Lane v. Facebook: Privacy Class Action Settlement Requires Facebook to Pay $9.5 Million, but Provides No Direct Benefits to Most Plaintiffs
Consumers who believe they have suffered an injury from a large corporation get excited when they hear that a class action has been filed to requite the wrong. What they often don't realize is that if the class action is successful, it may well result in a settlement that will provide them little or even nothing in the way of direct benefits. In other words, no money.
Such will be the result if the court approves the proposed settlement in the class action brought over Facebook's "Beacon" social advertising system. See Lane v. Facebook, Inc., N.D. Cal., Case No. 5:08-cv-038450. In fact, if the Court approves the settlement, which was proposed last Friday (September 18, 2009), over 96% of the settlement funds will actually wind up being used to pay the plaintiffs' attorneys fees or simply being paid to a Facebook foundation to be used promote online security.
According to the complaint, the purpose of Facebook's Beacon system was to "share news of Facebook members' online purchases with their friends." To make the system work, Facebook set up arrangements with certain online retailers to receive notices whenever their customers made online purchases. When a customer made a purchase, the retailer would notify Facebook electronically of the transaction. If the purchaser was a Facebook member, Facebook would generate a little Beacon popup notifying its member that it had received information about the purchase. Facebook would then create a notice of the purchase and post it on the member's Facebook page.
For example, Sean Lane purchased a white gold and diamond eternity flower ring from Overstock.com for his wife for Christmas 2007. Shortly thereafter, a headline appeared on Sean's Facebook page for all his "friends" to see which read: "Sean Lane bought 14k White Gold 1/5 ct Diamond Eternity Flower Ring from overstock.com." Within two hours, he received an instant message from his wife, Shannon: "Who is this ring for?" She then informed him that Facebook has just put an item on his page saying he bought a ring. It included a link to Overstock, which noted a 51 percent discount on the ring. Sean claimed that his wife's discovery of the purchase ruined his Christmas gifting plans.
Sean Lane thus became the lead plaintiff in this class action against Facebook. While Facebook initially acted as if it intended to contest this case, it put up very little fight -- postponing its motion to dismiss in favor of settlement talks shortly after it was filed. And apparently for good reason. In its motion to dismiss, Facebook admitted that the Beacon system was live for 30 days before it "changed Beacon to require an affirmative opt-in before actions on third party affiliated websites would be fed back to the users' personal profiles." In other words, Facebook admitted that it didn't get users' permission to start gathering information about or announcing their purchases to the world.
While in its court papers and press releases Facebook denied liability, the settlement agreement calls for Facebook to make a $9.5 million payment to settle the class action. In return, Facebook and all other parties stipulated to certification of the class action. This is a benefit to Facebook, because upon final court approval of the class certification and the settlement, Facebook would be relieved from liability from any future suits regarding the allegations in the complaint -- except by plaintiffs who have specifically opted-out of the settlement.
On the surface, that sounds like a pretty fair deal for Facebook. But wait 'til you hear the rest of the story. Of the $9.5 million:
• $250,000 goes to a Claims Administrator, not to cover the costs of administering claims (i.e., making distributions), but merely to cover the costs of "responding to inquiries from Class members";
• up to $3,166,667 goes to the Plaintiffs' counsel;
• $46,000 goes to the 19 representative Plaintiffs (with awards ranging from $1,000 to $15,000 each) "in recognition of their efforts on behalf of the Class" and "as appropriate compensation for their time and effort serving as Representative Plaintiffs in the Litigation";
• and the net, at least $6,037,333, goes to a Settlement Fund.
However the Plaintiffs don't get to share in this $6.04 million. Rather, this sum is to be used to help "Facebook . . . form and establish" a non-profit "Privacy Foundation", to fund projects that promote the cause of online privacy, safety and security. While the foundation is to be a separate entity, Facebook gets to nominate one and gets equal say on the nomination of the second of the three members on the foundation board of directors.
What a deal! Facebook is already required by law to promote the online privacy, safety and security of its users' information. For example, the FTC has mandated that all companies must "maintain reasonable and appropriate measures to protect sensitive consumer information" and has already filed suit and obtained consent orders requiring a couple of dozen consumer-oriented businesses like Facebook to do so. Most states also have data security and/or breach notification laws. For example, California requires businesses that own or license personal information about a California resident to "implement and maintain reasonable security measures . . . to protect the personal information from unauthorized access . . . use or disclosure." California Civil Code § 1798.81.5.
So Facebook effectively gets most of its money back to fund projects that it is already has an obligation to perform. If the Court winds up cutting the fees paid to Plaintiffs' counsel, this just means that more money will go back to Facebook to pay for things it is already obligated to do.
Is the whole thing legal? Well, yes. A settlement like this, where most of the money for plaintiff damages is paid to a non-profit, is called a cy pres distribution. Cy pres means "as near as possible." Cy pres distributions have been approved when a court finds that it is impossible to equitably distribute the settlement fund to the members of a class. So it does the next best thing (the "as near as possible" thing). Instead of requiring direct payments to individual class members, the court orders that the settlement funds be used to provide the class with indirect "benefits". In one race discrimination case, a court ordered that settlement funds that could not be distributed to class members be paid to fund scholarships for African-American high school students. Powell v. Georgia-Pacific Corp., 119 F.3d 703 (8th Cir. 1997).
But that doesn't mean that the Judge Seeborg is going to buy this settlement in its current form. One of the purposes of cy pres settlement distributions is to make sure that the plaintiff really pays damages even when the injured plaintiffs can't be located. See Six (6) Mexican Workers v. Arizona Citrus Growers, 641 F.Supp.259 (D. Ariz. 1986). Here, it could be argued that because, for all intents and purposes, most of the funds are merely being used to benefit the defendant, Facebook hasn't paid any much damages at all. Moreover, cy pres distributions are generally only appropriate where members of the plaintiff class cannot be located. See Powell v. Georgia-Pacific Corp., 119 F.3d at 704 (primary concern in deciding to create cy pres fund "was the fact that locating the individual class members for an additional distribution would be very difficult and costly"). If the parties expect Judge Seeborg to approve this settlement, they will likely have to prove that locating and individually compensating members of the class would be similarly impracticable.
What about extra cash being paid to the representative plaintiffs? This has also been deemed kosher by many courts -- but frequently only to compensate them for their time and effort in assisting the prosecution of the case, not as extra damages. See Lahance v. Harrington, 952 F.Supp. 630 (E.D.Pa. 1997) (court approves payments of $1000 each to three named class representatives based on the efforts they put into the case).
The 33 1/3% reserved for an attorneys fee award is also uncertain, as I said. Federal courts usually award fees based on the "lodestar" method -- the reasonable amount of time spent by the attorneys on the case times their reasonable billing rates. This amount can be adjusted upwards based success. But under the proposed settlement, any less money paid to the attorneys just goes back to the Facebook foundation.
Truth -- sad truth -- be told: this settlement proposal is not that different from many others that courts have approved. Lesson to be learned: if you're a consumer and want real money damages for a wrong committed by a large corporation, don't look to a consumer class action to right your wrong.
David D. Johnson is a business lawyer whose practice focuses on litigation and other issues relating to digital media and consumer electronics companies. David can be contacted at (310) 785-5371 or DJohnson@jmbm.com.
