Walmart Breached Contract When It Bowed Disc-to-Digital Service: Suit

Walmart breached an “implied-in-fact” contract involving RedKo Innovations’ movie exchange program and raked in “billions of dollars” without paying the company “a single cent,” alleged RedKo's complaint Monday (docket 0:24-cv-02452) in U.S. District Court for Minnesota in Minneapolis.

The retailer “took advantage” of RedKo, a two-person business, by agreeing to implement its movie upgrade program “but then completely cut RedKo out of the picture, took RedKo’s movie program for itself, and launched RedKo’s movie program on its own,” alleged the complaint.

The plaintiff’s business -- which allowed movie viewers to exchange physical copies of their movies to a newer format such as Blu-ray “for a small fee” -- enabled consumers to upgrade their movie collections “without having to re-purchase their favorite movies at full retail price,” the complaint said. RedKo first pitched the deal to Walmart in 2003, saying it would help the retailer’s movie studio partners make “billions of dollars” in movie sales, while also driving more foot traffic into its stores, the complaint said. Under RedKo’s business model, the defendant would pay the company “just a few cents for every movie upgraded," it said.

In 2011, soon after Walmart acquired Vudu, RedKo pitched the movie program to Walmart executive Chris Nagelson, now the vice president-entertainment property merchandising at Walmart, said the complaint. Redko told Nagelson that “billions of movies were sitting in consumers’ homes at that moment waiting to be 'upgraded’” and that the plaintiff’s compensation would be “just a few cents for every movie unit upgraded.” Walmart “never disagreed with that or said it wouldn’t pay RedKo based on those terms,” the complaint said.

Following the meeting, Nagelson met with certain movie studios to pitch RedKo’s movie program, alleged the complaint. After the studios showed interest, Nagelson “confirmed with RedKo” that he wanted to implement the program at Walmart and wanted to be the first retailer to offer the program, the complaint said.

RedKo and Nagelson discussed how to implement the program, Walmart’s operations costs, staffing needs and advertising for the program, the complaint alleged. Nagelson told RedKo he wanted to get the movie program “implemented as soon as possible” so he asked the plaintiff to meet with Walmart executive Louis Greth, currently senior director-private brands pet and baby, who was at the time involved with the retailer’s in-store and online movie sales through Vudu, the complaint alleged. RedKo “did exactly as Nagelson directed and met with Greth so that the Movie Program could get implemented within the timeframe Nagelson was shooting for and under the terms RedKo and Nagelson had agreed to,” it said. Greth said he would advise Nagelson about the proposed implementation plan, the complaint alleged.

After a few communications with RedKo about the plan’s status, Greth put off further discussion and “ultimately stopped communicating” with the plaintiff, said the complaint. At no time in 2011 or later did anyone from Walmart reject RedKo’s offer, tell the company that Walmart wasn’t going to implement it, or say the retailer wouldn’t pay the “few cents for every movie upgraded,” the complaint said. Instead, Nagelson “only told RedKo that Walmart wanted to implement RedKo’s Movie Program under the terms they discussed and that he wanted it done in the upcoming year,” it said.

Months later, Walmart announced it launched a “brand new,” “Disc-to-Digital” service through which consumers could bring physical copies of movies to stores “and use them to upgrade, for a small fee, to a digital version of that same movie if they had a subscription to Walmart’s Vudu streaming service,” the complaint said. Disc-to-Digital “was essentially the same” as the plaintiff’s movie program, but Walmart “claimed Disc-to-Digital as its own, and completely cut RedKo out of the picture,” the complaint alleged.

Though Walmart called Disc-to-Digital “revolutionary,” it had many of the same core concepts as the RedKo concept, the complaint alleged. Instead of allowing for physical-to-physical upgrades and physical-to-digital upgrades, the defendant’s Disc-to-Digital program “was limited in scope and only allowed movie lovers to use their physical copy to get a digital copy,” the complaint said. Walmart lifted RedKo’s storyline about Disc-to-Digital: that it gives movie lovers’ movie collections a “second life,” or an increased lifespan, “by unlocking value in content they already owned,” the complaint said. Nagelson and Greth “took credit for key aspects of the program that Walmart had taken directly from RedKo’s hands,” it alleged.

Walmart “use of RedKo’s Movie Program was a massive hit” for the retailer, which made “billions of dollars” and received “home entertainment and movie industry awards, and business innovation accolades, all from using RedKo’s Movie Program,” the complaint alleged. It was “the classic story of the corporate bully taking everything and pushing out the little guy"; Walmart “gave RedKo nothing in return,” it said.

The defendant used the program to grow the number of subscribers to its Vudu service, which is available on over 100 million home entertainment devices in the U.S., alleged the complaint. it also used the movie program to “successfully sell Vudu to Fandango Media,” it said.

RedKo claims breach of implied-in-fact contract and unjust enrichment. It seeks a judgment against Walmart, damages in an amount to which it’s entitled, and attorney’s fees and costs. Walmart will "review the complaint and respond in Court as appropriate," a spokesperson emailed Tuesday.