• by Wendy Davis  @wendyndavis, January 26, 2010

A coalition of privacy organizations are criticizing the proposed $9.5 million settlement of a class-action lawsuit stemming from Facebook's Beacon on the grounds that the deal could benefit the social networking site more than its members.

The Electronic Privacy Information Center and five other advocacy groups take issue with the portion of the proposed settlement that calls on Facebook to fund a new privacy foundation with approximately $6 million. The remaining portion of the settlement would go toward attorneys' fees.

"The foundation as proposed is likely to become a public relations organization for Facebook," the groups state in a recent letter to U.S. Magistrate Judge Richard Seeborg in San Jose. Joining EPIC as signatories are the Center for Digital Democracy, Consumer Action, Consumer Federation of America, Privacy Rights Clearinghouse and Patient Privacy Rights.

A Facebook spokesperson said in a statement that the proposed foundation "will proactively improve the experience of all Internet users."

The proposed foundation's board of directors and by-laws were made public Tuesday. Facebook's director of public policy Tim Sparapani, and Berkeley Center for Law & Technology's Chris Jay Hoofnagle will serve as the initial co-presidents of the organization, named the Digital Trust Foundation. Journalist and Internet safety advocate Larry Magid will serve as chief financial officer and secretary.

If approved, the settlement would extinguish all litigation pending from Facebook's much maligned Beacon ad program, which told members about their friends' e-commerce activity. Among the cases that would be affected is a pending lawsuit in Texas against Blockbuster. Consumers there alleged that the company's participation in Beacon violated the Video Privacy Protection Act, which prohibits companies from disclosing consumers' movie rental records and imposes damages of $2,500 per incident.

The proposed settlement in San Jose calls for Facebook to pay damages ranging from $1,000 to $15,000 to the 19 consumers who were named in the lawsuit. No one else would receive any monetary awards. The deal also requires Facebook to permanently shutter Beacon.

The privacy groups question whether the settlement is appropriate given that Facebook theoretically could have been on the hook for nearly $1 billion just for violating the federal Video Privacy Protection Act. "If only 350,000 users -- 0.1% of the total user base -- had their rights violated under the VPPA, Facebook would be exposed to $875 million in liquidated damages," they write. "The $6 million figure proposed is clearly insufficient, and most significantly, the class members currently receive $0."

John Verdi, senior counsel at EPIC, adds that his organization is especially troubled by the structure of the foundation. The proposed Digital Trust Foundation will have two advisers -- one of whom is a lawyer for Facebook. In addition, the settlement agreement provides for Facebook to play a key role in selecting the board of directors. "It looks to us that this foundation is so dependent on Facebook, and within the control and thrall of Facebook, that it is basically just something that could benefit Facebook and not the class members," Verdi says.

The settlement agreement also says the foundation will be used to fund programs to educate users, regulators and enterprises -- a mandate that the privacy groups say "reads like public relations and lobbying efforts on behalf of Facebook."

The by-laws released Tuesday say the foundation will not "sponsor any litigation or lobbying matters."

The privacy groups are proposing several modifications to the settlement, including that Facebook distribute the money to existing organizations rather than create a new foundation.

Separately, lawyers representing two individual Facebook members also filed papers objecting to the settlement.

Seeborg granted the deal preliminary approval last October, at which time he set Feb. 1 as a deadline for objections. He is expected to decide later this year whether to sign off on the deal.