GameFly

at a head-to-head, competitive disadvantage. It accordingly did not seek remedies

that would have required the Postal Service to end manual processing of Netflix

mail or impose on Netflix additional charges for such treatment, for these remedies

would do nothing to advance GameFlys principal interest in the case: avoiding

automated-processing damage to its own DVDs.

GameFly has instead argued that it, too, should have the benefit of manual

processing and the attendant reduction in damage to DVDs sent via letter mail.

GameFly has accordingly sought an affirmative remedy that, rather than ending

the special processing treatment accorded Netflix, would both perpetuate it and

mandate its extension to all other DVD rental companies. See App. 247.

The Commission concluded that this operational remedy is inappropriate

because it would require the Commission to involve itself in day-to-day

managerial decisions that have historically been the exclusive responsibility of the

Postal Service, App. 379, 5014, potentially impose significant additional costs

on the Postal Service, id., 5015, tax the Commissions limited enforcement

resources, App. 379-80, 5015, 5016, and be difficult to enforce in practice.

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The statute has been amended in important respects sinceMail Order Assn

was decided, and the Commission now has substantially greater remedial powers

than its Rate Commission predecessor. The authority to determine how to

efficiently and effectively manage the mail, however, remains vested in the Postal

Service. The statute continues to charge the Postal Service with the duty to plan,

develop, promote, and provide adequate and efficient postal services, 39 U.S.C.

403, and it specifically empowers the Postal Service to provide for the collection,

handling, transportation, delivery, forwarding, returning, and holding of mail. 39

U.S.C. 404. While the Commission now has substantial regulatory authority to

remedy unreasonable discrimination by the Postal Service among users of the

mail, the management of day-to-day postal operations remains the Postal Services

responsibility. Thus, it is still the case that in remedying inequities in Postal

Service operations, the Commission does not have carte blanche to intrude as far

as it wishes into Post Office management. Mail Order Assn, 2 F.3d at 424.

This does not mean that the Commission lacks any authority to direct

operational changes in response to unreasonable discrimination. Indeed, contrary

to petitioners contentions (see Pet. Br. at 36-37), the Commission took care to

note that its rejection of GameFlys proposed operational remedy on the record

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here is not to suggest that an operational remedy may never be warranted. App.3

379, 5014. The Commission, however, did consider the extent to which a

proposed remedy would interfere with the Postal Services managerial discretion

in making its decision here. And given the continuing statutory division of powers

between the Postal Service and the Commission, that remains a relevant factor that

the Commission may properly consider when determining an appropriate remedy.

Here, the Commission had ample basis for concluding that GameFlys

proposal to extend Netflix-levels of manual processing to all DVDs mailers

would unreasonably interfere with the Postal Services management of the mails.

First, the operational remedy advocated by GameFly would compel the Postal

Service to maintain and enlarge the scope of manual processing despite the

Commissions express determinations that manual processing of Netflix mail

increases Postal Service costs without demonstrably improving efficiency. App.

354, 4192; App. 344, 4164-4166.

The Postal Service disagreed with these conclusions with respect to Netflix

mail, principally because it maintained that the higher volumes, densities, and

Moreover, as GameFly notes (Pet. Br. 37), the predecessor Rate3

Commission imposed operational remedies to remedy discriminatory rates wherethe record warranted it, even though its remedial powers were more limited thanthose now vested in the Commission. See Red Tag Proceeding, No. MC79-3(Postal Rate Commission May 18, 1980).

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other unique characteristics of Netflix mail enabled manual processing to create

efficiencies and costs savings with respect to Netflix that could not be realized

with respect to smaller volume mailers like GameFly. App. 341, 4156, App.

347. 4172. The Commission found these putative advantages to be illusory,

even in the case of a high volume mailer like Netflix. GameFlys own expert,

moreover, reached the same conclusion, noting that manual culling and related

special handling of DVD return mailers are substantially more costly than

automated letter processing. App. 137.

GameFlys proposed operational remedy would nonetheless compel the

Postal Service to adopt such processing forallDVD round-trip mailers, even in

those cases where the Postal Service itself does not believe such efficiencies can

be realized, and in the teeth of the Commissions finding that such efficiencies will

not in fact be realized in mostcases. GameFly thus seeks a remedial order that

would not only trump the Postal Services managerial choices in this regard, but

foist upon it the universal adoption of a processing method that the Commission

has found to be costly and inefficient in the great majority of cases.

Second, GameFlys proposed operational remedy would interfere with the

Postal Services discretion to selectively employ manual processing in those

limited instances where manual processing would be beneficial. Though the

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Commission concluded that manual processing is usually of little benefit, it

accept[ed] the general proposition advanced by Postal Service witnesses that in

some unusual situations manual processing could further processing efficiency

* * *. App. 343, 4160. The Commission, for example, noted that some DVD

mailpieces tended to jam Postal Service processing equipment, and that the Postal

Service had maintained that manual processing in those circumstances could

enhance efficiency by enabling it to divert problematic mailpieces from the

automated processing stream. App. 342-44, 4162-63.

GameFlys proposed remedy, however, would mandate manual processing

at the level now accorded Netflix in allcircumstances, thereby eliminating the

Postal Services discretion to tailor the level of manual processing to local

operational need. The record demonstrates that such a remedy would

substantially, and in many instances irrationally, intrude on the Postal Services

day-to-day processing decisions. One study in the record estimates that

approximately 77.3 percent of Netflix return mail is processed manually.

Christensen Study, Supp. App. 475. GameFlys proposal would thus require all

DVD return mail to be manually processed at a comparable level, and it would do

so without regard to whether any operational consideration actually warranted that

level of manual processing.

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This would impose arbitrary and nonsensical limitations on the Postal

Services discretion to adjust processing operations to specific operational

circumstances. For example, Blockbuster also rents DVDs to its customers

through round-trip letter mail. The record indicates, however, that its mailpieces

are better designed than those used by Netflix, that they are more automation

compatible, and that they are therefore less likely to jam automated processing

machinery. App. 142-43. Blockbuster return mail has accordingly been subject to

far lower rates of manual processing. Indeed, the Christensen study the same

study used by GameFly in its calculation of relative processing costs (see App. 32-

39) found that only 36.4 percent of Blockbusters return DVD mail was

processed manually less than half the level accorded Netflix. Christensen Study,

Supp. App. 475. Yet Gameflys proposed remedy would nonetheless require the

Postal Service to more than double manual processing of Blockbusters mail

without any demonstrated operational need to do so, and despite the Commissions

determination (echoed by GameFlys own expert) that manual processing is less

efficient and substantially more costly.

Finally, GameFlys proposed remedy would interfere with the Postal

Services ability to respond to changes in technology or market conditions. Many

such changes could affect the feasibility or utility of providing manual processing

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at the levels now accorded Netflix. Though GameFly maintains that Netflix has

resisted improving the design of its mailpieces (App. 210), other DVD mailers

might design a new mailpiece that, like Blockbusters mailer, is less prone to jam

automated processing machines and that would therefore generate less operational

need for manual processing. See Christensen Study, Supp. App. 475,

recommending design changes in DVD mailers. By the same token, Postal

Service witnesses testified that new processing equipment may, on the one hand

make manual processing more difficult and, on the other hand, reduce the

likelihood that DVD mail will jam the machines (Supp. App. 433, 455)

technological changes that would reduce the need for and practicality of manual

processing. Overall volumes of round-trip DVD mail may fall as Netflix and

similar businesses shift to electronic downloading (Supp. App. 433) a change in

market conditions that might further affect whether manual processing of DVDs

at the levels accorded Netflix makes operational sense. GameFlys proposed

remedy, however, would, in each of these circumstances, lock the Postal Service

into a level of manual processing that would no longer be warranted by any

operational need.

The Commission concluded that these operational decisions are generally

the prerogative of the Postal Service, and that mandating and enforcing a fixed and

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specific level of manual processing would unreasonably intrude on the Postal

Services authority to manage day-to-day processing operations. App. 379,

5014. Its remedial determination in this regard is based on a reasonable

evaluation of relevant statutory factors, and it is entitled to substantial deference

on judicial review.

2. The Commission Reasonably Considered PracticalLimitations On Its Ability to Enforce An OperationalRemedy.

An agency has broad discretion to take account of practical limitations on

its ability to undertake a particular enforcement action. In making such decisions,

the agency must not only assess whether a violation has occurred, but whether

agency resources are best spent on this violation or another, whether the agency is

likely to succeed if it acts, whether the particular action requested best fits the

agencys overall policies, and indeed, whether the agency has enough resources to

undertake the action at all. Hecklerv. Chaney, 470 U.S. 821, 831 (1985). Such

considerations lie squarely within the agencys discretion and must, at a minimum,

be accorded great deference on judicial review. Id. at 831-33.4

We do not argue here that the Commissions decision rests entirely and4

exclusively on matters that are committed to agency discretion by law, and that theCourt, as in Chaney, consequently lacks jurisdiction. Rather, the Commissionsdecision rests, not only on the presumptively unreviewable consideration of itslimited enforcement resources, but on the above-discussed determination that

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The operational remedy demanded by GameFly would plainly impose

substantial and continuing enforcement burdens of the Commission. GameFly

sought a measurable and enforceable qualitative outcome i.e., at least 80

percent of the customers DVD volume must be diverted from automated

processing * * *. App. 247. It demanded that the mandated manual processing

include eight highly specific elements pertaining to where and when DVDs must

be culled from the automated processing stream, the containers used to collect the

DVDs, the method for arranging DVDs within these containers, and the methods

for stacking full containers. Ibid. And it demanded that the Commission take an5

GameFlys proposed remedy would unduly intrude on the Postal Servicesmanagerial discretion. The latter ground is a substantive determination that is notcommitted to agency discretion by law, and that therefore remains subject to

judicial review.

Nonetheless, although the Commissions decision is not shielded fromjudicial review entirely, its consideration of enforcement-related factors implicatesmatters that are reserved to the agency in the first instance. Its evaluation of suchfactors must consequently be accorded great deference, even if its ultimatedecision remains subject to judicial review. Cf. Dunlop v.Bachowski, 421 U.S.

560, 568-72 (1975) (court must accord substantial deference to agencys decisionnot take enforcement action, even where decision ultimately remains subject to

judicial review); Consumer Federation of America v. Consumer Product Safety

Commn, 990 F.2d 1298, 1305 (D.C. Cir. 1993) (same).

In the proceedings below, the specific elements of its proposed remedy5

were treated as confidential proprietary information. We accordingly refer to themin only general terms here. Further detail is set forth in the sealed Appendix filedwith the Court. See App. 247.

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active and indefinitely continuing role in assessing whether each of these

requirements had been met, thus demanding periodic reporting to the

Commission to provide current and precise data on the extent to which the Postal

Service is actually achieving the minimum required level of manual processing.

App. 248.

This extraordinary remedy, with its highly particularized substantive

standards and ongoing reporting and monitoring requirements, would place the

Commission in a role akin to that of a district court administering a consent

decree. The Commission found this to be singularly inappropriate, noting that it

was unable to develop modifications to the proposed remedy that would protect

against the imposition of potentially large costs on the Postal Service, mailers, and

the Commission itself. App. 380, 5016. The Commissions reservations about

taxing its limited enforcement resources in this manner are eminently reasonable

and entitled to substantial deference from the Court.

The Commission also acted reasonably in expressing skepticism over

whether, even apart from the likely administrative burden, GameFlys remedy

could reasonably be enforced. App. 379, 5015. This determination is well

supported by the record. As an initial matter, though GameFly demanded specific

numerical targets for manual processing, the record does not indicate that there is a

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workable means of measuring such processing levels on a continuing basis and at

a reasonable cost. The Christensen study cited by both parties used survey

research, sampling techniques, and on-site visits to measure rates and methods of

manual processing. Supp. App. 465-67, 470-74. GameFly, however, does not

demonstrate or even assert that it would be reasonable to incur the costs that

would be involved in undertaking a similar effort on an ongoing, nationwide basis.

GameFly instead suggests that barcode scan data can reveal how often a

customers pieces have passed through automated processing equipment. Pet. Br.

at 39. It did not, however, advance this contention to the Commission. It does not

explain how information on the number of times mailpieces pass through

automatedprocessing equipment sheds light on the proportion of mailpieces

processed manually. And it does not explain how barcode scan data would show

whether the Postal Service employed the eight specific processing steps GameFly

demanded be included as the required elements of Commission-mandated remedy.

See App. 247.

Even if these measurement obstacles could be overcome, GameFly does not

explain how the Commission could shape and structure orders that would ensure

the Postal Service is providing the requisite type and level of manual processing.

The Commission found that the Postal Service was aware of and accountable for

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the preferential treatment accorded Netflix. App. 340-41, 4154-55. It

nonetheless accepted the Postal Services assertions that responsibility for

processing decisions resides at the local, district, and area levels as well as the

Postal Services assertions regarding many of the factors that limit local

processing decisions. App. 340, 4152. Thus, in order to implement GameFlys

remedy, the Commission would have to ensure that local processing facilities

each subject to a variety of constraints imposed by local conditions that may vary

from hour to hour produce an output of manual processing that collectively

satisfies the levels demanded by GameFly.

That would require the Commission to involve itself in day-to-day

management decisions to an inordinate degree, without any indication that it has

the resources or practical ability to successfully enforce the proposed remedy. For

example, if manpower limitations, mail volumes, or other constraints made it

infeasible for processing facilities in New York to maintain a specified level of

manual processing of DVD mail during a given time period, then the Commission

would somehow have to ensure that the shortfall is made up by processing

facilities located elsewhere, all after taking account of the relative volume of DVD

mail, the geographic distribution of facilities processing that mail, and any local

constraints on those facilities ability to process mail manually.

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The Commission does not have the resources or ability to take control of

postal operations in this manner. It noted that the Commission expressly accepts

the fact that the efficient and effective processing of mail requires operational

flexibility at the local level and stated that it will not interfere with that

operational flexibility by dictating how mail is physically processed. App. 334,

4135. That determination is well within the Commissions discretion and

affords ample basis for declining to mandate Gameflys proposed, operational

remedy.

Finally, GameFly errs in asserting (Pet. Br. 40) that the Commission

violated procedural requirements of the Administrative Procedure Act by

considering whether the proposed remedy would be feasible without affording

express, advance notice that the feasibility of the remedy would be taken into

account. Any agency vested with remedial discretion must evaluate whether a

proposed remedy is workable. GameFly cannot reasonably claim to be unfairly

surprised by the Commissions consideration of that issue. Moreover, the APA

makes clear that [e]xcept as otherwise provided by statute, the proponent of a rule

or order has the burden of proof. 5 U.S.C. 556(d). GameFly, as the proponent

of a specific and particularized remedial order, thus had the burden in the first

instance of demonstrating that the order would be an appropriate exercise of the

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Commissions discretion. The feasibility of its proposed remedy has a direct and

obvious bearing on that question, and GameFly had a full and fair opportunity to

address it during the lengthy evidentiary hearings and briefing afforded by the

Commission.

C. The Commission Reasonably Rejected GameFlys

Proposed, Rate-Based Remedy.

The Commission also acted reasonably in rejecting GameFlys alternative

proposal for parity between the rates charged DVD letter mail and DVD flat mail.

GameFly had requested that flat mail rates be reduced to the point where the

additional postage due for mailing a flat rather than a letter would be limited to the

additional cost of processing a flat. In support of its request, it adduced expert

testimony purporting to establish the difference in relative processing costs.

GameFly concluded that, in 2009 when the complaint was filed, and before taking

into account discounts offered for presorted mail, it was paying an extra charge of

$1.22 per round trip to send its DVDs as flat mail rather than letter mail. Pet. Br.

9. It asserted, however, that the extra cost of processing DVD flats is far lower.6

GameFlys calculation of processing costs is based upon confidential6

information submitted to the Commission under provisions that require the

Commission to safeguard it from unauthorized public disclosure. See 39 U.S.C. 504(g); 39 C.F.R. Part 3007. We accordingly do not identify GameFlys specificcost estimates in this publicly filed brief. The pertinent cost estimates, however,are set forth in the non-public version of the appendix filed with Court under seal.

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GameFly therefore demanded, as an alternative to an operational remedy, a rate-

based remedy that would require a commensurate reduction in flat mail rates.

The Commission rejected this rate-based remedy, reasoning that GameFlys

processing cost estimates were not sufficiently accurate for use in revising the

rates for flat shaped DVD mail, that such a remedy would intrude on the Postal

Services authority to take account of factors other than cost when setting different

rates for letter mail and flat mail, and that a rate-based remedy did not respond to

other consequences of the preferential treatment accorded Netflix. App. 380-81,

5020. Each of these grounds is a reasonable and adequate basis for the

Commissions rejection of GameFlys rate-based remedy.

As an initial matter, GameFly misstates the issue in asserting (Pet. Br. at 41)

that the Commission acted arbitrarily in maintaining differences in the rates

charged for letter mail and flat mail. These rates were proposed by the Postal

Service in prior proceedings and subsequently reviewed and approved by the

Commission. GameFlys administrative complaint did not place the lawfulness of

these previously established rates at issue. It instead alleged discriminatory

treatment of similarly situated mailers. The question for the Commission thus was

not whether it was lawful to maintain a difference in the rates for letter mail and

See App. 28-29, 248.

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to sustain the agencys choices unless they are patently irrational. See, e.g.,

Village of Bensenville v.FAA, 376 F.3d 1114, 1122 (D.C. Cir. 2004); ([W]e owe

considerable deference to an agency's exercise of its judgment and expertise in

estimating costs); West Virginia v.EPA, 362 F.3d 861, 867 (D.C. Cir. 2004)

(Agency determinations based upon highly complex and technical matters are

entitled to great deference) (internal citation and quotation omitted).Milk Train,

Inc. v. Veneman, 310 F.3d 747, 754 (D.C. Cir. 2002) (An agency typically has

wide latitude in determining the extent of data-gathering necessary to solve a

problem)(internal quotation and citation omitted).

Here, the Commission stated that it had examined the models used by

GameFlys expert to estimate the difference in relative processing costs and

concluded that they did not afford an adequate basis for restructuring DVD postal

rates. App. 380, 5019. It noted in particular that GameFly modeled the cost of

processing DVD flat mail by making adjustments to a model previously developed

to estimate the cost of processing DVD letter mail, that some of these

modifications were questionable, and that GameFlys evidence could likely only

provide a second best point of departure for separate ratemaking purposes. App.

358, 4204. The Commission cited, as one example of a questionable cost

assumption, the use of factors developed to model the costs of processing Standard

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Flat Mail as a proxy for the costs associated with processing First-Class Mail.

App. 358, n. 51.

GameFlys various attacks on this reasoning are meritless. Its threshold

contention (Pet. Br. at 43) that the Commission acted arbitrarily in refusing to

reduce postal rates without reliable evidence of postal costs is untenable. The

Commission reviews rates, it does not set them in the first instance. Where rates

are disputed in a proceeding under 39 U.S.C. 3662(c), the complainant and the

Postal Service appear before the Commission as adversary parties. The

Commission may order relief and impose a rate reduction on the Postal Service

only if it finds the complaint to be justified. Ibid. Under 5 U.S.C. 556(d), as the

complainant and proponent of an order directing a cost-based change in rates,

GameFly had the burden of proof on this question. That means, not only that

GameFly had the burden of going forward with pertinent evidence, but that it also

had the burden of persuasion. See Director, Office of Workers Compensation

Programs, Dept of Laborv. Greenwhich Collieries, 512 U.S. 267 (1994).

GameFlys novel suggestion that the Commission should nonetheless order

a specific, cost-based change in postal rates without adequate proof of the relevant

postal costs has no support in logic or precedent. As we will show below, there is

no requirement that postal rates be tied exclusively to postal costs in the first

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instance. Moreover, the Commission, for other reasons, did in fact order a

significant reduction in the rate GameFly must pay for mailing a DVD flat a rate

reduction that would translate into $2.4 million per year in postage savings at the

rates and mail volumes prevailing during the litigation. But even assuming that

processing costs are the only relevant factor, the maxim, cited by GameFly, that

the perfect should not be the enemy of the good does not authorize the

Commission to impose a rate change in the absence of reliable cost information.

GameFlys critique of the Commissions technical analysis of the cost data

is also meritless. The Commission looked carefully at the assumptions underlying

the cost model proposed by GameFly. Indeed, it specifically rejected as

inconsequential many of the criticisms of the model advanced by the Postal

Service. App. 358, 4204. It concluded, however, that GameFlys cost data did

not have sufficient rigor and reliability to be used in designing a new rate

structure. Ibid.

Contrary to GameFlys contention, the Commission did not, in making this

determination, hold that the use of a proxy for actual data in modeling postal costs

is inappropriateper se. It instead reasoned that GameFly could not simply

assume, without justification, that a factor developed for use in modeling the cost

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of one type of mail would be an adequate proxy for costs incurred in processing a

differenttype of mail.

As one example of this problem, the Commission noted that GameFly had

taken a CRA adjustment factor developed for use in modeling the costs of

Standardflat mail and used it as a proxy for the CRA adjustment factor for use in

modeling the costs of GameFlysFirst-Class flat mail. App. 358 n.51. A CRA

adjustment factor is a weighting factor that is used to reconcile the costs

predicted by a model of postal costs with actual cost data reported by the Postal

Service. By statute, the Postal Service must file with the Commission annual

reports analyzing costs, revenues, rates, and service. 39 U.S.C. 3652(a). The

filings, known as Cost and Revenue Analysis or CRA reports present

information on the volumes, costs, and revenue associated with specific market-

dominant products, such as First-Class Mail.

Cost models break down a Postal Service product like First-Class flats into

a series of discrete steps involved in making the postal service available. The

model then attempts to assign the pertinent direct and indirect costs associated

with each step of the process. Such information is useful in analyzing rate

requests or assessing the impact of changes in policies, cost inputs, market

conditions, and many other factors affecting postal service and revenue. A cost

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Finally, even if GameFly had succeeded in establishing the difference

between the costs of processing DVD letter mail and DVD flat mail, that would

not compel the Commission to adopt as a remedy for discrimination new rates

based solely on cost factors. The Commission has wide discretion to consider

factors other than cost in ratemaking. Mail Order Assn of America, 2 F.3d at

434; accord UPS Worldwide Forwarding, Inc. v. USPS, 66 F.3d 621,634-35 & n.

14 (3d Cir. 1995). That principle, moreover, applies with added force where a

complainant seeks a rate change as a remedy for discrimination.

The Commissions mandate upon finding discrimination is to adopt such

remedies as it deems appropriate. In making that determination, the

Commission is free to consider the impact of a proposed remedy on other statutory

interests. Those interests include assuring revenues sufficient to maintain the

Postal Services financial stability (id. 3622(b)(5)), preserving the Postal

Services authority to draw reasonable distinctions within, between, or among

classes of mail (Id. 3622(b)(8)), preserving the simplicity of the rate structure

(39 U.S.C. 3622(c)(6)), and maintaining the Postal Services pricing flexibility

(id. 3622(c)(7)).

Thus, the Commission is not obligated to impose, as a remedy for disparate

treatment among DVD mailers, new rates that would blur the distinction between

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letter mail and flat mail. It is not obligated to complicate the rate structure by

establishing unique, cost-based rates for a small group of mailers who demonstrate

that the current rates exceed the costs of handling their mail. Cf. Mail Order

Assn of America, 2 F.3d at 437-38 (statute allows the Commission to consider

the simplicity of the rate structure, and a separate rate for every group of mailers

with special costs savings, no matter how small the group, would produce a

hopelessly complicated rate schedule). And it has no duty to ensure that mailers

within the same class make an equal contribution to Postal Service costs. Ibid.;

Cf. Time, Inc. v. USPS, 710 F.2d 34, 41 n.8 (2d Cir. 1983) (disparities between

contribution to the Postal Services fixed costs from each class of mail service are

not so great as amount to undue or unreasonable discrimination among users of

the mails).

The Commission thus had reasonable basis for rejecting GameFlys

proposed rate-based remedy. GameFly failed, in the first instance, to establish the

cost differential underlying its rate proposal. The Commission, moreover,

reasonably concluded that even if GameFly had adduced more reliable cost data, it

was not appropriate to impose a remedy in this case that would interfere with the

Postal Services responsibility, in the first instance, to [p]ric[e] products to fairly

balance the multiple policies, objectives, and factors of title 39. App. 380,

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5020. That is a reasonable exercise of the Commissions remedial discretion that

should be affirmed on judicial review.

D. The Commissions Mandated Reductions In PostalRates and Surcharges On DVD Mail Are A

Reasonable And Appropriate Remedy For The Postal

Services Discriminatory Conduct.

The remedies the Commission did impose are a reasonable exercise of its

substantial discretion to take account of the interests of the statute as a whole

when addressing unreasonable discrimination among users of the mail. First, the

Commission has prohibited the Postal Service from selectively imposing a non-

machinable surcharge on DVD mailers other than Netflix. The Commission found

that the Postal Service had granted Netflix a discriminatory preference by

excusing it from paying the extra charge for letters that, though mailed as first-

class mail, cannot be processed automatically, while continuing to impose the

surcharge on other DVD mailers. App. 334-35, 4136. The Commission

concluded that this is unreasonable discrimination among users of the mail, and it

accordingly ordered the Postal Service to cease the practice by excusing allround-

trip DVD mailers from paying the surcharge for non-machinable letters. App.

382, 5026. That is a full and complete remedy for the Postal Services rate

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discrimination among similarly situated First-Class mailers who enter non-

machinable letters into the mailstream.

Second, the Commission ordered a substantial reduction in the postage paid

by DVD mailers like GameFly who employ flat-shaped mailers, and who must add

weight to the mailpiece to ensure that it is not routed to the machines that process

letter-shaped mail automatically. The Commission reasoned that the Postal

Service had declined to charge extra postage for DVD letter-shaped mail that is

diverted from the automated letter processing stream and processed by hand. It

concluded that, to ensure nondiscriminatory treatment, the Postal Service must

similarly refrain from imposing a charge on the extra weight a DVD mailer must

add to a flat-shaped mailpiece in order to ensure that it, too, is diverted from the

automated letter processing stream. App. 382, 5025-5027. The Commission

accordingly instructed the Postal Service to set the rate for a two ounce DVD flat

equal to the rate for a DVD flat weighing one ounce or less a remedy that

essentially ensures that DVD mailers employing flat-shaped mailpieces are not

charged for the extra ounce of weight they must add to the mailpiece in order to

ensure that it avoids the automated letter processing stream. Ibid.

Though GameFly do

Documents

GAMEFLY vs PRC and USPS- 2012