• by Wendy Davis  @wendyndavis, September 20, 2009

Facebook said Friday it will pull the plug on its troubled Beacon ad program, which tells members about their friends' off-site e-commerce activity, in order to settle a privacy lawsuit. The company also will contribute $9.5 million to a settlement fund, approximately two-thirds of which will be used to launch a new privacy foundation.

If approved, the settlement would resolve a year-old lawsuit by more than a dozen Facebook members who alleged that the company violated their privacy with the controversial platform.

When Facebook launched Beacon in November of 2007, CEO Mark Zuckerberg hailed the program as heralding a revolution in media. Instead, the initiative quickly became known as one of the biggest privacy debacles of the Web 2.0 era.

Not only did the platform tell Facebook members about their friends' purchases at off-site retailers, like Zappos and Blockbuster, but it initially operated by default. In other words, Beacon spread news about people's purchases unless they affirmatively opted out.

From nearly the day it launched, Facebook users complained that they didn't understand how Beacon worked. Even sophisticated Web users, like industry research analyst Charlene Li, reported being surprised when the program transmitted information to their contacts. Some people 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 after this, the company added a feature that allowed people to permanently opt out.

On Friday, Barry Schnitt, Facebook's director of policy communications, said the company "learned a great deal" from its experience with Beacon. "For one, it was underscored how critical it is to provide extensive user control over how information is shared," he said in a statement.

The company also said it will transition the "small number" of companies that still use Beacon to other services.

The settlement also provides for individual plaintiffs to receive damage awards ranging from $1,000 to $15,000. The plaintiffs' lawyers will be eligible to receive up to one-third of the $9.5 million in the settlement fund.

The deal still must be approved by the U.S. District Court for the northern district of California.

The Beacon program also resulted in a separate lawsuit against Facebook-partner Blockbuster for allegedly violating the Video Privacy Protection Act, which says that movie rental records can't be released without people's written consent.