Commentary

Facebook's Beacon Settlement Attacked By Cato Institute

The libertarian organization Cato Institute is backing the Center for Class Action Fairness in its effort to convince the Supreme Court to scuttle Facebook's $9.5 million settlement of a class-action privacy lawsuit stemming from the Beacon debacle.

Cato argues that the deal -- like other class-action settlements where defendants donate to charities instead of paying consumers -- violates consumers' rights.

The settlement requires Facebook to pay around $6.5 million to create a new privacy organization, the Digital Trust Foundation. The new foundation will be directed by a three-person board -- and Facebook will have a major say in selecting those people. (One of the board members was supposed to be Facebook's former public policy director, Tim Sparapani, but he left the company before the foundation was created.) The lawyers who brought the case on behalf of the consumers -- including New York attorney Scott Kamber and Texas lawyer Joseph Malley -- stand to receive around $2.3 million.

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The settlement, which was okayed earlier this year by the 9th Circuit, resolves allegations that Facebook violated users' privacy with the 2007 Beacon program. The short-lived Beacon initiative shared information about people's e-commerce activity with their friends. 

The lawsuit's resolution was always controversial, with critics arguing that Facebook's users -- whose privacy allegedly was violated by Beacon -- won't necessarily benefit from the new organization. Now, the Cato Institute is raising another point -- one that could affect many class-action settlements. The organization says that allowing companies to settle class-action lawsuits by donating to nonprofits violates the free-speech rights of the consumers who were harmed, given that they won't necessarily be aligned with the nonprofits on policy issues.

Cato argues it would be truly extraordinary if members of the class were uniform in their preferences for charitable giving.

"Some class members could be misanthropes, preferring to avoid all philanthropy. Most class members might agree with the notion of charitable giving generally, but would disagree as to the type of organizations that were worthy of financial support,” Cato argues. “It is inappropriate for class counsel to presume to select a 'worthy' charitable organization to be the recipients of funds that represent damages owed to class members."

Cato adds that companies get a big benefit when they agree to make donations to nonprofits in order to settle a class-action lawsuit: The deal allows those companies to burnish their public-relations images by funding charitable efforts with the money that rightfully belongs to the class.” The group says the Supreme Court should take the case.

For its part, Facebook filed papers opposing the request. The company argues that the courts correctly approved the settlement, which it says resulted from “months of protracted, good faith negotiations.”

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