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Friday, October 5, 2012

McCall v. Facebook: Court Affirms Settlement Despite Objections As To Cy Pres Beneficiary

In McCall v. Facebook, Inc. (9th Cir. 9/20/12), the Ninth Circuit held that the district court did not abuse its discretion in approving a somewhat unusual $9.5 million settlement in a case involving more than 3.5 million putative class members.

The case arose out of allegations that Facebook's "Beacon" program violated users' privacy. The settlement allocated about $3 million to attorney fees, costs, and class rep enhancements and the remaining $6.5 million to establish and fund a new entity, the Digital Trust Foundation (“DTF”), which would “fund and sponsor programs designed to educate users, regulators[,] and enterprises" regarding online privacy issues. One of DTF's three directors would be a Facebook employee. DTF would have a Board of Legal Advisors, which would consist of counsel for both the plaintiff class and Facebook. Four class members objected, the district court granted final approval, the objectors appealed, and the Ninth Circuit affirmed.

Of greatest interest was the Court's rejection of the objectors' argument that Facebook’s employee serving on DTF’s board of directors created an unacceptable conflict of interest that would prevent DTF from acting in the interests of the class. Slip op. at 11545-11548. Given that direct distribution to the more than 3.5 million class members would be infeasible, the Court held that DTF was an acceptable alternative, even if the objectors did not find it "ideal." Slip op. at 11545. "The cy pres remedy the settling parties here have devised bears a direct and substantial nexus to the interests of absent class members and thus properly provides for the 'next best distribution' to the class." Slip op. at 11546. 

The Court also rejected the objectors' argument that the district court did not sufficiently evaluate the plaintiffs’ claims and compare the value of those claims with the class’s $9.5 million recovery (slip op. at 11548-11554), that the notice of settlement was insufficient because it did not describe the value of the plaintiffs’ claims and “did not accurately describe what the class members would receive in exchange for the release” of those claims (slip op. at 11554-11555).  The Court concluded: 
Ultimately, we find little in Objectors’ opposition to the settlement agreement beyond general dissatisfaction with the outcome. That dissatisfaction may very well be legitimate insofar as Objectors would have acted differently had they assumed the role of class representatives. But while Objectors may vigorously disagree with the class representatives’ decision not to hold out for more than $9.5 million or insist on a particular recipient of  cy pres funds, that disagreement does not require a reviewing court to undo the settling parties’ private agreement. The district court properly limited its substantive review of that agreement as necessary to determine that it was “fair, adequate, and free from collusion.” 
Judge Kleinfield wrote a very strongly worded dissent, which begins as follows:  
This settlement perverts the class action into a device for depriving victims of remedies for wrongs, while enriching both the wrongdoers and the lawyers purporting to represent the class.
Slip op. at 11555.  The opinion is available here.  

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