Apr 26, 2008 2:45 pm US/Pacific
SF Appeals Court Upholds $9M NetFlix Settlement
LOS GATOS (BCN) ―
A state appeals court in San Francisco has upheld a settlement of a consumer lawsuit against Netflix Inc. that will give movie rental customers $7 million in benefits and lawyers $2 million in fees.
A three-judge panel of the Court of Appeal on April 21 unanimously upheld the settlement and attorney's fees approved by San Francisco Superior Court Judge Thomas Mellon in 2006.
Under the agreement, Los Gatos-based Netflix, the world's largest online movie rental company, will give one month of upgrades or free service to 697,000 present and former subscribers nationwide who signed up for the settlement by a 2006 deadline.
The month of free DVD rentals for former customers is valued at about $17 and the upgrade for present customers is worth about $6.
San Francisco attorneys Seth Safier and Adam Gutride, who filed the lawsuit in 2004 on behalf of lead plaintiff Frank Chavez, of San Francisco, will get $2 million.
The lawsuit accused Netflix of false advertising in promising one-day delivery of rented DVDs. It alleged the company gave slower service to the most frequent customers to save costs.
Netflix did not admit any wrongdoing in the settlement, but changed the wording of its service explanation in addition to agreeing to the financial settlement.
Safier said on Friday, "I think we are all very pleased with the results and look forward to the class members receiving their benefits."
Netflix spokesman Steve Swasey said the company would not comment on the case except to note that the firm "settled without admitting wrongdoing."
The benefits won't begin until all appeals are completed. Benjamin Nutley, a lawyer for a customer who challenged the settlement, said, "We haven't made a decision" on whether to appeal further to the California Supreme Court.
An earlier version of the settlement was controversial because it would have automatically renewed the increased service at the customer's expense after the first month unless the customer took action to cancel the increase.
The earlier proposal would also have given the lawyers up to $2.53 million.
About 450 customers and the Federal Trade Commission filed objections to the original proposal, charging that the automatic renewal was an unfair marketing ploy.
The FTC filed a brief saying the planned automatic renewal "appears dangerously close to being a promotional gimmick" and would give consumers "very little of value."
After meeting with FTC representatives in January 2006, Netflix and the consumer attorneys agreed on the revised settlement, which does not include automatic renewal of the one-month upgrade.
After Mellon approved the settlement in July 2006, four individual customers filed appeals challenging the claims process, the amount of the attorney fees and/or the way the fees were calculated.
The appeals court said, however, that it found no errors in the claims process or in the way Mellon calculated the fees.
The lawyer fees included a basic payment of $805,000 plus an extra amount reflecting the value of benefits to consumers, for a total of $2 million. An award of an extra amount is common in consumer class action lawsuits.
Some of the customers who appealed argued unsuccessfully that the extra amount was too much because the final settlement was shaped from the outside by the objections of the Federal Trade Commission and some consumers.
Nutley, representing customer John Vogel, of Los Angeles, said, "That's not right and it looks terrible for the lawyers to be getting more than their hourly rate when the FTC has to step in and fix it."
Safier said of the final agreement, "The settlement was good. It provides exactly what the plaintiff sought: it gives people the DVDs they should have and provided more disclaimers by Netflix."
Safier said the settlement would have been worth more than $50 million if all of the 5.5 million eligible customers had signed up for the settlement. Those eligible were present and former customers as of 2005.
Netflix now has more than 8 million subscribers and annual rental revenue of more than $1 billion, according to its Web site.
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