Accounting for the $9 million settlement resulted in a 14 per cent decrease in the fourth-quarter net income that Netflix Inc. reported Jan. 25.

The bottom line for the final three months of last year now comes to $35.2 million, or 64 cents per share, down from the previously reported $40.7 million, or 73 cents per share. The company, which is based in Los Gatos, disclosed the change in a regulatory filing late Friday.

Netflix's stock price has surged 23 per cent since the fourth-quarter results were released, partly because the company's earnings were substantially above analysts' average estimate of 57 cents per share. But investors mostly were impressed with Netflix's fourth-quarter gain of 600,000 subscribers - a number unaffected by Friday's accounting adjustment

The upturn in subscribers indicated that Netflix had bounced back from a public-relations nightmare triggered by a 60 per cent increase in its U.S. prices last September. Netflix expects to sustain a loss this year as it pays higher licensing fees for video and establishes its service in Latin America, the United Kingdom and Ireland.

The $9 million legal settlement rids Netflix of another potential headache.

A lawsuit on behalf of Virginia residents Jeff Milans and Peter Comstock alleged Netflix had been breaking a 24-year-old law by retaining records of the DVDs and Internet video that its subscribers watched for up to two years after they cancelled their plans. The complaint, filed in San Francisco federal court, cited the Video Privacy Protection Act, which was passed in 1988 to prevent video rental services from sharing information about what their current and former customers have been watching.

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