When Frank Chavez v. Netflix, Inc. was settled back in September, there were plenty of people who were less than pleased, but what could they do? The settlement was scheduled to go before the Hon. Thomas J. Mellon of the San Francisco Superior Court on January 18, 2006, and it was widely expected that he would sign off on it without objection. And then, last week, the FTC unexpectedly entered the fray by filing a brief of their own in the case which comes down strongly against the proposed settlement.
First, a bit of review. Back in 2004, California resident Frank Chavez discovered to his horror that Netflix was not living up to two of the claims commonly made in its marketing materials: 1) unlimited rentals and 2) one-day delivery. It turned out that the Netflix service was not truly unlimited and had several ways of preventing customers from checking out, say, 100 DVDs each month, no matter how hard they tried. Also, due to the vagaries of snail mail, Netflix DVDs did not always reach the customer in exactly one day. Chavez, on behalf of aggrieved Netflix users anywhere, did what any right-thinking American would do: took Netflix to court.
After undergoing the Chinese water torture of discovery, in which they turned over more than 100,000 pages of material, Netflix decided to settle without admitting any wrongdoing. The proposed settlement didn't offer much to consumers. Those who are current subscribers would receive a free one-month service upgrade. Those who had been Netflix subscribers prior to January 15, 2005 would receive a coupon good for a free month of service. For both groups, though, there was a catch: if they did not cancel their membership after the free month or revert to their earlier plan, they would be automatically enrolled and billed at their current rate. The settlement was not exactly the triumph of the little guy over an evil corporate empire, and the benefit to consumers is so slight that it makes one wonder why any lawyers would waste their time with this sort of thing.
The answer is money (but you already knew that, didn't you?). The law firm that argued the case will not be receiving free Netflix memberships; instead, they are asking (and Netflix has agreed) for US$2,528,000 in attorney's fees and costs. As they point out, "Plaintiff's Counsel have not received payments for their services, nor have they been reimbursed for any out-of-pocket expenses, in connection with this Litigation." It's hard to feel too upset about this when the lawyers make US$2.5 million and consumers get a month of four DVDs at a time instead of their usual three. And what about Chavez? US$2,000 for his time and trouble.
Then, just as things were looking good for the settlement, the FTC rolls into town and administers a massive smackdown. Their basic problem is that the proposed compensation is coupled with a "negative option" which requires consumers to act in order to avoid future charges. If the settlement goes through, it may turn out to be little more than a US$2 million marketing campaign for Netflix, who will certainly sign up more members as a result. The FTC believes that this can hardly be called compensation and they say so in no uncertain terms that are worth quoting at length.
"In addition, even if the terms of the negative option plan were fully and clearly disclosed to class members before they chose to accept the benefit, the use of negative option features poses special problems in class action settlements. In the instant case, the Commission believes that the negative option aspect of the proposed settlement appears dangerously close to being a promotional gimmick. Specifically, the value of the benefit offered each class member is very low, both because those members who accept the benefit receive very little of value and because it is reasonably foreseeable that many class members will forgo any benefit altogether to avoid the negative option. This apparently small benefit to class members, however, provides a larger benefit to Netflix if members inadvertently either continue service at higher prices or re-enroll in the plan and continue beyond the free month based on the negative option. While the Commission has no knowledge of the strength of plaintiff's case, it nonetheless questions whether any settlement in which a defendant benefits potentially at consumers' expense would be appropriate."
While the FTC has gotten some bad press here at Ars in the last year or two, it's refreshing to see them take a stand on this sort of class action lawsuit that benefits both the plaintiff's lawyers and the company being sued while leaving the little guy hung out to dry. Perhaps it will serve as a warning to other firms looking for class action work in the hopes of reaping a windfall that does not even require them to go to trial.
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