Friday, August 31, 2012

Settlement Rejected in Class Action over Facebook’s “Sponsored Stories”


Facebook and the attorneys in a class action suit over the use of user names and pictures in connection with “Sponsored Stories” are back at the negotiating table after their request for preliminary approval of a settlement was rejected by a federal judge in San Francisco.

On August 17, 2012, Judge Richard Seaborg of the Northern District of California rejected a proposed settlement in the putative class action case Fraley v. Facebook, Inc., N.D. Cal. Case No. C 11-1726.  The case addresses allegations that Facebook’s use of users’ names and photos in connection with the paid advertising known as “Sponsored Stories” created improper endorsements that violated the users’ publicity rights and was an unlawful, unfair, and fraudulent business practice under California law.  The proposed class could cover the 150 million or more Facebook users in the United States that had created profiles prior to January 27, 2011.

The Plaintiffs submitted a proposed settlement to the court in June 2012, in which Facebook would (1) make certain changes to its “Statement of Rights and Responsibilities” governing use of the site; (2) implement certain mechanisms to increase user control and awareness regarding use of their names and likenesses in “Sponsored Stories,”; (3) make a “cy pres” settlement payment of $10 million to certain internet privacy groups (rather than users); and (4) pay Plaintiffs’ attorney fees, up to a maximum of $10 million, upon application by the Plaintiffs. 

Despite the low threshold necessary for preliminary approval of putative class actions, Judge Seaborg rejected the settlement based on a combination of the following factors:

(1)  The adequacy of the recovery by class members.  By agreeing to a cy pres-only settlement rather than providing any monetary recovery for the class members, the Plaintiffs may have unfairly bargained away the $750 in statutory damages each violation of publicity rights would have incurred.  To remedy the problem, the court instructed Plaintiffs to address the likely size of the covered class, the minimum size of a settlement fund that could be distributed, and the legal argument to justify substituting cy pres relief instead of recovery by the class in light of the potential for statutory damages.

(2)  The amount of the cy pres payment.  The court took issue with the Plaintiffs failure to connect the amount of the cy pres payment to the damages suffered by the class.  Cy pres settlements are designed to provide for the interests of the class members in place of actual damages.  Again, the court instructed Plaintiffs to estimate the likely recovery at trial in light of the statutory damages and size of the class.  The court pointed out that the estimate of potential recovery made by Facebook and the total settlement costs to Facebook (including attorneys’ fees) may be relevant to the settlement value. 

(3) The adequacy of the injunctive relief.  The court raised issues regarding the specifics of Facebook’s remedial measures and the extent of Facebook’s discretion in implementing the features and revising its “Statement of Rights and Responsibilities.”  The Plaintiffs were also instructed to address the issues raised in the companion case regarding obtaining consent from minors.

(4) The amount of attorneys’ fees.  The court took issue with the “clear sailing” provision by which Facebook would not object to an attorneys’ fees motion for up to $10 million in fees and $300,000 in costs.  The court noted that the Plaintiffs attempted to justify this amount by valuing the injunctive relief at $103.2 million as an estimate of the value of future “Sponsored Stories” to Facebook.  However, according to the court, Facebook’s revenue from the advertising is not the same as the value received by the members of the class.  Instead, Plaintiffs must provide legal support for any valuation of the injunctive relief that they rely on to  justify the high attorneys’ fees.

The court also instructed the Plaintiffs to include an estimate of the number of class members that may not receive notice of the settlement via email and discussion of any other major issues that had been raised by third parties in any future proposed settlements. 

Conclusion

Judge Seaborg’s preliminary rejection of the settlement is grounded in concerns regarding the fairness of settling the statutory damage claims of millions of users for payments to third parties, uncertain future protections, and millions in fees for the attorneys that brought the claims. 

Online companies should take note that violations of their users’ privacy rights that carry statutory damages, like the endorsement/publicity rights at issue in this case, may result in extremely high damages figures that would result in catastrophic consequences in the event of adverse judgments.  Additionally, class action settlements need to be constructed with judicial scrutiny in mind, in order to prevent issues like those raised in this case and now faced by Facebook and the Plaintiffs’ attorneys as they return to the negotiating table.

-- Steven Gebelin

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