January 11, 2006, 12:00 AM

The FTC opposes the proposed settlement in Netflix class-action lawsuit

The FTC is opposing a proposed settlement in a class-action lawsuit against Netflix Inc., saying it serves more as a promotional vehicle for the DVD rental service than a means of providing redress to consumers.

Kurt Peters

Executive Editor

The Federal Trade Commission is opposing a proposed settlement in a class-action lawsuit against Netflix Inc., saying the settlement serves more as a promotional vehicle for the online DVD rental service than as a means of providing redress to consumers. In the friend-of-the-court brief, filed last week in superior court in San Francisco, the FTC also claimed that the settlement would leave many consumers in a worse position than if they had decided not to participate.

In the suit Frank Chavez, et al. v. Netflix Inc., filed in September 2003, Chavez contended that Netflix failed to provide “unlimited” DVD rentals and “one day delivery” as promised in marketing materials. Netflix denied any wrongdoing or liability in the case but agreed to a settlement it believed is “in the best interests of our shareholders and our customers,” a spokesman says. He declined further comment.

The proposed settlement requires Netflix to modify its marketing materials and pay up to $2.528 million in class counsel fees and costs. It also gives current Netflix customers a free service upgrade for one month and former customers one month of free service.

What the FTC objects to is a provision that would automatically enroll those customers in the plans after one month unless the customers canceled.

The FTC contends that the settlement notice to class members doesn’t adequately inform them about the negative option and the settlement agreement, does not require disclosure of the terms of the negative option plan, and fails to specify how consumers can cancel once they’re enrolled.

The settlement applies to current and former customers who enrolled in a paid Netflix membership program prior to Jan. 15, 2005.

The FTC took no position on the merits of the underlying suit.

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