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Netflix Settles False-Advertising Suit Over DVD Rental Service

Online DVD rental company Netflix Inc. has offered its members one month of free service and has agreed to change its advertising as part of a settlement reached in a false-advertising suit.

Netflix subscriber Frank Chavez alleged in his lawsuit that the company engaged in misleading and false advertising by promising "unlimited" DVD rentals and "one-day delivery" of the discs.

Chavez alleged that Netflix did not meet its advertised promises and so breached its contracts with subscribers and also committed unfair trade practices in violation of California law.

Under the Netflix system, for a monthly fee, subscribers can check out two to five DVDs at a time depending on the plan selected, which they may keep as long as they like. As the subscriber returns each DVD, Netflix ships out the next requests on a list the subscriber maintains on the Netflix Web site.

Chavez filed suit in the San Francisco County Superior Court last year on behalf of all Netflix subscribers. The class was certified in September and included all those who had enrolled in a paid Netflix membership prior to Jan. 15, 2005. The plaintiff sought damages and injunctive relief.

Netflix denied the allegations but has modified the "terms of use" it gives to all subscribers to describe its service more clearly.

After mediation with Chavez from Aug. 15 to Sept. 14, Netflix settled the dispute without admitting to any liability. The company has agreed to change its advertising for one year in order to alert subscribers to the terms of the settlement.

As part of the agreement, former subscribers are entitled to one free month of Netflix membership; current members will receive one month of a free one-level upgrade in their membership service. The "former" or "current" status of a member is determined as of Oct. 19, the date of the preliminary approval hearing.

In addition to the class benefits, Netflix agreed to pay Chavez a $2,000 incentive award and $2,528 in attorney fees to class counsel.

The plaintiff's attorneys agreed to encourage class members to participate in the settlement and not opt out. Netflix has the right to cancel the benefits if more than 5 percent of the class members opt out.

The court approved the settlement Oct. 27.