• by Wendy Davis  @wendyndavis, August 17, 2012

A federal judge has rejected the proposed settlement of a class-action lawsuit about Facebook's sponsored stories program.

U.S. District Court Judge Richard Seeborg in the Northern District of California ruled late Friday that the proposed settlement raised too many questions to warrant approval. But Seeborg also said that his decision is without prejudice, meaning that the parties can beef up their arguments to address his concerns, and then try again to win approval of the deal.

The proposed deal called for Facebook to donate $10 million to various advocacy organizations and law schools -- but nothing to Facebook users who were featured in sponsored stories. The company also promised not to oppose a request by the consumers' lawyers for up to $10 million in attorneys' fees. Additionally, Facebook said it would give users more control over sponsored stories in the future -- though only minors will be allowed to opt out of appearing in ads.

One of the major problems flagged by Seeborg is that the deal doesn't call for any monetary damages to Facebook users. The social networking service was sued for allegedly violating a California law providing that companies need consumers' permission before using their names or images in endorsements.

That law -- which also specifies that minors' images can't be used in endorsements without their parents' permission -- provides for damages of $750 per incident.

Facebook and the consumers argued the deal should be approved because the potential damages were otherwise so large that payments to individuals weren't practical, according to Seeborg's opinion. But he questioned whether that in itself was a good reason to structure a so-called "cy pres" settlement -- which involves payment to outside organizations in lieu of to the people directly affected.

"The issue this presents appears to be a novel one: Can a cy pres-only settlement be justified on the basis that the class size is simply too large for direct monetary relief? Or, notwithstanding the strong policy favoring settlements, are some class actions simply too big to settle?" Seeborg wrote.

The judge also found problems with Facebook's promise to pay up to $10 million in attorneys' fees to the lawyers who brought the case. The Center for Public Interest Law, which was among the groups opposing the settlement, argued earlier that it was "doubtful" that lawyers for the consumers deserved $10 million for their work on the case.

The lawyers haven't yet applied for attorneys' fees; when they do, they will have to convince Seeborg that the amount requested fairly compensates them. Seeborg said on Friday that if the lawyers can't justify $10 million, then Facebook's promise not to contest that figure could be relevant to whether the settlement was fair.

"If, and to the extent, that only a much smaller fee award can ultimately be justified here, then the fact that Facebook has agreed to pay up to $20 million (plus up to $300,000 in costs) to resolve this action may be of some consequence in evaluating the adequacy and fairness of the cy pres amount," the judge wrote.

The 9th Circuit Court of Appeals (which encompasses the Northern District of California) is increasingly scrutinizing class-action settlements -- especially where lawyers receive money but consumers don't. That court recently rejected a proposed class-action settlement in a lawsuit alleging that Motorola didn't disclose the risk of hearing loss posed by Bluetooth headsets. The proposed settlement would have required Motorola to donate $100,000 to various health-related organizations, while the attorneys who sued would have received $800,000.

In its order rejecting the settlement, the 9th Circuit said one sign of a questionable deal is "when the class receives no monetary distribution but class counsel are amply rewarded."