January 16, 2012 11:10pm PT by Eriq Gardner
Netflix Investors File Class-Action Lawsuit
Netflix is facing a new class action lawsuit that charges the company with concealing negative trends in its subscription business and putting out false and misleading statements about contracts with content providers.
The lawsuit was filed in California federal court on behalf of institutional investors at the City of Royal Oak Retirement System.
The plaintiffs take issue with statements issued by Netflix during the period between December 20, 2010 and October 24, 2011, when the company's stock price hit a high near $300 per share. The investors say that Netflix's stock was artificially inflated during this time because the company failed to take into account "skyrocketing costs and rapidly defecting customers."
Last year, Netflix made giant news when it announced that it was splitting its business into a streaming service that would retain the Netflix name and a DVD subscription service that would take the Qwikster moniker. During this time, the company also raised prices for customers as much as 60 percent. After a backlash, Netflix reversed itself on the Qwikster plan, but the investors say it wasn't enough to stave off customer flight or a sinking of the company's share price to $130 a share. (Today, Netflix's share price is around $95.)
Was any of this foreseeable?
The plaintiffs in this class action are saying Netflix withheld pertinent information about its contracts with content providers, including that the deals were short-term ones that forced Netflix into a "Hobbesian choice to renegotiate the contracts in 2011 at much higher rates or not renew them at all."
In some instances, most notably the deal that Netflix had with Starz, the contract was not renewed.
The plaintiffs also say that Netflix concealed the fact that content providers were demanding much higher license fees, that pricing would need to increase, and that Netflix wasn't on track to meet earnings forecasts
In the complaint, the plaintiffs point to various statements made by Netflix CEO Reed Hastings that purport to show how the company underestimated the risks of not seeing eye-to-eye with various content creators and the materially negative impact that would have on the business.
Netflix responded to our requests for comment by saying it doesn't comment on legal matters.