A proposed legal settlement affecting more than 6 million current and former Netflix Inc. subscribers has been delayed to address complaints that the deal unfairly favors the online DVD rental service and lawyers who sued the company.
Approval of the class-action settlement in state court was rescheduled to Feb. 22 after the Federal Trade Commission raised a red flag in a legal brief this week that warned the agreement “appears dangerously close to being a promotional gimmick” for Netflix.
In a separate objection, the Trial Lawyers for Public Justice echoed the FTC’s concerns and protested Netflix’s agreement to pay class-action lawyers $2.53 million — 64 percent of the $3.98 million that the company expects to spend on the settlement.
“This settlement is a striking example ... of class-action settlements that provide substantial benefits to the defendants and class counsel but little or no relief to the class,” the public interest law firm argued.
Adam Gutride, one of the attorneys pursuing the suit on behalf of Netflix subscribers, said Thursday that the hearing originally scheduled for next Wednesday was postponed after more than 30 parties objected to the settlement.
The suit filed in September 2004 alleges Netflix exaggerated how quickly it delivers movies to customers — most of whom pay $17.99 per month for up to three DVDs at a time. Once a DVD is returned in a postage-paid envelope, Netflix mails the next movie on a customer’s online wish list.
After the case was filed, Netflix revised its “terms of use” policy to acknowledge it places a lower priority on delivering DVDs to customers with a history of rapidly returning movies. The practice sometimes delays delivery to the heavy-using customers and makes it less likely that they receive popular movies at the top of their request lists.
Without acknowledging wrongdoing, Netflix agreed to settle the case four months ago by paying attorney fees and offering free DVDs to anyone who subscribed to its service before Jan. 15, 2005 — the date the company revised its terms of use.
Nearly 4.1 million former subscribers are being offered a free month of Netflix’s service. Another 2.08 million current customers are being offered a free upgrade for a month.
In most instances, customers who currently pay to have three DVDs at a time would be able to check out as many as four.
If everyone eligible accepted the offer, the settlement would be worth $85.5 million, according to the consumer attorneys. Netflix’s dramatically lower estimate reflects the company’s belief that relatively few people will sign up for the upgrades.
Anyone who accepts the offer will have to cancel the service after a month or will be automatically charged. That “opt out” provision has fueled most of the objections, which contend the settlement is designed to boost Netflix’s profits.
As an example of how this might happen, customers currently paying for three DVDs at a time would end up being charged $6 more per month if they accept an upgrade and don’t return to their old plan after a month.
The outrage over the settlement hasn’t been limited to the courthouse. Netflix customers also have expressed dismay at Web sites such as netflixsettlementsucks.com.
Netflix spokesman Steve Swasey reiterated the Los Gatos-based company’s belief that the settlement is in the best interest of its customers and shareholders.
In court documents, Gutride and another attorney, Seth Safier, have maintained that their requested fee is justified because they have already spent more than 2,100 hours on a case that prompted Netflix to acknowledge that customers paying the same fee for its service aren’t always treated equally.
Since its inception in 1999, Netflix has grown into one of the Internet’s biggest success stories as it has steadily won over new fans at the expense of traditional movie rental merchants like Blockbuster Inc.
Netflix had 3.6 million subscribers in September and expects to end this year with more than 5.6 million.