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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
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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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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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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
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