Overview
In 2004 the class-action lawsuit "Frank Chavez v. Netflix, Inc." was filed in San Francisco Superior Court. It came about because Netflix subscribers who were getting an extremely high volume of DVDs from the company became disgruntled. Their disgruntlement arose when they observed that the stream of discs they were receiving was apparently being slowed down. They accused Netflix of engaging in a practice they called "throttling" and consulted attorneys.
The legal basis for bringing the case against Netflix turned out not to be the throttling itself, but the allegation that Netflix mislead subscribers about how quickly it delivered DVDs. As a result of the lawsuit, the company changed some of its official statements in 2005. The case was finally settled in 2008, and Netflix was obliged to make available certain small benefits for which a large number of former and current customers were eligible.
The Netflix Policy That Led to the Lawsuit
For its first several years of operation, Netflix remained silent publicly about how it determined priority for shipping and inventory allocation. Most people outside the company were probably tacitly assuming that a first-come-first-served approach was being used. But then "Chavez v. Netflix" came along in 2004, alleging the company's claim of unlimited rentals with one-day delivery constituted false advertising. As a result of the lawsuit, Netflix posted revised terms of use on January 15, 2005. In those terms of use, the company stated that it takes into account a variety of factors in determining priority for shipping and inventory allocation, but was generally vague about exactly what the factors are or how they are used. However, Netflix did make it clear that they give priority to those members who receive the fewest DVDs through their service.
But why would Netflix have such a policy? The obvious answer is that they were (and still are) trying to maximize profit. Since they charge subscribers a flat monthly fee, it is more profitable for them to have many low-volume customers and few high-volume customers.
An argument can be made that the policy is beneficial to the majority of Netflix's subscribers, who use the company's services only in moderation. It probably helps keep the high-volume customers from hogging titles where demand exceeds supply.
The Class-Action Settlement
By 2006, the litigants in "Chavez v. Netflix" had reached an agreement, but due to a lengthy review process, that agreement wasn't implemented until 2008. Netflix apparently didn't change any of their practices, although they did put revised terms of use on their Website on January 15, 2005. That is considered to have legally resolved the issue of misleading advertising, even though few subscribers are expected to read it, and of those who do, many will surely not fully grasp its implications.
In the settlement, Netflix agreed to provide a benefit for anyone who subscribed to their service prior to January 15, 2005. For those who qualified, but were no longer a Netflix subscriber, the benefit consisted of one free month, a value of approximately $17.00 for most. For those who qualified, but were a current Netflix subscriber, the benefit consisted of a free upgrade to a higher subscription level for a month, a value of around $7.00 for most. The company made these benefits available in 2008, but it is widely assumed that many eligible people will never use their benefit.
Closing Thoughts
However Netflix has operated over the years, they have had millions of satisfied subscribers, so they must be doing a lot of things right. But like other companies that provide a service for a flat fee, they can be tricky if they believe a customer is overusing their service. If you're thinking you can sign up with them for the three-DVDs-at-a-time plan and get something like 42 discs a month, you'll probably be disappointed.
