Why Hollywood Wins in Judge's Rejection of Facebook Privacy Settlement

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In a ruling on Friday, a San Francisco judge rejected a $20 million settlement in a class action lawsuit over whether Facebook violated the privacy of its users by featuring them in a "Sponsored Stories" advertisement program.

The rejection of a settlement where half of the money was to go to lawyers and half to "charity" and almost nothing to actual victims could bolster attention on a maneuver that allows big tech companies like Facebook and Google to funnel money to organizations that are hostile to Hollywood's pro-copyright agenda.

The original lawsuit itself had little to do with Hollywood. Nevertheless, it touches entertainment anyway thanks to the judge's address of cy pres, a legal doctrine born out of Norman French and old estate law that roughly means that when it's hard or impractical to award compensation in court cases, payment can be made as "near as possible," including to not-for-profit organizations with similar interests.

The plaintiffs in the "Sponsored Stories" case sued Facebook for allegedly violating their rights of publicity and California's unfair competition law by using their names and images without consent in ads that were shown to users' online friends on the social network. After two years of litigation, the dispute settled. Facebook agreed to pay $10 million to the plaintiffs' lawyers, $10 million to cy pres recipients, and $37,500 to the three class representatives who were named as plaintiffs. Facebook also agreed to make policy changes that the plaintiffs' expert economist estimated to be worth $103.2 million.

At a hearing earlier this month, U.S. District Judge Richard Seeborg was openly skeptical about the cy pres award, wondering how lawyers arrived at that amount and how it stood to benefit Facebook's users. In a ruling rejecting the proposed settlement on Friday, the judge followed this up by saying, "Although it is not a precise science, plaintiffs must show that the cy pres payment represents a reasonable settlement of past damages claims, and that it was not merely plucked from thin air, or wholly inconsequential to them..."

Although the judge didn't rule out the possibility of a cy pres payment in the case -- and reportedly even asked at the hearing, "Why shouldn’t the cy pres be $100 million?” -- more focus on who is getting cy press money could be around the bend.

In a column for Forbes in late July, legal analyst Roger Parloff pointed out that a good chunk of cy pres money awarded in privacy cases is going to organizations that "would very likely be getting at least some donations from Google or Facebook" anyway. He notes that recipients Electronic Frontier Foundation, the Center for Democracy and Technology, and the Center for Internet and Society at Stanford collect voluntary contributions from the two big tech companies and "all reliably line up on the tech sector side in scrimmages with copyright holders."

To be fair, each of these organizations does in fact often take strong positions against tech companies on privacy issues, so in a certain regard, it's perfectly appropriate to award them money to monitor these companies going forward.

But so does the Electronic Privacy Information Center, which hasn't found it as easy to collect such money. The difference is that EPIC doesn't win friends in Silicon Valley by taking on Hollywood in legislative and policy debates. It doesn't because copyright matters are mostly outside its purview. Such a disadvantage once led EPIC to complain that one Google cy pres settlement served to divert money "to organizations that are currently paid by Google to lobby for or to consult for the company."

To avoid being shut out of a possible "sponsored stories" settlement, the EPIC along with other groups like the Center for Digital Democracy, the Privacy Rights Clearinghouse, and the Institute for Public Representation at Georgetown University, have asked to the court to adopt a procedure previously proposed in privacy cases involving Google Buzz and Netflix whereby potential cy pres recipients would disclose connections and contributions from Facebook.

E-mail: eriq.gardner@thr.com; Twitter: @eriqgardner