No catch, really, to use the flight passes, except that you have to buy at least 3 passes. You have to buy them in advance, in the States before you leave. The passes are good for a year, I believe. It works out great for us, because we have been traveling as a family of 4, so we always need four passes per leg.
Many of the smaller, independent airlines accept Europe by air passes as payment. You only have to pay the airport taxes extra--a few dollars per person. Europe by air will make the reservations for you on all the legs you need. The nice thing is, if you change your mind on dates or routes, you can easily take a different flight--you still have your coupon. The website shows all the various routes, though the route map isn't up to date. Call the 800 number on the site, and they'll give you all the latest information, sell you the passes, and make your reservations. (they even called me to tell me of a time change on a flight I had reserved)
The Paris-Madrid flights are on Spanair. You check in, give them your flight pass, pay the airport tax, and go. Elsewhere on this BB, I'm reading bad reports about Spanair, so I hope all is well for that leg. Last year, Alpi Eagles (Barcelona-Venice) was the best flight we took. Comfortable leather seats, wine and good Italian food served in coach. The plane was half empy in July.
Happy travels!