[Federal Register Volume 74, Number 134 (Wednesday, July 15, 2009)]
[Pages 34373-34375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-16782]



[Docket No. C2009-1; Order No. 235]

Complaint of GameFly, Inc.

AGENCY: Postal Regulatory Commission.

ACTION: Notice.


SUMMARY: The Commission has initiated a case to address allegations of 
undue discrimination and other issues raised by GameFly, Inc. (GameFly) 
in a formal complaint related to sending and receiving DVDs. Accepting 
the case will provide an opportunity for review of pertinent issues.

DATES: 1. Joint prehearing conference memorandum is due July 20, 2009.
    2. Notices of intervention are due July 22, 2009.
    3. A prehearing conference will be held July 23, 2009 (10 a.m.).

ADDRESSES: Submit comments electronically via the Commission's Filing 
Online system at http://www.prc.gov.

FOR FURTHER INFORMATION CONTACT: Stephen L. Sharfman, General Counsel, 
202-789-6820 and stephen.sharfman@prc.gov.

SUPPLEMENTARY INFORMATION: The Complaint of GameFly, Inc. (Complaint) 
was filed on April 23, 2009. The Complaint asserts several claims that 
concern unreasonable discrimination and other undue preferences allowed 
by the United States Postal Service in violation of the law. In support 
of its Complaint, GameFly, Inc. (GameFly) alleges that the Postal 
Service extended preferential services and inequitable rates to certain 
high volume rival mailers who similarly use First-Class Mail to send 
and receive DVDs.
    GameFly specifically contends its pieces are being processed 
through the automated letter mail processing equipment that continues 
to cause damage, and that the favored high volume DVD mailers are not 
suffering the high level of broken DVDs. It further alleges that ever 
since it resorted to higher cost flat rates and inserts to reduce 
breakage, it is still suffering more damage than these other mailers, 
while it is also paying the additional ounce postage charges and more 
for the flats shape of its pieces.
    The Answer of the United States Postal Service (Answer) in response 
to the Complaint was filed on May 26, 2009, together with a Motion of 
the United States Postal Service for Partial Dismissal of Complaint 
(Motion for Partial Dismissal). The Answer denied that the Postal 
Service's updated policy favors special handling by hand for inbound 
pieces, even though some exceptions arise in the field. The Motion for 
Partial Dismissal asserts that GameFly's reliance upon 39 U.S.C. 404(b) 
for jurisdiction appears misplaced. On June 2, 2009, GameFly, under a 
Motion of GameFly, Inc. for Leave to File Reply to Requests of the USPS 
for Disposition of Complaint (Motion for Leave), filed a Reply of 
GameFly, Inc. to Requests of the USPS for Disposition of Complaint 
    For the reasons explained below, the Commission concludes it has 
jurisdiction over the dispute, grants GameFly's Motion for Leave, and, 
upon a review of the pleadings, denies the Postal Service's Motion for 
Partial Dismissal. The Commission also concludes that the Complaint 
raises material issues of fact and law, and shall begin proceedings to 
hear the issues involved. 39 U.S.C. 3662(b).

I. The GameFly Complaint

    GameFly claims that the rates and services extended to some high 
volume DVD mailers violate 39 U.S.C. 101(d), 403(c), 404(b) and 
3622(b)(8), which prohibit undue discrimination. Complaint at 1. It 
explains that it, like many other businesses that rent DVDs to 
consumers, uses a two-way DVD mailer. Id. at 3. It distributes game 
DVDs to

[[Page 34374]]

subscribers via First-Class Mail, and subscribers usually return the 
DVDs to GameFly in prepaid mailers via First-Class Mail Business Reply 
Mail (BRM). Id.
    The Complaint alleges that the DVD is small enough so that when it 
is mailed in a lightweight mailer, the combined mailpiece can qualify 
as a one-ounce letter. Id. at 4. However, when the DVDs were enclosed 
in lightweight mailers without protective inserts, the company 
experienced breakage of DVDs in the mail. Id. GameFly alleges that the 
``breakage occurs during the processing of DVD mailers on Postal 
Service automated mail processing equipment'' for letters. Id. at 5. To 
reduce breakage, GameFly began to insert cardboard protectors into its 
DVD mailers in 2002. Id.
    While reducing breakage, the protectors ``increased the size and 
weight of the mailpieces * * * to * * * two-ounce flats.'' Id. This 
raised GameFly's postal rates for this higher total weight. Id. at 6. 
In 2007, the rising postal rates on flats led GameFly to test other 
mailpiece designs without a protector to reduce breakage at less cost, 
but these tests did not succeed. Id. The Postal Service also declined 
GameFly's request to reduce rates as to the second ounce. Id. at 7.
    GameFly contends that ``the Postal Service failed to stop breaking 
GameFly DVDs'' despite charging the higher rates for flats. Id. at 5. 
On account of the higher postage for flats, surcharges for the extra 
ounce, and certain other losses for theft, GameFly claims that it has 
incurred ``greatly increased mailing costs,'' that on average are 
almost 88 cents per piece more than the postage for a one-ounce letter. 
Id. at 6-7.
    GameFly alleges that the Postal Service gave preferential treatment 
for certain high volume movie DVD mailers who also faced significant 
DVD breakage.\1\ It claims that ``the Postal Service has adopted a 
practice of manually culling out the DVD mailers of two high volume 
shippers of DVDs, Netflix and Blockbuster, for special processing.'' 

    \1\ Id. at 8-9. GameFly cites a report from 2007 that allegedly 
found that most of the two-way DVD mailpieces from one unnamed high 
volume DVD rental company received manual processing. See Complaint 
at 8, para. 36, citing USPS Office of Inspector General, Audit 
Report No. MS-AR-08-001, Review of Postal Service First-Class Permit 
Reply Mail (November 8, 2007) (OIG Report).
    \2\ Id. at 8; see also OIG Report at 5, n.9. The term 
``culling'' usually refers to removing, by hand, non-letter mail 
from letter mail, and non-machinable mailpieces from automation rate 

    GameFly asserts that the Postal Service's practice of giving manual 
processing to DVDs from certain high volume mailers has continued since 
the OIG Report. Complaint at 9. It alleges that, despite its requests, 
the Postal Service has declined to give GameFly's DVD mailers 
processing on terms and conditions comparable to those offered to the 
two high volume mailers. Id. It alleges that Blockbuster is a rival 
that is entering the market for game DVD mailpieces. Id.
    Counts I and II assert undue discrimination under sections 3662(a) 
and 403(c).\3\ Under counts III and IV, GameFly contests postal rates 
charged for DVDs entered by GameFly as First-Class flats as 
inequitable, in violation of 39 U.S.C. 404(b).\4\ Each of the counts 
includes the first 39 paragraphs of the Complaint. GameFly requests 
relief, following a hearing, in an order that prescribes the same rates 
and terms of service that the Postal Service provides to Netflix and 
Blockbuster. Id. at 13.

    \3\ The Postal Service's Motion for Partial Dismissal, discussed 
below, does not separately challenge GameFly's first two counts, 
raised under section 403(c), either based upon any defect of 
pleading or jurisdiction.
    \4\ Count III asserts the rates are unfair because the Postal 
Service processes the same DVDs on letter-sorting equipment, unless 
the mailer also pays second-ounce postage. Count IV asserts that 
they are unfair because the Postal Service fails to process the DVDs 
on flats-sorting equipment.

II. The Postal Service's Answer and Motion for Partial Dismissal

    The Postal Service responds to the Complaint with a timely answer, 
which denies most of the material allegations directly, and adds 
certain affirmative allegations. The Postal Service also denies any 
preferential practices of unfair rules, inequitable rates, or 
processing standards, as well as any liability, losses, causation, and 
injury. See, e.g., Answer at paras. 2, 12, 16, and 19. It separately 
submits a Motion for Partial Dismissal to assert that the Commission 
lacks jurisdiction to hear counts that assert violations of 39 U.S.C. 
404(b). Motion for Partial Dismissal at 1.
    Aside from its Motion for Partial Dismissal, addressed below, the 
Postal Service alleges that it does not have a ``policy'' of manually 
processing mail entered by other high volume DVD mailers for delivery 
to or from its customers. Answer at para. 49. The Postal Service 
explains that while it has no current practice of manually culling 
incoming DVDs, it admits that ``some culling of the incoming DVDs 
(returns from customers) may * * * occur despite the change in 
policy.'' Id. at para. 37. It also denies that ``any significant volume 
of outgoing DVD mail pieces (from the mailer to the customer) are 
processed manually.'' Id.; see also para. 38.
    The Postal Service urges that its procedures for letter sorting 
streams and flat sorting streams are justifiably different. Id. at 
para. 39. It asserts that mailpieces very close to the size of the 
envelopes that complainant currently uses would typically not be 
extracted as a flat. Id. at para. 22. It explains that each mailer's 
mailpiece design controls the processing of the mailpiece. See, e.g., 
Answer at paras. 12, 17, 23.
    The Motion for Partial Dismissal explains that the Commission's 
jurisdiction to hear complaints is ``narrowly specified'' in a quoted 
portion of 39 U.S.C. 3662(a). The Postal Service mainly assails 
paragraphs 53 and 55 of the Complaint. It observes that the Complaint 
improperly alleges that the Postal Service practices have violated 39 
U.S.C. 404(b). Motion for Partial Dismissal at 2. The Postal Service 
submits that ``subsection [404(b)] is not one of the specific 
provisions * * * that are identified in subsection 3662(a).'' Id. Nor 
is the cited statute in chapter 36. Id. On these grounds, it contends 
that a ``complaint filed under subsection 3662(a) alleging a violation 
of subsection 404(b) fails to state a cause of action for which the 
Commission may grant relief.'' Id.

III. Commission Analysis

    The Postal Service's Motion for Partial Dismissal aims at 
eliminating allegations by GameFly under 39 U.S.C. 404(b), and 
particularly defeating counts III and IV. See id. at 2. Section 404(b) 
mainly empowers the Governors ``to establish reasonable and equitable 
classes of mail and reasonable and equitable rates of postage'' 
consistently with chapter 36. 39 U.S.C. 404(b). Section 404(b) is not 
included in the grounds for complaints listed in section 3662.
    GameFly asserts, by its Reply, that section 3662(a) incorporates 
section 101(d). Reply at 5-6. It adds that ``[b]y operation of Sections 
401(2) and 101(d), the substantive standard of section 404(b) thus is 
clearly justifiable in a complaint filed under section 3662(a).'' Id. 
at 6. Section 101(d) is included in the grounds for complaints listed 
in section 3662(a).
    In view of these contentions, it is appropriate to explore whether 
the counts are properly based upon statutory authority that satisfies 
the usual notice pleading requirements. Each count includes by 
reference the first 39 paragraphs of the Complaint. See Complaint at 
paras. 52 and 54. Thus, each count properly may be read to assert a 
violation under sections

[[Page 34375]]

101(d) and 403(c), unless the allegations otherwise fail to state a 
colorable claim.\5\

    \5\ See Complaint at para. 2 (the rates and services offered to 
high volume DVD mailers violate sections 101(d) and 403(c), which 
prohibit undue discrimination, and inequitable rates and 
practices.); see also Answer at para. 2; and see generally Docket 
No. C2001-1, Order Partially Denying Motion of United States Postal 
Service to Dismiss Complaint and Notice of Formal Proceedings, March 
20, 2001, at 9 n.11.

    The Postal Service's dismissal motion overlooks that the contested 
counts expressly include other allegations based upon section 101(d). 
Each count plainly has at least one clear statutory basis upon which to 
seek recourse. Thus, despite its apparent reliance on section 404(b) at 
the very end of the counts, GameFly still satisfies the standards of 
pleading statutory authority at this juncture. See Complaint at 1, 
citing 39 U.S.C. 101(d), and 403(c). The Commission has determined that 
the Postal Service's Motion for Partial Dismissal must therefore be 
    The Commission finds that the pleadings raise issues of both law 
and fact relevant to whether or not the actions, or inactions, of the 
Postal Service violate 39 U.S.C. 101(d) or 403(c), either by (a) Rising 
to the level of undue discrimination or preferences among users of the 
mails, or (b) charging rates inequitably among such mailers. 39 U.S.C. 

IV. Prehearing Conference and Public Representation

    A prehearing conference is scheduled for July 23, 2009 at 10 a.m. 
in the Commission's hearing room.
    GameFly and the Postal Service must meet and confer at least two 
weeks before the conference date to consider the appropriate scope and 
timeframes for discovery. Discussion should separately address each of 
the categories mentioned in the Complaint. See Complaint at para. 41. 
They shall jointly prepare a prehearing conference memorandum that 
identifies relevant undisputed facts. They shall offer suggestions, and 
be prepared to discuss the proper scope of discovery and the dates to 
complete discovery and to present their cases. They are urged to 
stipulate to an orderly process that streamlines the discovery schedule 
so as to reduce the need for motions on any special challenges. Where a 
mutually acceptable process cannot be agreed to, GameFly and the Postal 
Service shall fashion a joint statement clarifying areas of contention. 
The joint prehearing conference memorandum, with any related proposed 
stipulations, must be filed no later than July 20, 2009.

V. Opportunity for Intervention

    Except as otherwise specified above, any interested person may file 
a notice of intervention, consistent with the Commission's rules of 
practice, as a full or limited participant. See 39 CFR 3001.20 and 
3001.20a. The notice of intervention shall be filed using the Internet 
(filing online) at the Commission's Web site (http://www.prc.gov) 
unless a waiver is obtained for hard-copy filing. See 39 CFR 3001.9(a) 
and 3001.10(a). Notices of intervention are due no later than July 22, 
    Pursuant to 39 U.S.C. 505, E. Rand Costich and John Klingenberg are 
appointed to serve as officers of the Commission (Public 
Representative) to represent the interests of the general public in the 
above-captioned docket.

VI. Ordering Paragraphs

    It is ordered:
    1. The Commission finds that the Complaint by GameFly, Inc., filed 
April 23, 2009, regarding violations of law by the Postal Service, 
raises material issues of fact and shall begin proceedings in this 
    2. The Motion of GameFly, Inc. for Leave to File Reply to Request 
of the United States Postal Service for Disposition of Complaint, filed 
June 2, 2009, is granted.
    3. The Motion of the United States Postal Service for Partial 
Dismissal of Complaint, filed May 26, 2009, is denied.
    4. The Commission will sit en banc in this proceeding.
    5. The deadline for filing any notices of intervention is July 22, 
2009. Notices shall indicate whether the intervening party intends to 
participate in the hearing and the nature of that participation.
    6. A prehearing conference will be held in the Commission's hearing 
room on July 23, 2009 at 10 a.m. At least two weeks before the 
conference, the parties shall meet and confer on discovery. They shall 
prepare a joint prehearing conference memorandum that must be filed no 
later than July 20, 2009.
    7. The Commission appoints E. Rand Costich and John Klingenberg as 
Public Representative to represent the interests of the general public 
in this proceeding.
    8. The Secretary shall arrange for publication of this order in the 
Federal Register.

    By the Commission.
Judith M. Grady,
 [FR Doc. E9-16782 Filed 7-14-09; 8:45 am]