Bloggers Challenge a Class-Action Settlement
from
March/April 2006
by Charles Burck
Could this be the Boston Tea
Party of the class-action game—a relatively small-potatoes event that
leads to epochal change? An Internet-driven consumer uprising against a
pending class-action settlement by Netflix, the online movie-rental
outfit, may torpedo this particular deal. But even if it doesn’t, the
uproar reveals a growing universe of people who are as mad as hell
about suits where lawyers pocket millions while each injured party gets
a coupon worth $6, maybe.
This case involved alleged
misleading advertising by Netflix, which settled without acknowledging
any wrongdoing. As is typical of the payouts in such agreements, the
plaintiff, one Frank Chavez of California (and otherwise unidentified),
on whose behalf the suit was filed, got $2,000. His lawyers, Adam
Gutride and Seth Safier of San Francisco, will get up to $2.5 million.
And the some six million past and present Netflix subscribers who made
up the class can claim a so-called coupon settlement. Former
subscribers can receive a month’s free membership, which gives them
unlimited rentals over the period—an offer worth up to $18. Current
subscribers get a month’s upgrade; a basic subscriber, for example,
could thus rent two DVDs at a time rather than one, an addition worth
$6. Estimated cost to Netflix: just 24 cents per class member, which
suggests that the company’s gross profit margins are to be envied.
Still,
the settlements sound like a good deal for all the customers, right?
Not necessarily. Human nature being what it is, the prize is likely to
end up costing many of them far more than its value. Netflix will
notify subscribers by e-mail when the free ride is over, but unless
they specifically opt out at the end of that month, they’ll find
themselves owing for continued membership or upgraded status. The
negative option pretty much guarantees that a lot of people will stay
on the train and pay more out of inertia.
The pioneer
of online movie rentals, Netflix has built a big and loyal customer
base. It’s rated No. 1 among Web retailers in so-called browser
satisfaction, with a score of 85—ahead of Amazon.com and QVC.com—by
ForeSee Results, an Internet research outfit. And it garnered first
place among all companies on Fast Company magazine’s 2005 Customers
First Awards list.
But what company can please all its
customers all the time? Netflix’s ads promised “unlimited” rentals and
one-day delivery. Surprise: Things don’t always go by the script, and
that’s where the trouble began. According to the suit, deliveries
sometimes take up to six days. Some of that might be explained by the
fact that the company doesn’t process returns or deliveries on
weekends, but still…
Was Netflix also adding extra days
to limit deliveries to its heaviest users—“throttling,” in industry
jargon? Chavez said he’d noticed that the more movies he rented, the
slower the delivery seemed to be, which effectively limited the number
of DVDs he could get each month. In other words, both of the company’s
advertising claims were misleading, his lawyers claimed. Other
subscribers echoed the complaint.
As soon as the
Netflix-Chavez settlement was announced, blogs began to fill up with
comments from Netflix subscribers, and the battle lines concerning
customer satisfaction were clear. Some people related their own
delayed-shipment horror stories.
Others, like
“bmxbabe,” posting on Netflixfan.com, sprang to the company’s defense:
“If Chavez wasn’t happy with the service, he should have canceled his
membership. Netflix is so customer-friendly. It’s not like he was under
some contract.”
A surprising number of bloggers on both
sides of the customer-satisfaction aisle were upset by the whole idea
of the settlement. “I too am quite tired of getting the countless
class-action lawsuits that seem to infiltrate my mailbox, where someone
felt as though their hamburger wasn’t quite two ounces, their car was 1
hp less than advertised, or they (in this case) can only see 10 movies
a month,” said Dave Guo of Pittsburgh on MSNBC’s Red Tape Chronicles, a
blog. “The pathetic joke to it all is, the only one that gains is the
attorney in every case.”
Also weighing in on this
point was “Will,” who posted on Geektronica.com. “I really don’t care
whether the lawsuit was justified,” he said. “I don’t care if it’s
about false advertising or a petulant subscriber. I don’t care if this
guy should have been subscribing at a higher level. I don’t care if
anyone here personally saw the effects of throttling or not. What I
care about is a $2.5 million payout to a bunch of lawyers. If Netflix
did wrong by its customers, why is it that the lawyers are getting the
biggest payoff?” Even some attorneys agreed with the point. “We lawyers
get a lot of undeserved abuse about a lot of things,” said Tom Moss,
posting on Red Tape Chronicles. (Perhaps wisely, he didn’t give a
hometown.) “But when it comes to class-action lawsuits and coupon
settlements, lawyers deserve every rotten thing that can be said about
them.”
Netflix subscriber Christopher Ambler, 38, was
so outraged that he decided to do something. The chief software
strategist for eNom, a Bellevue, Washington, registrar of Internet
domain names, Ambler says he loves the service he gets from Netflix,
admires the company and its business model, and is “sick and tired of
class-action lawsuits where the customers get a token, at best, and the
lawyers get rich. This suit was never about the customers. It was about
a law firm that saw an opportunity.” He also suspects that Netflix will
get a nice revenue boost from the subscribers who fail to cancel. “It’s
not a settlement,” he says. “It’s a marketing campaign.”
Ambler
set up a site called Netflixsettlementsucks.com, where he invited
people to join in filing an objection to the settlement and asked
whether any attorney would volunteer to help. In a few weeks the site
had some 27,000 hits, and roughly 1,000 people asked to join the
objection. Just as gratifying, Ambler says, is that “within four hours
I had four attorneys who offered to help.” He picked Jay Edelson of
Blim & Edelson in Chicago. Explains Edelson: ”We’re a class-action
firm ourselves, and this will be our first objection. But we see this
settlement as very extreme and think the profession ought to start
policing itself, so we’re volunteering our time.”
The
objection argues that “the twin goals of the settlement, the class
notice, and even the post-settlement conduct of Class Counsel, are none
other than the financial gain of Netflix and Class Counsel—both coming
at the expense of the six million class members this settlement
purportedly benefits.” And it asks that the settlement be rejected so
that Ambler and his attorneys can negotiate a better deal (as yet
unspecified) for the class members.
Wilson Sonsini
Goodrich & Rosati, which represented Netflix in the case, had no
comment for this story. But plaintiffs’ attorney Adam Gutride says he’s
not fazed by the reactions. “It’s very common for some class members to
raise objections,” he says. What’s not common is for so many of them to
take direct aim at the lawyers—and that’s a testament to the growing
power of blog consumerism.
If the settlement is
thrown out, it’s anybody’s guess what a new one might look like. In any
case, the bloggers have struck a symbolic blow for sanity in the
class-action circus, and possibly established a model for others to
follow.
There will doubtless be plenty of
opportunities. The federal Class Action Fairness Act (CAFA), signed
into law in February 2005, is supposed to discourage frivolous suits.
Among other things, it generally cuts back on “forum shopping,” in
which plaintiffs’ lawyers look for jurisdictions where the courts tend
to make big awards; the act requires plaintiffs seeking $5 million or
more in damages to seek redress in federal courts. These typically have
been less sympathetic than state courts to claims of corporate fraud or
negligence. So far there’s no evidence one way or the other that the
new law has accomplished its goal.
Jay Edelson
cautions that corporate hopes for CAFA may be dimmed by the very
provision designed to discourage lawyer-heavy rewards. “CAFA makes the
courts tie attorney fees to the actual value of a coupon settlement,”
he notes. “The risk is that there’s a lot less flexibility in
settlements. It might actually make things more expensive for business.”
Some companies are taking defensive measures against class-action suits, Netflix among them. Even though spokesman Steve Swasey says that “more than 90% of our customers receive their DVDs within a day,” the company now explicitly acknowledges in its terms of service that subscribers who rent the most movies are likely to get slower delivery.
