Netflix Settlement Gets Reworked After Protests

By Caroline E. Mayer
Washington Post Staff Writer
Wednesday, March 22, 2006

A proposed class-action settlement involving Netflix Inc. customers has been rewritten to address complaints that the agreement did little for consumers while rewarding the company and lawyers who filed the suit.

The new version of the settlement, which is scheduled to be reviewed by a California Superior Court judge at a hearing today, still gives the plaintiffs' attorneys more than $2 million. However, the chief complaint about the previous settlement -- that it would have resulted in Netflix customers paying higher monthly fees -- has been resolved.

Under the previous proposed settlement, subscribers of the DVD-by-mail services would have received a one-month upgrade entitling them to additional DVDs, a value that ranges from $2 to $6, depending on the plan a customer had. Consumers would have continued to be billed for the more-expensive service after the upgrade unless they specifically requested a return to the less expensive plan. The revised agreement still gives them the one-month free upgrade, but it ends automatic renewal of the more expensive service.

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 check out a certain number of DVDs at one time. The most popular plan, for $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 a new one.

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

Netflix has denied any wrongdoing, although it did revise its Web site to note that it gives priority to customers who receive the fewest DVDs. The company said it agreed to the settlement because it was in the best interest of shareholders and customers.

The settlement's original terms gave plaintiffs' lawyers $2.5 million; the new agreement gives them $2.3 million. 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, were filed to the initial agreement. They alleged that consumers could end up in a worse position after the settlement because they would be paying more than they expected for DVD rentals. In the past few years, both the FTC and the trial lawyer group have actively protested class-action settlements that produce little value for consumers, usually coupons of limited monetary value, but that pay off handsomely for lawyers.

The two groups have dropped their opposition to the revised settlement. With the elimination of automatic renewal, "there is no risk that customers will be unwittingly duped into higher membership charges," said Richard Frankel, an attorney for the trial lawyers group.

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