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: