Class Action Defense Cases–Chavez v. Netflix: California Court Upholds Trial Court Approval Of Class Action Settlement Providing Customers With One-Day Free Rental And Awarding $2 Million In Attorney Fees

Jun 12, 2008 | By: Michael J. Hassen

Class Action Settlement was not a “Coupon” Settlement and Trial Court did not Abuse its Discretion in Approving Class Action Settlement or Awarding Class Counsel $2 Million in Attorney Fees California State Court Holds

Plaintiff filed a class action lawsuit against Netflix, Inc. alleging false advertising in advising customers that, for a flat monthly fee, it would send them “unlimited” DVD rentals with “1 Day Delivery”; the class action alleged that these representations were false. Chavez v. Netflix, Inc., 162 Cal.App.4th 43, 75 Cal.Rptr.3d 413, 418 (Cal.App. 2008). Specifically, the class action charged that “Netflix was employing sophisticated algorithms to prioritize the allocation of its DVD’s to its lowest-consuming members with the effect that high-consuming members would receive fewer DVD’s per month, reducing the costs Netflix incurred to serve this high-usage group, and increasing its profits.” Id., at 419. Defense attorneys denied the allegations and extensive discovery followed: “Netflix produced approximately 86,000 pages of documents, answered more than 200 interrogatories and 59 requests for admissions, and made five of its employees, including three executives, available for deposition by Chavez. Chavez produced documents and answered interrogatories.” Id. Plaintiff sought class action certification of the lawsuit, but before the court ruled on whether to afford class action treatment, the parties reached a settlement. Id. The original class action settlement was amended to address objections filed in opposition to the proposal; over the challenges of a handful of objectors, the trial court approved the terms of the amended class action settlement and awarded plaintiff’s lawyers $2 million in fees and costs. Id., at 419-21. Some of the objectors appealed, and the California Court of Appeal affirmed.

Under the terms of the original class action settlement, Netflix agreed to modify its advertising, and agreed to provide current members with “a one-level membership upgrade for one month, allowing the current members to receive one additional DVD at a time at no charge,” and all former members with “a free one-month membership at the three-at-a-time level, which would allow the former member to receive a minimum of three and up to 11 or more rentals at no charge.” Chavez, at 419-20. The original proposal also included an “auto-renewal feature.” Id., at 420. The trial court gave preliminary approval to the class action settlement and notice was provided to class members, id. Several objections were filed on behalf of “approximately 450 of the 5.5 million class members”; the Federal Trade Commission (FTC) also filed an objection, challenging the auto-renewal feature of the proposed class action settlement. Id. Ultimately, the parties eliminated the auto-renewal provision, and made certain other modifications to address some of the objectors’ concerns, and a second notice was provided to class members. Id. The amended class action settlement agreement resulted in the withdrawal of the objections by the FTC and by 428 of the original 450 objectors, id. The trial court ultimately gave final approval to the settlement, and awarded plaintiff approximately $2 million in attorney fees. Id., at 420-21. In the end, almost 700,000 people filed claims for benefits under the settlement, id., at 421. Three appeals were filed on behalf of four objectors followed: the appellate court consolidated the appeals and affirmed. Id.

The Court of Appeal addressed first the claim by one of the objectors, Ellis, that the trial court erred in denying her motion for leave to intervene; she argued that intervention was necessary “in order to gain access to the discovery documents material to her objections to the settlement agreement and attorney fee award.” Chavez, at 421. The appellate court found no error, explaining that trial courts are afforded broad discretion and that no abuse of discretion could be shown here because Ellis’s motion to intervene was both untimely and “wholly unconvincing on the merits.” Id., at 422.

The appellate court rejected also the claim that “the absence of cash payments” to class members meant that the settlement “constitutes a disfavored ‘coupon’ settlement.” Chavez, at 422-23. The Court explained that the objector “bases her entire argument on the premise that this is a coupon settlement and that such settlements are, in general, inherently suspect and improper.” Id., at 424. In the Court’s words, “these premises are neither entirely accurate nor particularly useful for evaluating the fairness of the specific settlement terms before us.” Id. The benefit afforded by the class action settlement is not a coupon settlement because it does not “partly defray the cost of making a new purchase of goods or services from the defendant” but rather offer class members “an opportunity to obtain a limited number of rentals at no charge.” Id. At bottom, the terms of the settlement were fair, so the objector’s claim lacked merit. Id., at 424-25.

We do not here discuss the various objections to the notices provided to the class; the court rejected each argument and its discussion may be found at pages 425 through 429. We note only that the Court of Appeal rejected the argument that the notices “were deficient for failing to provide a dollar estimate of the overall value of the settlement in relation to the damages sought by plaintiffs,” holding that all that is required is that the notice “allow each class member to decide whether to accept the benefit he or she would receive under the settlement, or to opt out and pursue his or her own claim.” Chavez, at 426. And we note that the trial court has broad – “virtually complete discretion” – in determining the manner of giving notice to class members. Id., at 427. Nor do we discuss here the appellate court’s rejection of attacks on the attorney fee award. As night follows day, challenges to attorney fee awards follow approval of class action settlements. We do not here discuss that aspect of the court’s opinion, which may be found at pages 429 to 434. In sum, the appellate court affirmed the trial court decision in its entirety. Id., at 434.

NOTE: The Court of Appeal explained the manner in which Netflix operates as follows: “Netflix offers its members an on-line movie rental service in which for a set monthly fee, the members can order movies on digital video discs (DVD’s) via the Internet. Netflix ships the DVD’s to the member by first-class United States mail. Based on the level of monthly fee paid, the member is allowed to have a specified maximum number of DVD’s on loan at any one time, e.g., three for $17.99 per month (priced at the time the settlement was approved) under the most popular plan. Once the maximum number of DVD’s have been mailed to the member, the member obtains a new DVD rental by returning one of the DVD’s in a prepaid return envelope Netflix provides. When a returned DVD is received by Netflix, Netflix ships the member another DVD chosen from a priority list the member has created on the Netflix Web site. Netflix informs its member by e-mail when it mails a DVD to the member and when it has received a DVD mailed back by the member.” Chavez, at 418-19.

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