Ninth Circuit OKs Facebook class settlement, holding that it’s fair for all the settlement funds to go to a defendant-created foundation

by Greg Beck

The Ninth Circuit today upheld a district court’s decision approving a class-action settlement against Facebook over the company’s long-defunct “Beacon” program—one of the first of what turned out to be a long string of privacy fiascos for the social media company. With Beacon, Facebook teamed up with Blockbuster to post users’ video rentals online—allegedly without permission—thus running afoul of the Video Privacy Protection Act, which provides $2,500 in statutory damages for revealing private rental information.

Rather than giving class members any of their statutory damages, the settlement approved by the district court would give all the settlement funds—$9.5 million—to a new foundation created by Facebook to “educate” users about privacy. The court held that such a foundation sufficiently advanced class members’ interests in privacy, though Beacon does not appear to have been a failure of user education. If anything, Facebook was the one in need of privacy education.

Even worse, the settlement provided that Facebook’s own chief lobbyist would occupy one of the three seats on the foundation’s board, where he would influence the foundation’s distributions. The court was not troubled by the defendant’s retention of control over the damages, holding that the settlement was the product of compromise and need not be “ideal.” The court noted that no precedent disallowed cy pres funds on the ground of a defendant’s retention of control. That, however, is presumably true only because nobody has dared try it before.

Finally, the court concluded that, given the risks of litigation, it was reasonable and fair for class members to settle their $2,500 statutory damages claims in exchange for nothing.

In dissent, Judge Kleinfeld writes: “This 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.”

Quite a decision. If this kind of thing is OK, I don’t see any reason defendants won’t find it an attractive option in many cases.