Ninth Circuit Approves Facebook Settlement, But Who Benefits?

Three years ago, a class action alleging a violation of privacy rights by Facebook was settled prior to class certification. The settlement provided for no compensation to class members, no injunction against similar conduct by Facebook in the future, and a substantial expansion of the class beyond the definition proposed in the complaint. The plaintiffs’ attorneys received approximately $3 million in fees.

Yet a federal district court in San Francisco approved the settlement, and a divided Ninth Circuit panel recently affirmed. The case illustrates both the deference awarded a district court’s evaluation of a class action settlement and the limited scrutiny to be given cy pres remedies—i.e., settlements in which the plaintiffs received an “indirect” benefit when the award is distributed to beneficiaries other than those actually wronged.

The decision, Lane v. Facebook, Inc., arose out of Facebook’s short-lived Beacon program, which updated a Facebook member’s personal profile to reflect transactions the member had made with from other vendors who participated in Beacon—such as letting the member’s “friends” know that the member had just rented a particular movie from a Beacon participant. Beacon was initially designed as an “opt out” program, such that members’ purchase information was published without their affirmative consent. In the wake of consumer complaints, Facebook changed Beacon after a few weeks to an “opt in” program, so that information would be shared only with the user’s permission. Some users, however, apparently complained that even after the change, their information was shared without their “opting in.”

The lawsuit was filed only on behalf of users affected during the brief “opt out” period. The settlement agreement, however, expanded the class to include users with complaints arising during the “opt in” period. The settlement provided for a $9.5 million payout, of which approximately $3 million would consist of attorneys’ fees, administrative costs, and incentive payments to the class representatives, and the remainder would be used to set up a new charity organization that would fund and sponsor educational programs relating to online privacy. The charity organization would be run by a three-member board of directors, one of whom would be a Facebook executive. Although Facebook agreed to permanently terminate the Beacon program, the settlement did not expressly prohibit Facebook from reviving the program under another name.

After the district court approved the settlement, four objectors appealed to the Ninth Circuit, contending that the district court’s approval constituted an abuse of discretion. They challenged both the cy pres remedy, particularly the involvement of the Facebook executive on the new charity’s board, and the overall amount of the settlement.

The Ninth Circuit panel affirmed the settlement, holding that Facebook’s involvement on the charity’s board did not constitute a conflict of interest. The court state that while a cy pres remedy must provide the “next best distribution” other than a direct monetary payment to absent class members, “[w]e do not require . . . that settling parties select a cy pres recipient that the court or class members would find ideal.” Rather, the cy pres distribution need only bear “a substantial nexus to the interests of the class members.” Facebook’s insistence on a board seat to “preserv[e] its role in the process of selecting the organizations that would receive a share of that substantial settlement fund,” the court determined, was simply “the unremarkable result of the parties’ give-and-take negotiations.”

As to the settlement amount, the objectors complained that the value of the class’ claims was far greater than the $9.5 million settlement. In particular, the objectors argued that the district court had not properly considered the class’ claims under the Video Privacy Protection Act, which provides for liquidated damages. The panel not only found that the district court had considered the claim, it expressly rejected the notion that a district court is required to make a factual finding as to the potential recovery for each specific cause of action.

Judge Andrew J. Kleinfeld, in dissent, opined that 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.” Judge Kleinfeld noted that class counsel received a substantial fee award, Facebook and its Beacon partners obtained the benefits of an expanded class now barred from bringing claims, and Facebook was not prevented from reviving Beacon under a different name, yet the victims “obtained nothing.”

The majority opinion is firmly rooted in Supreme Court and Ninth Circuit precedent, and in isolation, none of the arguably offending factors—the expansion of the settlement class, Facebook’s representation on the cy pres board, or the lack of an injunction barring the Beacon program—would be unusual. But the convergence of all of these issues creates a decision that may not be legally flawed, but is troubling nonetheless.

Posted in Settlement Approval Issues

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