Netflix Modifies Class-Action Settlement
By MICHAEL LIEDTKE

Netflix Inc. told a judge on Wednesday that it has changed a class-action settlement so 6 million consumers eligible for free DVDs from the online rental service won't be charged automatically after the one-month offer expires.

The company indicated last week that it was mulling the revision, but didn't confirm the change until its attorneys appeared Wednesday before San Francisco Superior Court Judge Thomas Mellon Jr.

The concession responds to objections filed by the Federal Trade Commission and more than 400 current and former customers - all of whom argued that the original settlement smacked of a promotional gimmick designed to enrich Netflix.

The class-action suit alleges Netflix exaggerated how quickly it delivers movies to customers. 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.

Under an agreement reached five months ago, Netflix planned to offer free DVDs for one month to anyone who had been subscribing to the popular rental before Jan. 15, 2005. The company then planned to charge for the service unless recipients took steps to cancel after the free month.

Under the modified settlement, Los Gatos, Calif.-based Netflix won't be able to extend the service beyond the free month without explicit approval from consumers.

David Newman, an attorney for the FTC, told Mellon that the agency's staff is pleased with the change. Attorneys representing some of the objecting consumers also indicated the revision addressed their concerns.

Netflix spokesman Steve Swasey said the company believes the new settlement benefits everyone involved. As before, Netflix isn't admitting any wrongdoing.

Mellon will decide whether to give his final approval of the revised settlement at a March 22 hearing.

More than 400,000 consumers already have accepted Netflix's settlement offer, according to Adam Gutride, a San Francisco attorney who filed the class-action suit in September 2004. Everyone eligible for the offer will receive another notice spelling out the changes after Mellon approves the settlement.

Almost 4.1 million former Netflix subscribers will be offered a free month of service. Nearly 2.1 million current customers will be offered a free service upgrade, meaning someone who currently pays $17.99 month to rent up to three DVDs at a time will receive as many as four movies at no additional cost for a month.

Despite some heated criticism about shipping delays, Netflix has been steadily growing in popularity. The service had 4.2 million subscribers through 2005, up from 2.6 million subscribers at the end of 2004.

The free DVD offer is designed to compensate consumers who believe they were misled before Netflix changed its terms of use.

Participating consumers are expected to receive anywhere from four to 12 free DVDS - a benefit Gutride has estimated could cost Netflix more than $80 million. Netflix has estimated the settlement's cost at about $4 million, including $2.53 million to cover attorney fees.

Gutride and his partner Seth Safier originally sought the entire $2.53 million, arguing that they had earned the money by spending more than 2,100 hours on the case.

Responding to objections, Gutride and Safier on Wednesday told Mellon they will reduce their fees so a portion of the $2.53 million can be shared with other attorneys who represented consumers objecting to the original settlement.

If the attorneys demand more $2.53 million in combined fees, Netflix can still back out of the settlement. The attorneys must file their fee requests by March 13.