$10M Fund Set Up to Settle Facebook Privacy Suit

Privacy foundations will be getting between $1 million and $500,000. The Electronic Frontier Foundation and the Center for Democracy and Technology, for example, will get $1 million each, and the Berkeley Center for Law and Technology and the High Tech Law Institute at Santa Clara University School of Law are getting $600,000 each.

Launched on Jan. 25, 2011, “Sponsored Stories” are paid advertisements that appear on someone's Facebook page when a friend “likes” an advertiser, complete with that person's name and photograph.

Five Facebook members sued the social networking site in April 2011, alleging that the feature violates their right to publicity under California law.

Facebook and the plaintiffs executed a term sheet memorializing the settlement “in principle” on May 22. San Jose U.S. District Judge Lucy Koh had made it clear to both sides during a May 21 status conference that she would not approve a settlement agreement that did not benefit class members. A hearing has been set for July 12.

An economist for the plaintiffs took a look at the revenues “Sponsored Stories” generated and estimated that if all class members implemented the controls Facebook will put into place in accordance with the settlement, it could cost the company up to $103 million in revenues.

Policy Change

Under the terms of the settlement agreement proposed June 20, Facebook is revising its terms of service and letting members control what information can be used in sponsored stories. Users younger than 18 will have to get their parents' permission to be featured in one of the ads. The changes will remain in effect for at least two years “to make it clear to all persons with Facebook accounts ('users') and the parents or legal guardians of minor users that their names and likenesses may be used in 'Sponsored Stories' ads,” lead plaintiffs attorney Robert Arns of The Arns Law Firm in San Francisco wrote.

Facebook also agreed to pay $10 million in attorney fees and $300,000 in costs to resolve the litigation.

Infante, who has been mediating negotiations since March 1, said in the declaration that he supported the plaintiff's motion for preliminary settlement approval because the case is novel and the plaintiffs' raise issues that have never been litigated in either state or federal court. Class certification was uncertain.

And the facts of this case “do not lend themselves to an award of meaningful monetary relief,” Infante wrote. “The sheer size of the class, coupled with the lack of any economic relationship between the class members and Facebook ' make it very difficult to determine the fact and extent of injury to a given class member.”

Infante also indicated that Facebook had agreed to change some of its practices under the settlement, without offering specifics. A court may not order the same types of changes.

“Facebook and class counsel are better able to work together to craft stringent, but not unworkable, solutions to the issues alleged in the complaint than would the court with advice from a victorious plaintiff and resistance from a losing defendant,” he said.

Cooley litigation chair Michael Rhodes led the negotiations for Facebook. Rhodes and an official with Facebook declined to comment. Arns did not immediately respond to a request for comment.

Similar Settlements Questioned

Similar settlement agreements have been challenged by privacy and consumer advocates who say they don't benefit consumers. Last year, Google Inc. settled a privacy class action over its Buzz social media service by putting $6 million in a cy pres fund. And in 2009, Rhodes also handled a settlement for Facebook over its now-defunct Beacon service, which broadcast users' personal details, such as what movies they rented online. The agreement gave $6 million to an organization that would study online privacy.

The Electronic Privacy Information Center (EPIC) challenged both settlements, saying they didn't provide relief to class members. EPIC dropped its objections to the Buzz settlement after a federal judge awarded it $500,000.

“The important aspect of cy pres relief is that the cy pres fund be actually distributed to groups that protect the interests of the class members,” says David Jacobs, a consumer protection counsel at EPIC.

And when Rhodes had to defend Facebook's Beacon settlement before the U.S. Court of Appeals for the Ninth Circuit last October, he was met with skepticism. The court has yet to issue a decision.

“I had problems right from the get-go with this deal,” Ninth Circuit Senior Judge Andrew Kleinfeld said. “I don't see anything in this for the class.”

Facebook Inc. and plaintiffs attorneys have agreed to put $10 million into a fund for privacy foundations to settle a proposed class action over the site's “Sponsored Stories” feature, according to court papers filed June 14.

Plaintiffs alleged in the suit filed in San Jose federal court that the feature violates California law by publicizing users' images and names to advertise products without paying them or letting them opt out.

The parties want to put the money into a multiyear cy pres fund that would be distributed to “groups whose charters set out actions and programs relevant to advocacy related to the purposes for which the case was brought,” JAMS mediator Edward Infante wrote in a declaration filed supporting the plaintiff's motion for preliminary settlement approval. “This will further the goals and interests raised in the suit for years to come.”

Privacy foundations will be getting between $1 million and $500,000. The Electronic Frontier Foundation and the Center for Democracy and Technology, for example, will get $1 million each, and the Berkeley Center for Law and Technology and the High Tech Law Institute at Santa Clara University School of Law are getting $600,000 each.

Launched on Jan. 25, 2011, “Sponsored Stories” are paid advertisements that appear on someone's Facebook page when a friend “likes” an advertiser, complete with that person's name and photograph.

Five Facebook members sued the social networking site in April 2011, alleging that the feature violates their right to publicity under California law.

Facebook and the plaintiffs executed a term sheet memorializing the settlement “in principle” on May 22. San Jose U.S. District Judge Lucy Koh had made it clear to both sides during a May 21 status conference that she would not approve a settlement agreement that did not benefit class members. A hearing has been set for July 12.

An economist for the plaintiffs took a look at the revenues “Sponsored Stories” generated and estimated that if all class members implemented the controls Facebook will put into place in accordance with the settlement, it could cost the company up to $103 million in revenues.

Policy Change

Under the terms of the settlement agreement proposed June 20, Facebook is revising its terms of service and letting members control what information can be used in sponsored stories. Users younger than 18 will have to get their parents' permission to be featured in one of the ads. The changes will remain in effect for at least two years “to make it clear to all persons with Facebook accounts ('users') and the parents or legal guardians of minor users that their names and likenesses may be used in 'Sponsored Stories' ads,” lead plaintiffs attorney Robert Arns of The Arns Law Firm in San Francisco wrote.

Facebook also agreed to pay $10 million in attorney fees and $300,000 in costs to resolve the litigation.

Infante, who has been mediating negotiations since March 1, said in the declaration that he supported the plaintiff's motion for preliminary settlement approval because the case is novel and the plaintiffs' raise issues that have never been litigated in either state or federal court. Class certification was uncertain.

And the facts of this case “do not lend themselves to an award of meaningful monetary relief,” Infante wrote. “The sheer size of the class, coupled with the lack of any economic relationship between the class members and Facebook ' make it very difficult to determine the fact and extent of injury to a given class member.”

Infante also indicated that Facebook had agreed to change some of its practices under the settlement, without offering specifics. A court may not order the same types of changes.

“Facebook and class counsel are better able to work together to craft stringent, but not unworkable, solutions to the issues alleged in the complaint than would the court with advice from a victorious plaintiff and resistance from a losing defendant,” he said.

Cooley litigation chair Michael Rhodes led the negotiations for Facebook. Rhodes and an official with Facebook declined to comment. Arns did not immediately respond to a request for comment.

Similar Settlements Questioned

Similar settlement agreements have been challenged by privacy and consumer advocates who say they don't benefit consumers. Last year, Google Inc. settled a privacy class action over its Buzz social media service by putting $6 million in a cy pres fund. And in 2009, Rhodes also handled a settlement for Facebook over its now-defunct Beacon service, which broadcast users' personal details, such as what movies they rented online. The agreement gave $6 million to an organization that would study online privacy.

The Electronic Privacy Information Center (EPIC) challenged both settlements, saying they didn't provide relief to class members. EPIC dropped its objections to the Buzz settlement after a federal judge awarded it $500,000.

“The important aspect of cy pres relief is that the cy pres fund be actually distributed to groups that protect the interests of the class members,” says David Jacobs, a consumer protection counsel at EPIC.

And when Rhodes had to defend Facebook's Beacon settlement before the U.S. Court of Appeals for the Ninth Circuit last October, he was met with skepticism. The court has yet to issue a decision.

“I had problems right from the get-go with this deal,” Ninth Circuit Senior Judge Andrew Kleinfeld said. “I don't see anything in this for the class.”