• by Wendy Davis  @wendyndavis, November 12, 2009

Privacy advocates are asking a federal appellate court to uphold a ruling allowing consumers to sue Blockbuster for participating in Facebook's Beacon program.

In papers filed recently with the 5th U.S. Circuit of Appeals, the Electronic Privacy Information Center is urging the court to reject Blockbuster's argument that consumers have no right to bring a class-action lawsuit because the company's terms of service require mandatory arbitration.

"To permit companies to substitute unilaterally mandatory arbitration clauses for the express language set out in federal statute will undermine privacy safeguards, contribute to further privacy harms, and frustrate the intent of Congress," the privacy group argues.

The case grows out of Facebook's all-but-defunct Beacon program, which told users about their friends' activity at outside sites including Blockbuster, Zappos and Overstock. The program originally operated by default, spreading news about members' purchases unless they affirmatively opted out. Some users immediately complained that they were blindsided by the platform, which transmitted information that they had intended to keep private. Members also said they didn't see the opt-out boxes -- some of which were served via pop-ups that disappeared after just 20 seconds.

Within weeks of its launch, Facebook revised the program to make it opt-in. Shortly afterwards, the company allowed people to permanently opt out.

In April of 2008, consumers in Texas filed a potential class-action lawsuit against Blockbuster for participating in Beacon. The consumers alleged that the movie rental company had violated the Video Privacy Protection Act, a 1988 federal law passed after a newspaper obtained video rental records of U.S. Supreme Court nominee Robert Bork. That law provides for damages of $2,500 per violation.

Blockbuster said the dispute did not belong in court because its user contract called for arbitration and banned class-action lawsuits, but U.S. District Court Judge Barbara Lynn in Dallas rejected that argument. She ruled in April that Blockbuster's contract with users was "illusory" because the agreement said that movie rental store could change the terms and conditions at any time.

Blockbuster appealed to the 5th Circuit, which is now considering the case.

John Verdi, a lawyer with the Electronic Privacy Information Center, says that a decision in Blockbuster's favor would effectively allow companies to avoid federal privacy law.

"There's a real risk that the court could put consumers in a situation where, as a practical matter, they wouldn't have the rights that Congress intended them to have," he says.

Regardless of the appellate court's decision in this appeal, the consumers' lawsuit against Blockbuster could still be dismissed if a class-action settlement of a separate lawsuit in California against Facebook and its partners goes through.

In the California case, U.S. Magistrate Judge Richard Seeborg in San Jose tentatively approved a deal that calls for Facebook to shutter Beacon permanently and to pay $9.5 million -- approximately two-thirds of which will fund a new privacy foundation. If that settlement is approved in its current form, it would extinguish the Texas litigation against Blockbuster. But the consumers in Texas are likely to object to that settlement, and the ultimate outcome remains uncertain.