Netflix Prevails In Shareholder Lawsuit Over Account Sharing Impact

Netflix won the dismissal of a shareholder lawsuit that accused the streaming giant of downplaying the impact of account sharing on subscriber growth.

U.S. District Judge Jon Tigar, in Oakland, California, on Tuesday, ruled that Netflix did not mislead shareholders, rejecting claims that the company had concealed the impact of account sharing on its growth, reported Reuters.

The lawsuit's allegations center around account sharing, which occurs when a paying Netflix member shares their account credentials (username and password) with a non-paying user who does not reside in the subscriber's household so that the non-paying user can access and use Netflix's platform.

The proposed class action lawsuit was filed after Netflix revealed in April 2022 that it had lost 200,000 subscribers in the previous quarter. It marked the first decline in subscriber growth in a decade for the company. Further, Netflix warned that it could lose an additional 2 million subscribers over the next three months.

The plaintiff Fiyyaz Pirani, a Texas-based trustee of the Imperium Irrevocable Trust, had argued that Netflix had intentionally downplayed the effect of account sharing, which they believed had hindered the company's subscriber growth and hurt share prices.

The judge ruled that Netflix's previous statements regarding its market penetration in the United States and Canada were not deemed false or misleading. The company had stated that it was "roughly 60% penetrated" in these regions and highlighted that there was "a lot of headroom" left for future growth.

The court found that these statements were not deceptive, as Netflix's remarks pertained to paid subscribers and did not suggest that future growth was guaranteed. Plus, there was no proof to back the claim that Netflix had hidden any conclusion that account sharing would significantly impact its growth, the judge stated.

He stated that the plaintiff's allegations suggest that, at most, Netflix looked into account sharing and identified it as just one among the many potential threats to growth.

Netflix, meanwhile, attributed the decline in subscribers to several factors, including account sharing, increased competition, and the suspension of its service in Russia following the invasion of Ukraine. As a result, the company's shares dropped by 35% the following day, erasing more than $54 billion in market value.

Tigar had rejected an earlier version of the lawsuit in January, this year. The dismissal on Tuesday was final, meaning that Pirani is not allowed to revise or resubmit his complaint.