Protests Put Netflix Settlement On Hold

A proposed class-action settlement involving Netflix customers may be rewritten in response to complaints that the agreement does little for consumers while rewarding the company and the lawyers who filed the suit.

A hearing over the $4 million settlement had been scheduled in California Superior Court today but was postponed for a month.

Plaintiff attorneys, who were slated to receive $2.5 million in the proposed settlement, said the delay enables both sides to review more than 50 objections, including one by the Federal Trade Commission and another by the Trial Lawyers for Public Justice, a national public-interest law firm. Netflix Inc. declined to comment on the delay.

In the past few years, both the FTC and the trial lawyers group have been actively protesting class-action settlements that bring little value to consumers, usually coupons with little monetary value, but pay off handsomely for lawyers.

The settlement stems from a September 2004 lawsuit on behalf of more than 6 million former and current customers. The lawsuit accused Netflix of misleading consumers by promising DVD delivery within one business day after an order was processed. In reality, the lawsuit said, it would often take as long as four to six business days for customers to receive requested DVDs. That meant customers could watch fewer videos than promised under Netflix's monthly membership plans, which allow customers to have only a certain number of DVDs checked out at one time. The most popular plan, at $17.99 a month, allows customers to check out three DVDs at a time. Once a DVD is returned by post-paid mail, Netflix sends out a new one.

The lawsuit also alleged that customers who were heavy users, those who viewed and returned their movies quickly, received lower delivery priority.

The FTC said the Netflix settlement was "more a promotional vehicle" for the company than a means to correct alleged misleading practices. While not making any comments on the merits of the original lawsuit, the FTC said the settlement was particularly troublesome, because it "could leave some consumers in a worse position" because they could end up paying more than they expected for DVD rentals.

Richard Frankel, an attorney for the trial lawyers group that filed similar criticism, said plaintiffs attorneys had contacted his group to help craft a new settlement to improve consumer restitution.

Plaintiffs attorney Adam Gutride defended the settlement, saying it provided past and present Netflix customers with an opportunity to rent more DVDs in an effort to deal with allegations that Netflix failed to deliver DVDs as quickly as promised. "There may be changes to the settlement; there may not," Gutride said in an interview yesterday.

Under the proposed settlement, which must be approved by the court, current Netflix customers would get a one-month upgrade to receive more DVDs, a value that ranges from $2 to $6, depending on the plan a customer already had. But if consumers fail to cancel that upgraded service at the end of 30 days, they would be billed for the more expensive service every month after that.

Meanwhile, former Netflix customers would get a month's free service.

Netflix spokesman Steve Swasey said the company agreed to the settlement because it was in the best interest of its shareholders and customers.

Netflix did not admit any wrongdoing in the settlement, although it has revised its Web site to note that its gives priority to customers who receive the fewest DVDs.