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Judge delays approval of Netflix settlement

/ Source: The Associated Press

A judge on Wednesday delayed approval of a proposed class-action settlement that would require Netflix Inc. to offer a free month of DVD rentals to resolve a lawsuit that prompted the popular online service to acknowledge it gives preferential treatment to its most profitable customers.

San Francisco Superior Court Judge Thomas Mellon Jr. indicated he needed more time to figure out how much he will reduce the fees of two San Francisco lawyers representing the interests of 5.5 million current and former Netflix subscribers.

The attorneys, Adam Gutride and Seth Safier, had filed papers seeking $2.3 million in fees to be paid by Netflix, but Mellon said he plans to award them significantly less money.

The judge also said he also expects to limit the fees of attorneys who objected to an earlier settlement to $100,000 — about half the total that group of lawyers wanted.

Mellon's refusal to approve the proposed attorney fees represents the latest twist in an 18-month-old case revolving around allegations that Netflix had been exaggerating how quickly it delivers movies to subscribers.

Netflix and the class-action lawyers initially reached a settlement five months ago, but the deal was scrapped after the Federal Trade Commission and several attorneys objected to a provision that would have allowed the company to automatically charge people after the free month of DVD rentals expires.

Under the revised settlement currently under consideration, Netflix will be able to charge only people who notify the company that they want to continue the service.

That revision prompted Netflix to raise the estimated cost of the settlement to $8.95 million from $4 million. Both estimates reflect an expectation that Netflix will have to pay $2.53 million in attorney fees, something that Mellon now says he won't let happen.

In court papers, Gutride and Safier valued the settlement at $85.5 million — a figure based on the premise that everyone eligible will sign up for the free DVD rentals.

About 418,000 consumers accepted the offer after Netflix sent notices last year under the original settlement. Gutride and Safier believe that number will grow substantially higher as more people learn about the revised settlement.

The agreement covers Netflix subscribers through Jan. 15, 2005 — the date that the company made a little-noticed change to its terms of use to disclose it sometimes delays shipments to frequent renters so it can give higher priority to customers who keep their movies longer.

The practice, derided as "throttling" by its critics, helps boost Netflix's bottom line because the company charges a flat monthly fee and provides postage-paid envelopes for DVD returns.

The system means Netflix makes more money from infrequent renters and risks losing money on customers who return DVDs quickly so they can get the next movie on their online wish lists.

Most Netflix subscribers pay $17.99 per month to keep up to three DVDs at time.

The eligible subscribers who still have that plan will have an option to check out four DVDs at a time for a month at no additional charge — a $6 value. About 3.7 million former subscribers will be offered a free month of the $17.99 rental plan, meaning that group would get three times the value of current subscribers participating in the settlement.

That disparity bothered Mellon, who said Wednesday he might ask Netflix to use some of the money the company saves on attorney fees to provide more free DVDs to current subscribers.