Nov. 15, 2005 at 11:00 AM ET
Tired of corporations with misleading advertising? Tired of class-action lawyers making big bucks and leaving crumbs behind for their plaintiffs? Here's a story for you.
DVD rental firm Netflix just settled a case involving accusations of misleading advertising. In the settlement, Netflix agreed to pay the lawyers up to $2.5 million. Consumers don't get any money. They get what's known in the class-action world as a "coupon settlement." Instead of money, Netflix customers get one free month's trial for upgraded service.
What's worse, that free trial sounds an awful lot like a marketing tactic. After the free month, consumers’ will automatically be enrolled in the upgraded service, and will pay for it -- unless they opt out of the upgrade. Sound familiar?
This is the kind of hard sell that marketing managers dream about, and it has Netflix consumer Chris Ambler hopping mad. He's set up a Web site named NetflixSettlementSucks.com, where he's gathering opponents to mount a formal objection.
What is Netflix?
Now for the details. You’ve probably heard of Netflix, the Internet-age way to rent movies. You make a list of movies you want to see, and Netflix mails them to you, two, three or four at a time. Whenever you mail the DVDs back, Netflix sends you more. The basic plans cost between $10 and $18 a month -- and for that price, you can rent "unlimited" movies. If you are an avid movie watcher, and you are conscientious with the mail, you can end up renting dozens of movies for one low price.
Well, kind of.
Last year, Netflix was sued by a consumer who claimed the firm had several sneaky ways to limit the number of movies it actually sent home. For starters, those one-day-turnaround deliveries could actually take up to six days. The company didn't count Saturdays or non-postal holidays. And in the lawsuit, the plaintiffs argued that Netflix purposefully tacked on an extra day here or there while handling DVDs. In reality, someone who paid for the "three-at-a-time" movie package could at most rent 10 movies a month, the lawsuit claims, a far cry from unlimited rentals.
What's more, the lawsuit claims, Netflix gave quick turnaround to new customers and consumers who didn't watch many movies -- their most profitable consumers. Avid movie-watchers who burned up the path to the mailbox were selectively penalized, getting movies slower than other members.
(You can see the lawsuit at San Francisco County Superior Court's Web site, but you'll have to download a piece of software and search for case 434884).
It was all unfair, the plaintiffs said, to consumers and to Netflix competitors like Blockbuster -- which says of its service that users should expect two- to three-day delivery.
No admissions, but a settlement
Netflix admits to none of this behavior but in September agreed to settle the case anyway. The settlement terms are simple: Consumers who are current members get a free one-month upgrade. If you are currently allowed three movies at a time, you'll be able to get four at a time for that month. But here's the problem. When your free month is up, Netflix will send you an e-mail. If you don't follow the instructions in that e-mail, you'll continue to be enrolled in the higher-service plan, and you'll be paying for it.
Even better for the Netflix marketing department: If you are a former Netflix customer who's quit, you get a free month of movies -- but you'll have to fork over a credit card or other payment method. And again, after that month is up, if you don't opt out, you'll be a paying member.
At this point, let's recap:
Lawyers: Up to $2.5 million
Netflix:A great upsell marketing plan
Consumers: A couple of extra DVDs, followed by higher bills
‘A very good settlement’
Seth Safier, lawyer for the plaintiffs, insisted that the settlement terms really did help consumers.
“This is a very good settlement. It addresses exactly what the plaintiff was complaining about,” he said. Netflix unfairly limited the amount of unlimited movies someone could rent, and so the settlement gives consumers a month's worth of extra movies. True enough.
He also says the court may not award him and his partner the full $2.5 million Netflix has agreed to pay -- the amount is merely a ceiling, pre-approved by Netflix.
And, Safier said, consumers will be given ample opportunity to decline the higher-priced services.
But why not just automatically assume they have the service they want already and ratchet them back down at the end of the free month?
"Netflix doesn't work that way," he said.
Netflix spokesman Ken Ross promised consumers would be treated fairly, citing the firm's high customer approval ratings.
And, ironically enough, Chris Ambler (you remember him, the NetflixSettlementSucks.com guy) is among those who gives Netflix high marks. He said he loves the service and has never had trouble getting the movies he wants in a timely way. But he thinks the settlement terms, well, suck.
"I looked at it, and I thought, 'This is absolutely ridiculous,'" Ambler said. In the long run, he figures he’ll be paying the price for the settlement through higher subscription fees. And he’s upset about what he calls free marketing. So he’s brought about 300 like-minded complainers to class-action lawyer Jay Edelson, who’s offering to write a formal objection for free. It's not clear if the objection will have any impact, but Edelson figures it's worth a shot.
"A lot of people are upset about this class," Edelson said. "This tars good class-action attorneys and feeds the fire for critics."
Among those critics is the Bush administration, which has long made lawsuit reform a platform of Republican politics. Earlier this year, a freshly emboldened Republican Congress passed the Class Action Fairness Act, and President Bush signed it. The law forces most class-action cases into federal court, where judges have been less friendly to class-action lawyers. And it limits the fees paid to class-action lawyers in coupon settlements.
The law, however, was not retroactive and has no impact on the current Netflix case. And it is silent about settlements that might be mistaken for clever marketing plans.