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Netflix subscribers decry $27M class action settlement

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A handful of Netflix Inc. (Nasdaq: NFLX) subscribers have asked a federal appeals court to overturn a $27.2 million class-action settlement that they say unfairly gives plaintiffs' lawyers over $8 million in fees for bringing suit over the marketing agreement the movie service company entered into with Wal-Mart Stores Inc. (NYSE: WMT).

The settlement calls for members of the class to receive a pro-rata share of the $27 million settlement amount. That is after attorneys' fees are paid. 

Since the settlement's approval in a California federal court, a handful of objectors have appealed to the U.S. Court of Appeal for the Ninth Circuit, based in San Francisco. Among appellants is Theodore Frank, a nationally noted litigation expert and founder of the Washington-based Center for Class Action Fairness.

In an interview with FierceOnlineVideo, he said the terms of the settlement are not in the best interest of the class, as required by federal law.

"The settlement is so patently one that benefits the attorneys without really giving anything to the class members," Frank said, noting the agreenment calls for the payment of attorneys fees in excess of the Ninth Circuit's 25 percent benchmark.

Moreover, he said, the settlement is inadequate.

"There are so many class members that if every class member had filed for a claim, they would have gotten less than a dollar each," Frank said.  The settlement "benefits class counsel at the expense of its clients," he said.

In settling the case, Bentonville, Ark.-headquartered Wal-Mart sought to resolve antitrust claims that the retail behemoth acted with Netflix to corner the market for online DVD sales and rentals.

Although Wal-Mart has sought to settle the lawsuit, Los Gatos, Calif.-based Netflix refused to do so, arguing the class action complaint is baseless. The company won its case in 2011.

The class-action lawsuit, first filed in January 2009, alleged that Wal-Mart and Netflix entered into an illegal marketing agreement in which Wal-Mart exited the online video rental market and Netflix discontinued sales of new DVDs. Plaintiffs argued that the cross-promotion agreement was anticompetitive and caused Netflix subscribers to face increased prices for online DVD rentals.

Judge Phyllis Hamilton of the U.S. District Court for the Northern District of California approved Wal-Mart's settlement March 29, less than two weeks after holding a fairness hearing at which time the judge considered objections by dozens of class members, including Frank.

Under the agreement, settlement payments would be made in cash to class members who spend the 44 cents to mail a claim or in the form of gift cards for claims filed online.

Since Wal-Mart gift cards would be issued, this is a so-called coupon settlement for which there are special provisions under the federal Class Action Fairness Act of 2005 (CAFA; Pub.L. 109-2), Frank said.

Signed into law in 2005 by President George W. Bush, CAFA requires that attorneys' fees be based on the value of settlement coupons distributed to class members. Therefore, Frank argued, the district court erred by "prematurely" approving an order awarding plaintiffs' legal fees.

"Children may be forgiven for wanting their dessert before eating their vegetables, but class counsel's behavior in determining its own fee in the absence of an open and transparent determination of what the class will receive is more troubling," Frank wrote in his objection to the then-proposed settlement.

What's more, Frank told FierceOnlineVideo, the Ninth Circuit has a benchmark for the payment of attorneys' fees: 25 percent of what the class receives, based on the redemption rate of the coupons.

Frank said parties in the case--including class counsel and attorneys for Wal-Mart--argued before the district court that CAFA did not apply to the litigation because settlement funds would be dispursed via gift-card credit, not in the form of coupons. 

"They were calling coupons 'gift cards' even though they're economically indistinguishable from a coupon," Frank said. "The vast majority of courts don't fall for that; but, for whatever reason, this one did."

Eligible for the Wal-Mart settlement class were individuals and entities that paid Netflix subscription fees anytime May 19, 2005 to Sept. 2, 2011.

Lead class counsel in the case was Robert Abrams and Gregory Baker, both partner at Baker Hostetler LLP in Washington. Represeting Wal-Mart was Lawrence DiNardo and Paula Render, of Jones Day in Chicago. Netflix was represented by the New York firm of Wilson Sonsini Goodrich & Rosati.

The district court case is: In Re Online DVD Rental Antitrust Litigation, No. 4:09-md-2029 PJH, N.D. Cal. (Oakland). Frank's appeal is 9th Cir. No. 12-15705 (San Francisco).