SAN FRANCISCO (CN) - A federal judge cited "serious concerns" in rejecting a proposed settlement agreement between Facebook and subscribers who claim the company used their names and likenesses to promote products without their permission.
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U.S. District Judge Richard Seeborg denied without prejudice plaintiffs' motion for preliminary approval of the settlement, which called for Facebook to make a $10 million payment to Internet privacy organizations; to allow users more control over how their names and likenesses are used and to pay attorney fees of up to $10 million without objection.
Angel Fraley and other users sued Facebook in March 2011 in Santa Clara County Superior Court for unfair competition and unjust over the company's use of users' names and likenesses to market products and services through its "Sponsored Stories" program without the user's permission. The plaintiffs sued on behalf of a class of Facebook users whose identities could have been used in the program. Facebook removed the case to the Northern District of California in April 2011.
Seeborg challenged the provision calling for a payment of $10 million to be made to organizations involved in Internet privacy issues in lieu of direct payments to class members.
While agreeing that it would be impractical to try to divvy up the $10 million between a class that may include up to 70 million people and agreeing that class members might not achieve a favorable judgment without the settlement, Seeborg noted that the governing California Civil code called for statutory damages or $750 for any violation.
He ruled that the potential for a judgment in favor of the plaintiffs "must be considered in evaluating the fairness of any settlement. Merely pointing to the infeasibility of dividing up the agreed-to $10 million recovery, for the relatively small per-use revenue Facebook derived, is insufficient, standing alone, to justify resort to purely cy press payments."
Seeborg used the parties' additional argument that any cash settlement would not be practical, given the sheer number of potential class members, to ask whether a cy-press only settlement could be justified on the basis that the class size is simply too large for direct monetary relief or if some class actions are just to big to settle.
The ruling also questions whether the $10 million payment is fair, adequate and reasonable. While the plaintiffs seemed to suggest during oral arguments that the payment is not that important because their primary purpose is to compel Facebook to change its practices going forward and the granting of that injunctive relief by itself represents a huge success, the problem with treating such payments as a bonus is that the relief relates only to future, not past conduct.
As Seeborg noted, cy press payments are intended to be "[u]sed in lieu of direct distribution of damages," as noted in a 9th Circuit ruling on Dennis v. Kellogg. "In other words, the cy press payment is compensation for past alleged wrongdoing. But the proposed agreement includes a release for any past misconduct by Facebook.
As such, Seeborg ruled that "regardless of the importance and value to plaintiffs of the injunctive relief, it cannot serve as meaningful consideration for a release of class members' claims for damages, statutory or actual."
While Facebook claimed during oral arguments that the $10 million figure represents a fair estimate of potential recovery at trial and includes discounts applied for the risks and costs of litigation, the present motion "does not provide adequate support for the conclusion. Although it is not a precise science, plaintiffs must show that the cy press payment represents a reasonable settlement of past damages claims, and that it was not merely plucked from thin air, or wholly inconsequential to them, given their focus on prospective injunctive relief."
The judge also found "problematic" Facebook's justification for the settlement amount that discounted the settlement figure by an additional amount to reflect that only a small percentage of class members usually file claims in class actions like this one, finding that such an approach would result in the settlement being similar to one calling for direct cash payments to class members where any unclaimed settlement funds revert to the defendant.
He noted that "while such revisionary provisions are not necessarily prohibited, they are problematic," citing a 9th Circuit decision in In re Bluetooth Headset Products Liability Litigation in support.
The rulings also expressed serious concerns that the plaintiffs might have bargained away something of value to them in agreeing to receive $10 million in attorney's fees from Facebook. The plaintiffs failed to explain or show legal support for how they calculated the value of the injunctive relief they requested.
The plaintiffs tried two approaches to explain how they reached the calculation but both "suffer from the same fundamental defect."
According to the ruling, "the dollars Facebook received from using its members' names and likenesses (allegedly wrongfully), cannot serve as a measure for the economic value realized by members through obtaining the ability to 'opt out' from allowing Facebook to do so in the future." Under the agreement users can allow Facebook to continue to use their names and likenesses without compensation or stop Facebook from doing so. "In neither instance will the Facebook member receive any clear or direct economic benefit."
Seeborg asked parties to include legal justification for all of their arguments, noting that the ratio of the amount of attorney fees specified and the economic value of the cy press payment, the sheer size of the award and the fact that any fees not awarded would revert to Facebook "all present serious concerns."
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