Netflix is alleged to have:

failed to provide "unlimited" DVD rentals and "one day delivery" as promised in its marketing materials. Netflix has denied any wrongdoing or liability. The parties have reached a settlement that they believe is in the best interests of the company and its subscribers.

Class action lawsuits are critical tools in the consumer arsenal against unfair conduct. When individual losses are small, but the overall harm is great, the class action mechanism allows many consumers who otherwise couldn't afford individual representation to band together to seek justice.

But class action lawsuits should result in court decisions or settlements that end the illegal conduct and act as a deterrent against others doing the same, should punish the violators and should compensate the victim class.

In the Netflix case, the proposed settlement essentially says this: Netflix will clarify its marketing and the lawyers who sued them will get up to $2.5 million.

What about the millions of Netflix customers? What do we get? Millions of dollars, too? I don't think so.

you are eligible to receive a free one-month upgrade in service level. For example, if you are on the 3 DVDs at-a-time program, you will be upgraded to the 4 DVDs at-a-time program for one month.

Note-- For only one month. But wait, there's more.

After the benefit period ends, the new or upgraded level of service will continue automatically (following an email reminder) and you will be billed accordingly, unless you cancel or modify your subscription. You can cancel or modify your subscription at any time.

For many years, the worst class action settlements have involved similar coupons, or certificates, good only for discounts on purchase of future products from the company that allegedly broke the law.

But this is a bad mutation of a coupon and a coupon is bad enough to begin with. It isn't just a discount, it's a discount tied to a free-to-pay scheme. To take advantage of the super-duper one extra video at home at any one time benefit, consumers must enroll in a so-called "free-to-pay" agreement.

It's a coupon that keeps on taking: unless you affirmatively cancel, your credit card will be billed. Netflix could actually end up increasing its revenue due to this settlement, and could end up making a lot of consumers unhappy when they get their credit card bills.

When you agree to a trial offer where a company already knows your credit card number, and it is up to you to cancel, such a conversion transaction is known as a "free-to-pay." It's such a one-side transaction that when the FTC amended its telemarketing rules, it didn't simply create a Do-Not-Call list. Here's how FTC requires telemarketers to obtain consumer consent when they offer a free-to-pay transaction:

In transactions involving pre-acquired account information and free-to-pay conversion offers, a company can obtain "express informed consent" only by doing all three of the following: 1) obtaining the consumer's express agreement to be charged using a particular account number; 2) re-quiring the consumer to recite at least the last four digits of the account number to be charged; 3) making an audio recording of the entire telemarketing transaction not just a verification after the initial sales pitch.

While those rules only apply to telemarketers, as a comparison, the Netflix settlement promises, as I read it, merely (1) "an email reminder" before billing you for the upgrade and no (2) or (3), let alone informed consent.

[In a similar case, the FTC recently ordered the credit bureau Experian to pay a $950,000 fine plus restitution for a very deceptive free-to-pay offer (See previous blog).]

The National Association of Consumer Advocates, a respected association of consumer attorneys, advocates and law professors, has a proposed revision of its Guidelines for Litigating Consumer Class Actions. We recommend it. See especially pages 9-10, on certificate (coupon) settlements. [You can also comment on the revision, through February.]

As for this settlement, it's not final. It could still be objected to and it could still be modified. I make no comment on whether Netflix deceived its customers as I haven't studied all the case documents. But I have read the proposed settlement documents and am not impressed.