Netflix to Modify Settlement

Netflix Inc. told a judge Wednesday that it would change the terms of a class-action settlement amid criticism that the online DVD rental company was going to use the accord to recruit customers.

The settlement calls for Netflix to offer a month of free or upgraded service to more than 6 million current and former customers. The Federal Trade Commission, however, criticized the company’s plan to automatically charge for the resumed or upgraded service unless recipients took steps to cancel after the free month. In response, Netflix dropped the plan for automatic charges.

“The company felt the settlement was in the best interest of customers and shareholders, but when the FTC objected we listened,” said Netflix spokesman Steve Swasey.

David Newman, an attorney for the FTC, told Judge Thomas Mellon Jr. the agency was satisfied with the new terms. Mellon is scheduled to give his approval of the settlement during a final hearing March 22.

Netflix has denied any wrongdoing. The lawsuit, filed in September 2004, accused the company of false advertising for its claims of “unlimited rentals” and “one-day deliveries.”

Netflix offers a variety of plans that allow customers to rent as many movies as they want each month without late fees. But dedicated customers -- some of whom rent as many as 30 movies a month -- discovered that the company had an undisclosed policy of allocating movies during shortages to customers who rent the least. After the suit was filed, Netflix incorporated the policy into its terms of use.

The settlement would give a free month of service or an upgrade to any customer who used Netflix before Jan. 15, 2005.

Despite criticism for its allocation policy, Swasey said the Los Gatos-based company continued to thrive, shipping out 7 million DVDs a week to more than 4.2 million subscribers.

Netflix has estimated that the settlement will cost the company about $4 million, including $2.53 million for attorney fees.

“We think that a good settlement has just gotten better,” plaintiffs’ lawyer Adam Gutride said.

Associated Press was used in compiling this report.