Here’s the way it looks like it works:  Google or Facebook overreach in a way that allows them to be sued for potentially billions in a class action that has yet to be filed, but could be.  Friendly lawyers come forward and offer a deal–we represent the class, we will do a settlement that pays the lawyers a bunch of money and eliminates the company’s liability for everyone except those who affirmatively opt out of the class.  And then the company gets to siphon cash into their favorite lobbying groups and a handful of real foundations thrown in for window dressing through a loophole called “cy pres“.

Lots of cash.

And, oh, yes–pays the class as close to nothing as they can get away with.

Three big settlements in the last few years that take on this appearance including the cy pres loophole are the Google Buzz settlement, the recently concluded Facebook “Sponsored Stories” settlement and the Facebook “Beacon” settlement.  MTP readers will recall we’ve written about this before as has Andrew Orlowski in The Register and Roger Parloff in Fortune.  Facebook has an earlier rather dubious class action regarding its controversial “Beacon” advertising tool that was the subject of excellent reporting by Adam Liptak in the New York Times.  An appeal from the grotesque Beacon class action settlement is on appeal to the U.S. Supreme Court and we should know any minute now whether the SCOTUS will hear the appeal.

As Adam Liptak explains in the New York Times:

Class-action lawyers call the diversion of settlement money from victims to other uses “cy pres.” The fancy-sounding term is derived from a French legal expression, “cy pres comme possible,” or “as near as possible.”

The Beacon Dissent and Appeal

The Beacon class action against Facebook featured a highly innovative technique:  Give the class members nothing and set up a toothless watchdog group foundation controlled by Facebook (which included tech journalist Larry Magid as a board member–his name also appears in a different class action against Facebook for Sponsored Stories because his ConnectSafely.org group gets money from Facebook in another innovative cy pres loophole settlement.  We tried contacting Magid for a comment a couple times over the last year, but got no reply.)

As Mr. Liptak tells us:

The settlement’s central innovation [in the Beacon settlement] was to cut [the class members] out of the deal.

The class members would get nothing. The plaintiffs’ lawyers would get about $2.3 million. Facebook would make a roughly $6.5 million payment — to a new foundation it would partly control.

The appeals court upheld the settlement last year by a 2-to-1 vote, with the majority saying it was “fair, adequate and free from collusion”….

“[The class members] do not get one cent,” Judge Andrew J. Kleinfeld wrote in dissent. “They do not even get an injunction against Facebook doing exactly the same thing to them again.”

In exchange for nothing, the plaintiffs gave up their right to sue Facebook and its partners in [the Beacon] program….The program has been shuttered, but its legal legacy lives on.

“This settlement perverts the class action into a device for depriving victims of remedies for wrongs,” Judge Kleinfeld wrote, “while enriching both the wrongdoers and the lawyers purporting to represent the class.”

You get the idea.

The Beacon case (Marek v. Lane) gives the U.S. Supreme Court the chance to review this cy pres loophole that Silicon Valley uses to funnel money to its lobbying and litigation machine outside of disclosure requirements.  (The EFF, for example, is a 501(c)(3) tax exempt organization–if the SCOTUS was feeling ambitious, a little choice dicta calling into question the propriety of allowing the EFF to function at the taxpayers expense could be quite helpful.)

Constitutional Issues

We make fun of these absurd cases that are mostly thinly disguised payoffs to “advocates” for the company line, but there are serious Constitutional issues involved as well.  Cato Institute has filed an amicus brief in the Beacon case that we hope will be heard by the SCOTUS.  This excerpt from Cato sums up the issues pretty well:

Cato filed an amicus brief arguing that the use of cy pres awards in class actions violates the Fifth Amendment’s Due Process Clause and the First Amendment’s Free Speech Clause. Specifically, due process requires — at a minimum — an opportunity for an absent plaintiff to remove himself, or “opt out,” from the class. Class members have little incentive or opportunity to learn of the existence of a class action in which they may have a legal interest, while class counsel is able to make settlement agreements that are unencumbered by an informed and participating class. In addition, when a court approves a cy pres award as part of a class action settlement, it forces class members to endorse certain ideas, compelling speech in violation of the First Amendment. When Facebook receives money — essentially from itself — to create a privacy-oriented charity, the victim class members surrender the value of their legal claims in support of a charity controlled by the defendant. Class members are left uncompensated, while Facebook is shielded from any future claims of liability.

How do you think Google and Facebook respond?  After all, we’re just talking about the Constitution, the founding document of a mere nation state.  Should something as trivial as the Constitution hold back permissionless innovation?  That might break the Internet.

They’re Not All Bad

Fans of class actions will be pleased to know that there are judges out there who are not fooled by these scams (or who don’t approve payments to their own law schools, like Judge Ware did in the Google Buzz settlement when he approved a $500,000 payment to Santa Clara University–right before he took early retirement to lecture at…Santa Clara University’s law school).

In the Custom LED v. eBay class action, another Northern District of California class action against a tech company, Judge Jon Tigar recently denied approval to the class settlement and highlighted  “obvious deficiencies” in the deal for the class that benefited eBay including that the proposed cy pres award recipients, the National Cyber-Forensics & Training Alliance and the National Consumer Law Center did not have “a nexus to the putative class members and their claims. Accordingly, the Court cannot conclude that the parties’ proposed cy pres award complies with the Ninth Circuit’s standard for such distributions didn’t have a sufficient nexus to the class members and their claims.”

So at least there’s some hope in San Jose federal courts for class members.

Facebook Says, “Me, too!”

Just so you get the idea, here’s a chart that compares the Buzz and Sponsored Stories lucky winners.  Not that there’s a pattern there or anything:

Organization	Sponsored Stories Settlement	Google Buzz Settlement
American Civil Liberties Union		$    7,000,000
Berkley Center for Law and Technology	$  300,000	$    500,000
Samuelson Law, Technology and Public Policy Clinic		$    200,000
Berkman Center	$  300,000	$    500,000
Brookings Insitution		$    165,000
Carnegie Mellon Privacy & Security Lab		$    350,00
Center for Democracy & Technology	$   500,000	$    500,000
Electronic Frontier Foundation	$   500,000	$ 1,000,000
MacArthur Foundation	$   500,000
Indiana University		$    300,000
Stanford Center for Internet and Society (founded by Lessig with $2,000,000 from Google)	$   300,000	$    500,000
YMCA of Greater Long Beach		$    300,000
Electronic Privacy Information Center		$    500,000
Santa Clara University	$  300,000	$    500,000
Youth Radio		$      50,000
Joan Ganz Cooney Center	$  500,000
NYU Information Law Institute	$  300,000
Campaign for Commercial Free Childhood	$  300,000
Consumers Federation of America	$  300,000
Rose Foundation	$  300,000
ConnectSafely.org (Larry Magid/Facebook)	$  300,000
WiredSafety.org	$  300,000