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Supreme Court notes “disconcerting” Facebook settlement, will eye future charity deals

When Facebook(s fb) gets sued over privacy, it has a novel way to make the issue go away: the company hands over a sum of money to lawyers and “non-profit” groups to reach a legal settlement while paying nothing to consumers. The trick worked when the social network got into trouble over Beacon, a program which publicly displayed users’ shopping purchases, and it worked again for “Sponsored Stories,” which turned users into product pitchmen without their consent.

This so-called “cy-pres” model, described in a New York Times piece this summer, has also been copied by other companies, including Google(s goog) and Adobe.

Now, the Supreme Court is hinting that it’s had enough of companies using charity payouts to end lawsuits. On Monday, Chief Justice John Roberts expressed skepticism about the Beacon settlement, which paid $3 million to class action lawyers and $6.5 million to a new privacy group called the “Digital Trust Foundation.” In a written opinion, he noted the potential for abuse and conflict-of-interest:

“[The] challenge focused on a number of disconcerting features of the new Foundation: the facts that a senior Facebook employee would serve on its board, that the board would enjoy nearly unfettered discretion in selecting fund recipients, and that the Foundation—as a new entity—necessarily lacked a proven track record of promoting the objectives behind the lawsuit.”

The opinion, however, concluded that the Supreme Court would not review the Beacon case, but that it might instead watch for a “suitable case” in order to “clarify the limits” on the charity payouts. In response to a request for comment, a Facebook spokesperson provided the following statement:

“We are pleased that the case is resolved and look forward to establishing the Digital Trust Foundation, which will fund worthy projects that will help protect and improve Internet users’ privacy, safety and security.”

While Monday’s decision is technically a victory for Facebook, since the Beacon settlement will be allowed to stand, Roberts’ words amount to a warning to companies that attempt to settle lawsuits in a way that cuts out consumers.

If the Supreme Court comes back to the issue, one candidate could be Facebook’s “Sponsored Stories” settlement, which is currently before a California appeals court. In that case, a judge initially balked at a $20 million deal, in part because lawyers had chosen payouts “out of thin air.” Since then, one of the charity recipients, the John D. and Catherine T. MacArthur Foundation, has refused its share of the money because it doesn’t work on privacy issues. Here’s Chief Justice Roberts (see also the Volokh Conspiracy for another unusual feature of the opinion):

Marek v Lane (Facebook Beacon, SCOTUS).pdf

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