Facebook announced on Friday that it settled the class action challenging its “Beacon” advertising program. [See Inside Facebook] You can access the key docs here (PDF): Settlement Agreement; Motion for Preliminary Approval.

Net result? Facebook establishes a privacy foundation funded with $9.5 million (or what’s left of this amount after attorneys’ fees, costs, and class claims are deducted).

Background: Beacon was an advertising program launched in November 2007 which (roughly speaking) allowed the transmission of purchase and consumer-related information between partner retailers, Facebook, and of course, your Facebook friends. [Wikipedia] I don’t think many people have a sense of all of the contours of the program, but famous bad examples of the program involved Facebook users who rented videos from Blockbuster having their rental choices broadcast to friends in their “news feed,” and one user who bought flowers for his girlfriend only to have his wife find out via Facebook. Purchasing decisions can often be private (as Robert Bork—who inspired the Video Privacy Protection Act and whose rental records were subpoenaed by Congress—can attest), and allowing Facebook and partner retailers to exploit this information was a fiasco waiting to happen. The fact that this program was even designed and approved by Facebook was for many a serious blow to Facebook’s credibility. At any rate, several class action lawsuits were launched, and it looked like after much behind the scenes activity, a settlement was reached in this particular lawsuit. (The settlement documents note that Facebook filed a Motion to Dismiss in late 2008, but before the court ruled on this motion the parties entered settlement negotiations…culminating in yesterday’s settlement.)

The Settlement: So what does the settlement involve?:

1. Privacy Foundation: Facebook sets up a privacy foundation, funded with whatever is left of the $9.5 million. The purpose of the foundation is to educate “users, regulators, and enterprises regarding critical issues relating to protection of identity and personal information online through user control, and to protect users from online threats.” The (three) initial directors will be named by the parties (essentially by class counsel and Facebook’s counsel).
2. Fees: Plaintiffs’ counsel is entitled to attorneys’ fees to the extent deemed reasonable by the court—Facebook agrees to not object if the amount is up to 1/3 of the 9.5 million dollar privacy fund.
3. Named Plaintiffs: Named plaintiffs get $15,000 and $7,000 for their time and effort.
4. Who Gets a Release?: “Protected Persons” are released. This includes Facebook, and all “Beacon Merchants” (e.g., Blockbuster, Fandango, Zappos.com, Overstock.com).

How about damages for the class? I may be missing the boat on something (maybe it’s doled out by the administrators) but there is little or no discussion of damages to the class. Maybe that’s typical in a class action settlement? Is the privacy foundation funded with what’s left? Maybe there are no damages to the class because the parties thought the class wasn’t damaged?

Other thoughts.

Blockbuster is involved in a separate lawsuit in the Northern District of Texas around its Beacon activities. It lost a Motion to Compel Arbitration, which it decided to appeal. Since Blockbuster obtained a release here (in the N.D. Cal. case), this may dispose of the Northern District of Texas case as well (unless Blockbuster wants to appeal the arbitration ruling to try to get it off the books, or the plaintiffs in that case opt out of this class action).

Facebook can reject the settlement if 1,500 or more class members opt out. That’s a pretty low number. I wonder if someone will start the “opt out of the Beacon class action settlement” group on Facebook? Seriously, I wonder if anyone will opt out and decide to pursue claims against Facebook on an individual basis?

Did plaintiffs have colorable claims? The answer is likely yes, given that Facebook was willing to pay out $9.5 million to make the lawsuit go away. Privacy-based lawsuits often suffer from damages issues, but in this case, plaintiffs could argue that Facebook generated revenues from the Beacon program and these amounts were ill gotten gains. Plaintiffs also brought statutory claims, rather than merely alleging violations of Facebook’s privacy policy.

Big win for KamberEdelson, which is racking up a pretty impressive class action record against internet and technology companies.

For more background: see this good overview from Caroline McCarthy at CNET here (“Facebook Beacon has poked its last”).