• by Wendy Davis  @wendyndavis, March 17, 2010

Rejecting complaints by privacy organizations, a federal judge in San Jose, Calif. on Wednesday approved a controversial $9.5 million settlement of a class-action lawsuit stemming from Facebook's Beacon ad program.

The settlement calls for Facebook to permanently shutter Beacon, which informed Facebook users about their friends' activity at sites like Blockbuster and Zappos, and to fund a new privacy foundation. That organization will be directed by a three-person board that includes Facebook's director of public policy, Tim Sparapani. Some privacy groups had weighed in against the settlement, arguing that Facebook would exert too much control over the new organization, arguing that it was likely to become "a public relations organization for Facebook."

But U.S. District Court Judge Richard Seeborg ruled that Facebook and the plaintiffs showed that the settlement "furthers the interests of the class, and the public at large."

"Settlements in litigation very often rest on the participants' abilities to find non-zero-sum game solutions," he wrote. "Thus, while it likely would be inappropriate to apply settlement funds in a manner that was solely or primarily for the benefit of the defendant, there is no requirement that the funds be used in a manner wholly antagonistic to the defendant's interests."

Seeborg also noted that the new foundation will include two independent board members -- UC Berkeley Center for Law & Technology's Chris Jay Hoofnagle and journalist and Internet safety advocate Larry Magid.

"Objectors have not shown there is any substantial reason to doubt the independence of two of the three directors," Seeborg wrote. "While the director associated with Facebook may reasonably be expected to exercise his influence against the Foundation taking any actions that would clearly and directly harm Facebook, there has been no persuasive showing that the Foundation will be a mere publicity tool for Facebook, or in any meaningful sense under Facebook's direct control."

Facebook also agreed to pay the 19 specific consumers who sued amounts ranging from $1,000 to $10,000. The plaintiffs' attorneys could receive around $3 million in attorneys' fees.

The privacy groups also argued that the settlement was not appropriate because Facebook theoretically could have been liable for nearly $1 billion just for allegedly violating the federal Video Privacy Protection Act -- which prohibits companies from releasing information about users' movie rentals.

But Seeborg ruled that claims that Facebook violated that statute "raise novel legal theories with little in the way of prior decisions to assist in gauging the likelihood of success" -- which also weighed in favor of approving the settlement. "Bringing this case to trial would likely have been a long and costly proposition, the outcome of which would have been uncertain," Seeborg wrote.