Cy Pres Remedies in the Internet Privacy Class Action Context

Last November, the Supreme Court denied certiorari in Marek v. Lane, a class action case concerning potential privacy violations arising from Facebook’s short-lived and controversial “Beacon” program, which automatically posted information regarding users’ transactions on third-party websites to the users’ Facebook feeds. The class action ended in a settlement, in which Facebook agreed to pay $9.5 million into a cy pres fund to “establish a charitable foundation” that would “fund organizations dedicated to educating the public about online privacy.” Class counsel would receive 25%, roughly $3 million. The new foundation would include a Facebook representative as one of its three board members. Affected users, the members of the class, would receive no direct compensation. Chief Justice Roberts published a statement expressing concern regarding the settlement, stating that the Court would soon need to address questions of when such cy pres remedies are appropriate and whether such settlements are fair.

This type of charity fund cy pres settlement should sound familiar to all Gmail users who tried out the now-defunct Google Buzz in February 2010. In November of that year, a Northern District of California judge approved a settlement in the Internet privacy class action lawsuit regarding Google Buzz’s automatic sharing of users’ Gmail contact lists. Generally, in class action settlements between major companies and classes comprised of large groups of customers, individual customers receive some kind of direct compensation, even if the amount is negligible or the payment comes in the form of coupons rather than cash. However, instead of compensating affected users directly, Google paid out $8.5 million to an “independent fund,” to “support organizations promoting privacy education and policy on the web.” Plaintiffs’ class counsel requested 25% of the settlement fund, or roughly $2 million, to cover attorneys’ fees and expenses.

Charity fund cy pres settlements such as those in the Facebook and Google Buzz cases described above raise various questions of fairness to class members in addition to implicating common criticisms of the class action device. This type of cy pres settlement is becoming increasingly common in class actions involving Internet privacy violations by companies such as Google, Netflix, and Facebook. The use of cy pres settlements in cases involving Internet privacy issues is thus among the trends that led Chief Justice Roberts to express concern with the cy pres settlement format.

One of the main problems with these cy pres settlements is one of fairness to class members. In general, courts are amenable to cy pres fund settlements in cases where “direct payments to the members of the putative class may be impractical,” perhaps because that class is too numerous. Courts generally agree that the distribution of cy pres awards to related charities (such as those educating users on Internet privacy) provides benefits, albeit indirectly, to the class and permit such awards for that reason. Because Internet privacy class actions involve such a large number of users, distributing part of the award to individual class members could easily be too costly or logistically impractical. Thus, courts have become more willing to approve settlements that give none of the award to class members as compensation. Intuitively, this seems unfair, particularly in the context where the Google Buzz lawsuit was broad under a statute providing for damages of up to $1,000 per violation.

An additional problem is that the method for distributing the awarded cy pres funds appears to allow Facebook and Google to direct funds to groups that they already support. As Consumer Watchdog reported, the Google Buzz settlement funds would likely be considered “tax-deductible donations” from Google to groups such as the MacArthur Foundation and the Stanford Center for Internet and Society, already “favored charities” of Google. Facebook’s settlement, on the other hand, sets up a new privacy foundation that would have a Facebook employee as part of its board. Because the settlement would create a new entity, its ability to benefit class members remains unclear. Both settlements seem to benefit the defendants more than the class members, thus appearing unfair.

Finally, given that class counsel in both the Facebook and Google Buzz cases stood to collect a substantial $2-$3 million from these awards, these cy pres settlements implicate the common criticism that class actions are merely a way for plaintiffs’ attorneys to profit while class members gain very little. This is a valid criticism in the context of the Facebook and Google settlements, when individual plaintiffs received no direct compensation even as plaintiff’s class counsel received substantial attorneys’ fees.

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