It took almost a year. Lawyers and privacy advocates had been waiting since oral argument last October to find out whether the Ninth Circuit would uphold a Facebook privacy class action settlement that puts millions into a charity instead of giving money to plaintiffs.
In the meantime, judges as well as consumer and privacy groups had expressed increasing skepticism about the fairness of similar settlements that dole out millions to privacy groups but not individuals. U.S. District Judge Richard Seeborg, who had approved the deal in 2009, threw out a similar settlement also involving Facebook Inc. this past August.
Now the U.S. Court of Appeals for the Ninth Circuit has given the settlement a stamp of approval, surprising many. On Thursday, it upheld Facebook’s $9.5 million settlement of a suit that claimed the social networking site’s now defunct “Beacon” feature violated privacy laws.
Beacon was a short-lived advertising program that broadcast details of users personal lives, such as what movies they rented online or what books they bought. Facebook agreed to shut down the program as part of the settlement.
The court ruled 2-1 in Lane v. Facebook, 12 C.D.O.S. 10846, that a 2009 deal on behalf of 3.6 million Facebook users that gave more than $6 million to a new organization that would study online privacy is fair.
“We appreciate the court of appeals’ careful consideration of this case, and are pleased that the panel affirmed the district court’s ruling that the Beacon settlement is fair, reasonable and adequate,” Facebook deputy general counsel Colin Stretch said in an emailed statement.
Senior Judge Procter Hug Jr. and Judge William Fletcher voted to uphold Seeborg’s decision that the settlement amount, which also included about $3 million for legal fees and administrative costs, isn’t too low and does benefit the plaintiffs. A cy pres remedy doesn’t have to be ideal, just fair and adequate, the court said.
“The cy pres remedy the settling parties here have devised bears a direct and substantial nexus to the interests of absent class members and thus properly provides for the ‘next best distribution’ to the class,” Hug wrote for the majority.
But the debate over the fairness of cy pres remedies may not be over. The Ninth Circuit may take the case up en banc because it conflicts with another recent decision from the court, said plaintiffs attorney Theodore Frank, president of the Center for Class Action Fairness in Washington, D.C.
In May, the Ninth Circuit rejected a class action settlement in Dennis v. Kellogg, cited in Senior Judge Andrew Kleinfeld’s dissent, over alleged false advertising of a breakfast cereal, ruling that a plan to contribute some of the payout to charity bore no relation to the case and that the plaintiffs attorney fee award was excessively generous.
“That’s going to cause some disarray in the lower courts,” Frank said. “Because there isn’t any way to reconcile these two decisions.”
Ginger McCall, a lawyer at the Electronic Privacy Information Center, first challenged the Beacon settlement at the district court, arguing that it did not provide relief for the class members.
McCall also claimed that Facebook wielded too much influence over the foundation created by the settlement, called the Digital Trust Foundation. The foundation has three directors: Larry Magid, an Internet safety advocate; Chris Hoofnagle, a Berkeley law professor; and Facebook executive Tim Sparapani. One of the attorneys representing the plaintiffs in the suit, Scott Kamber, and Michael Rhodes, the Cooley partner representing Facebook in the settlement, are legal advisers to the board.
But the court said there was no conflict.
“That Facebook retained and will use its say in how the cy pres fund will be distributed so as to ensure that the funds will not be used in a way that harms Facebook is the unremarkable result of the parties’ give-and-take negotiations,” Hug wrote.
Not surprisingly, McCall was disappointed with the Ninth Circuit’s decision in Beacon, saying it undermines the purpose of the class action. Moreover, the privacy foundation created by the settlement has no track record of protecting consumers or promoting privacy.
“Instead, it is run by a group of representatives hand-picked by Facebook, including the company’s own lobbyist” McCall said in an email. “In order to properly protect privacy, the cy pres funds should be distributed to organizations with a proven track record of protecting consumers.”
Kleinfeld also indicated the settlement wasn’t fair to plaintiffs. At oral argument, he said “it’s hard for me to see how it can be approved.” And he was no less skeptical in his dissent this week. The settlement “perverts the class action into a device for depriving victims of remedies for wrongs, while enriching both the wrongdoers and the lawyers purporting to represent the class,” he wrote.
He added that judges have become less tolerant of settlements that don’t benefit class members, pointing to the Ninth Circuit’s recent decisions in Dennis and other cases.
“We used to be extremely deferential when district courts approved settlement,” Kleinfeld wrote. “We have in the last few years become much less so.”
Perhaps picking up on the decreasing deference, Seeborg, who had approved the Beacon settlement in September 2009, threw out a proposed settlement in August between Facebook and its users over claims that the social networking site illegally sold ads containing users’ likenesses. He cited problems with a plan for Facebook to donate $10 million to Internet privacy causes as well as pay $10 million in attorney fees.
Seeborg rejected the deal without prejudice, saying plaintiffs failed to point to a sufficient reason for making donations to charities rather than direct payments to up to 100 million class members.
Seeborg gave the parties leave to resubmit, as long as they make modifications to the agreement or present a renewed motion “with additional evidentiary and/or legal support” for the $10 million in donations. “Merely pointing to the infeasibility of dividing up the agreed-to $10 million recovery, or the relatively small per-use revenue Facebook derived, is insufficient, standing alone, to justify resort to purely cy pres payments,” he wrote.
Amy Miller is a reporter for The Recorder, a Legal affiliate based in San Francisco.