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FTC Wants to Nix Netflix 'Opt-Out' Terms

The Federal Trade Commission (FTC) is opposing a proposed class action settlement agreement between Netflix and consumers, claiming the deal appears to unfairly favor the online movie DVD rental outfit.

Under the proposed settlement, class members who are current Netflix customers would receive a free one month upgrade on their service and former Netflix customers would receive one month of free service.

However, participants in the plan would be automatically enrolled and charged for the upgrade after the free month, a situation the FTC calls a negative option.

More than a year ago, a consumer who challenged Netflix's claims of "unlimited" monthly rentals and "one-day delivery" of the discs sued the Los Gatos, Calif.-based Netflix. The suit eventually grew into a class action with a settlement reached in September of last year.

The FTC is not questioning the underlying facts of the case, which also requires Netflix to modify its marketing materials and $2.5 million in attorney fees.

"Because the only relief provided by the settlement is linked to this negative option plan, class members who do not wish to assume the risks and obligations associated with such a plan must forego any compensation through the settlement," the FTC states in an amicus curiae filed last week.

According to the FTC, in a typical commercial transaction a consumer must act affirmatively to agree to buy a good or service and incur a charge. In a negative option plan, the consumer must act affirmatively to avoid being charged for a service.

"Negative option plans are not illegal if properly disclosed," The FTC brief states. "Here, however, [the FTC] is concerned that the existence and terms of the negative option will be inadequately disclosed to class members."

The FTC notes that nothing in the class action settlement requires Netflix to disclose the terms of the negative option "adequately" to members of the class action suit.

"Because this is a class action settlement and not an ordinary commercial transaction, consumers will be less likely to look carefully at the offer," the FTC states. "Thus, predictably some class members will accept the free month or free upgrade, not realizing the service will continue and they will incur charges unless they take action."