Netflix Mulling Revision to Settlement
Chicago Tribune

By MICHAEL LIEDTKE
AP Business Writer
Published February 16, 2006, 7:13 PM CST

SAN FRANCISCO -- Hoping to satisfy federal regulators, Netflix Inc. appears ready to revise a proposed class-action settlement so 6 million consumers eligible for a free sample of its online DVD rental service aren't automatically charged after the one-month offer expires.

Under an initial settlement reached five months ago, Netflix agreed to offer free DVDs for one month to anyone who had been subscribing to the popular rental before Jan. 15, 2005.

Unless the participating consumers canceled after the free month, the company planned to begin automatically charging for the service -- a provision that drew a harshly worded objection from the Federal Trade Commission, as well as other parties.

Los Gatos, Calif.-based Netflix indicated its willingness to drop the automatic renewal clause when its lawyers updated a San Francisco Superior Court judge Wednesday on the settlement talks, said Adam Gutride, an attorney representing consumers in the case.

If the change is made, eligible consumers would still receive free DVDs for a month, but Netflix wouldn't be able impose charges after the period expired unless the recipient took action to extend the service.

Netflix spokesman Steve Swasey declined to comment Thursday because nothing has been finalized.

To allow time for further negotiations, a court hearing to approve the settlement has been postponed by a month to March 22.

The class-action complaint, 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.

Four months after the suit was filed, Netflix changed its terms of use to acknowledge it sometimes delays shipments to frequent renters so it can give priority to customers who keep their movies longer. The practice, derided as "throttling" by its critics, helps Netflix boost its profits.

Without admitting wrongdoing, Netflix agreed to settle the case by paying attorney fees as well as distributing the free DVDs to eligible consumers.

Almost 4.1 million former Netflix subscribers are being offered a free month of service. Another 2.08 million current customers are being offered a free upgrade for a month.

The Federal Trade Commission protested the settlement last month, arguing the automatic renewal feature smacked of a promotional gimmick designed to help Netflix attract more subscribers.

As an example on how the automatic renewal clause could backfire on a consumer, Netflix subscribers currently paying for three DVDs at a time would end up being charged $6 more per month if they accepted an upgrade and didn't return to their old plan after a month.

Netflix, which started the year with 4.2 million subscribers, has said the settlement is in the best interests of its customers and shareholders.

The proposed settlement has also come under fire because the attorneys who filed the suit will receive $2.53 million -- 64 percent of the $3.98 million that Netflix expects to spend on the deal.

Gutride and Seth Safier, another attorney in the case, maintain the settlement is worth $85.5 million if everyone eligible accepts Netflix's free DVD offer. The attorney say they deserve to be paid $2.53 million because they have spent more than 2,100 hours working on the case.

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