Netflix has settled a purported class action in California state court complaining about alleged false advertising over “unlimited” DVD rentals. One is reminded of Lionel Hutz:

“Mr. Simpson, this is the most blatant case of false advertising since my lawsuit against the movie The Neverending Story!”

Class members get a free one-month upgrade in service level (e.g., those who have a subscription entitling them to eight DVDs rented at a time may now rent nine DVDs at a time)—but will be billed for the upgrade for future months unless they remember to ask for a downgrade before the free month expires. The plaintiffs’ attorneys will ask for $2.5 million, money well spent by Netflix since a court-ordered settlement will permit them to engage in upselling marketing tactics that might not be permissible otherwise. Precisely how the class is better off remains (at a minimum) questionable. (Chavez v. Netflix, Inc. (San Francisco Superior Court No. CGC-04-434884)) (hat-tip to D.F.). More from Baude, 3YOH, and Hit & Run.

The settlement remains subject to the court’s approval, and two class members have had discussions with me about representing them in filing an objection; I’m considering it, as are they. (Threatening to take away $2.5 million from a lawyer might get him angry enough to retaliate with harassing discovery.) Of course, the Class Action Fairness Act will help to act to prevent abuses like this in the future; will the California courts protect class members from their attorneys’ neglect of fiduciary responsibilities in the present?

Update, Thursday morning: This site has links to printable opt-out forms. Note that a 5% opt-out rate doesn’t necessarily keep the settlement from being approved (and the lawyers from being paid); it just gives Netflix the option of backing out of the settlement if they think there will be further litigation from the opt-outs. If Netflix attorneys believe that, even with a high opt-out percentage, there is unlikely to be further litigation and it will be cheaper to go forward with this settlement than continuing to litigate against Frank Chavez, they will proceed with the settlement. The 5% clause is there to protect Netflix from having to deal with a second class action. Opting out may just cost you 37 cents, and lead to a new class action settlement that you probably won’t like much better.

The Netflix Fan site (via Boing Boing (hat-tip A.T.)) notes that Netflix is budgeting for $3.0 to $4.0 million in settlement expenses—which implies $2.5 million for the plaintiffs’ lawyers, a few hundred thousand in legal and administrative expenses for Netflix, and negligible benefit to class members.

Class members as a whole are clearly worse off from this settlement: if they’re happy with the company, it’s financially injured by having to pay protection money to plaintiffs’ lawyers; if they’re unhappy with the company’s service, their recovery is illusory—even if the company had done something illegal, which it doesn’t appear that it has. Worse, consumers as a whole are worse off, because the ability of the plaintiffs’ lawyers to recover millions from a meritless lawsuit will encourage them to file other meritless lawsuits, diverting money from useful endeavours to lawyers’ pockets, and raising costs for everybody.

Note that one can only object to the settlement (or join in a filed objection) if one does not opt out of the settlement. Opt-outs are no longer members in the class, and will not have “standing” to object.

Here’s the settlement website. Geektronica post and comment thread. Bond comments.

And a trenchant observation from the Metafilter comments page:

I do wonder why the plaintiffs’ attorneys agreed to it.

‘Cuz they got paid $2.5 million.

(This post is expanded and bumped from Nov. 2, 10:32 am, when it was titled “Lawyers Imitate Lionel Hutz Department.” Post title changed to be friendlier to Google searches.) Update Jan. 11, 2006 (FTC objects); Jan. 21 (settlement delayed because of large number of objections).

Filed under: class action settlements, class actions