Judge tosses shareholder lawsuit on Netflix password-sharing

A federal judge in California has dismissed a proposed class action lawsuit against Netflix filed by a Texas-based trust that claimed the streaming service misled investors about problems associated with password sharing between subscribers and freeloaders.

The lawsuit was filed in spring 2022 after Netflix reported lower-than-expected subscriber growth for two consecutive financial quarters. Its first miss came with Netflix's year-end earnings reported in January 2022, during which the company told investors that it was "optimistic" about its "long-term growth prospects," believing a then-forthcoming slate of new original programming would lure additional paid subscribers to the service.

That didn't happen, with Netflix reporting an overall loss of 200,000 subscribers the following quarter, sending its stock price down more than 35%.

The proposed class action sought damages on behalf of investors who purchased Netflix stock between October 2021 and April 2022, with the plaintiffs accusing Netflix of knowing that its business prospects were worse than the company led its existing and prospective investors to believe.

The case largely relied on anecdotal testimony supplied by two former Netflix employees, who said the company actively monitored password sharing between paying and non-paying customers, and that the practice inhibited Netflix's ability to grow its paying subscriber base.

Coincidentally, two months before the lawsuit was filed, a consumer study offered by Leichtman Research Group revealed around one-third of Netflix subscribers surveyed by the firm admitted to sharing their passwords with people who live outside their home. (Netflix allows customers to share their accounts only with people who live within the same residence.)

Last Friday, a federal judge overseeing the lawsuit affirmed a motion filed by Netflix to dismiss the case, saying the plaintiffs had not proven that Netflix knew about the detrimental effects of password-sharing and other ill points of its business for as long as they alleged. The judge also appeared swayed by Netflix officials that claimed the ill-effects of freeloaders on its service were outweighed by its popularity during the global coronavirus health pandemic, when more people signed up for the service to watch television while stuck at home.

The judge agreed to allow the plaintiffs to refile their case if they are able to substantiate their claims with additional evidence, according to Reuters. It isn't clear if the plaintiffs intend to refile their lawsuit.

Prior to the shareholder lawsuit Netflix said it would introduce various measures to end password sharing. A limited test of the strategy launched in several Latin American countries in early 2022. There, customers were offered the opportunity to pay an extra fee for the privilege of sharing their passwords beyond their homes.

The same measure was put into place in the United States and other countries in May 2023. Despite suggestions that the password-sharing crackdown could hurt its business, the company reported lower churn during the first full month that the strategy was in place domestically.

Last October, Netflix said its customer base rose to 247 million global paying subscribers, an increase of 8.8 million customers compared to its prior financial quarter. The figure caused Netflix's stock price to increase 12% in after-hours trading.