Wal-Mart ready to settle Netflix case for $27.5M

Thu, 11/17/2011 - 1:44pm
The Associated Press

More than 25 million current and former Netflix subscribers are being offered a sliver of a $27.5 million payment to settle allegations that the video subscription service and Wal-Mart illegally conspired to inflate prices to rent and buy DVDs.

Most people covered by the agreement were notified when the details were sent in mass emails late Tuesday. A federal court judge gave tentative approval of the settlement in early September. A final hearing on the settlement's merits is scheduled March 14 before U.S. District Judge Phyllis Hamilton in Oakland, Calif.

Wal-Mart Stores, the world's largest retailer, is paying for the settlement without acknowledging any wrongdoing. The proceeds will be offered in cash or Wal-Mart gift cards. The settlement covers anyone who subscribed to Netflix – at any time – between May 19, 2005, and Sept. 2 of this year.

Anyone who doesn't want to be covered by the Wal-Mart settlement or represented in the case against Netflix has until Feb. 14 to notify the court.

The individual amounts paid to Netflix's current and former subscribers will depend on how many people decide not to accept the settlement and how much money is left over after attorney fees.

The lawyers representing Netflix subscribers are asking for 25 percent, or nearly $6.9 million, of the total settlement, plus as much as $1.7 million to cover their costs. That means less than $19 million could be left to pay the people covered by that settlement. Assuming everyone eligible participates, it would amount to less than $1 per person.

The case revolves around Wal-Mart's decision to abandon the DVD-by-mail rental market in May 2005 and turn its subscribers over to Netflix, which had about 3 million customers at that time. Netflix, in turn, agreed to promote Wal-Mart as a place to buy DVDs.

Wal-Mart's retreat from DVD rentals represented a David-versus-Goliath victory for Netflix. But another large company, Blockbuster, still loomed as an imposing threat. Netflix lowered its prices and prevailed in that clash, too, culminating in Blockbuster's bankruptcy last year.

As Wal-Mart and Blockbuster fell by the wayside, Netflix's growth rapidly accelerated. A backlash from the recent price increases triggered a wave of cancellations, but Netflix still ended September with 23.8 million subscribers.

Dozens of lawsuits filed in state and federal cases alleged Netflix wouldn't have done as well had it not secretly negotiated with Wal-Mart to divide up the DVD market. The lawsuits, which were eventually consolidated into the federal case in Oakland, contend the alleged agreement kept the prices to rent and buy DVDs much higher than they otherwise would have been. The suit points to internal Netflix documents indicating that Netflix was considering lowering the monthly price on its most popular subscription plan from $22 to $16 per month just before Wal-Mart dropped out. Netflix wound up decreasing the monthly price on that plan to $18 and then dropped it to $17 after Wal-Mart gave up on DVD rentals.

Unlike Wal-Mart, Netflix is taking a strident stance in the case. It is preparing to fight the allegations of market misconduct in a trial scheduled to begin Jan. 23. The company, which is based in Los Gatos, Calif., still hopes to persuade Hamilton to throw out the case before the trial begins.

Netflix contends that Wal-Mart simply decided to close its DVD-by-mail business because it was struggling to attract subscribers. Netflix also points out that the Federal Trade Commission and attorneys general in Florida and West Virginia didn't find anything illegal in its agreement with Wal-Mart after looking into the terms.

Putting the case before a jury poses a risk to Netflix at a particularly vulnerable time. Some of the evidence in the trial will likely expose the factors that Netflix considers in setting its prices. That's become a prickly subject since a September change that raised its rates by as much as 60 percent for customers who want to rent DVDs through the mail and view video over high-speed Internet connections.

Netflix attorneys believe the company's recent price increase shouldn't be mentioned during the proceedings because it might create prejudice to the jury, according to court documents filed Tuesday.

In an overview filed in preparation for the trail, the lawyers suing Netflix allege the company overcharged its subscribers by $494 million to $654 million after the Wal-Mart agreement. If a court agreed with those amounts and decided Netflix broke federal antitrust laws in the process, the damages owed by the company could be tripled.



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