How Lawsuits Fund Lobbyists Facebook pays millions in class actions to privacy groups. Facebook users may get nothing.
Nov. 10, 2013 6:39 p.m. ET
The Supreme Court last week set a record for the gap between innovative technology and hidebound regulation. The justices upheld a settlement against FacebookFB -2.39%based on a legal concept created by ecclesiastical courts in the Middle Ages to ensure that promises of charitable gifts made to secure entry into heaven would be carried out.
The good news is that the court said it would look for a new case to get Silicon Valley out of the purgatory of having to pay legal settlements to the very lawyers and advocacy groups whose mission is to regulate high-tech firms.
The case of Marek v. Lane arose after Facebook launched its Beacon program in 2007. Beacon automatically posted announcements when Facebook users bought a new product. It turned out that many users preferred confidentiality for surprise gifts and potentially embarrassing purchases. User complaints led Facebook to end Beacon after just a month.
That would have ended the matter except for the inevitable class-action lawsuit. Facebook eventually agreed to pay $9.5 million, but not to its hundreds of millions of users. The lawyers who brought the case got $3 million, and Facebook agreed to donate $6.5 million to create a new nonprofit group focused on privacy issues.
The legal basis of the settlement was a doctrine borrowed from trust law called "cy près," a French term that means a close enough use of funds. That makes sense when a charitable gift can't be carried out as intended, but not in a case that is supposed to compensate people who've suffered harm.
In an opinion accompanying the denial of review, Chief Justice John Roberts wrote that the court will look for a "suitable case" to "clarify the limits" on funding nonprofits instead of compensating victims. "This court has not previously addressed any of these issues," he wrote, "including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new legal entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class and so on."
Privacy lobbying groups such as the Electronic Frontier Foundation and the Center for Democracy and Technology get significant funding from class-action settlements. No wonder they advocate for more lawsuits. In 2011, the Electronic Privacy Information Center even went to court complaining when it wasn't among the advocacy groups sharing in a $10 million settlement from Google. GOOG +1.39%
The GigaOM technology news site discovered that one of the groups selected to share in another Facebook settlement—for $20 million relating to Facebook publicizing user "likes" in ads—had no idea why it was included and rejected its allotted $500,000. Representatives of the MacArthur Foundation said they "did not ask to participate" and don't work in online privacy.
"Under the current model, the legal process serves to stoke privacy panic while also failing to explain to consumers the basic nature of the contract they undertake when they sign on with Facebook or Google," reported GigaOM. "Consumers receive an incredibly useful product for no money, but pay instead with personal information which the companies collect for advertising."
The law is a clumsy tool to regulate fast-changing technology. Indeed, under the Beacon settlement, Facebook could relaunch the program under another name even though, as Chief Justice Roberts noted, the settlement by Facebook "insulated itself from all class claims." Ted Frank, a critic of the class-action system, has written that "a lawsuit where the cost of litigation is greater than the benefit to the class suggests the social costs are greater than the social benefits."
These kinds of lawsuits create the illusion that judges determine appropriate uses of technology. But people are still learning how much information they want to share online. It's becoming increasingly clear that users are the "product" being sold; the paying customers are the advertisers who want information allowing them to deliver personalized advertising.
A new novel ridicules companies like Facebook and Google for promoting openness without making clear why this is so basic to their advertising business. "The Circle" by Dave Eggers features an imaginary Silicon Valley company that takes these ideas to an extreme with rallying cries such as "Secrets are lies. Sharing is caring. Privacy is theft."
People should be free to choose the online services they want to use and how much personal information they will share. Markets, not lawsuits or lobbyists funded by lawsuits, are the most efficient way to monitor business practices affecting privacy. If companies such as Facebook and Google go too far, competitors will step in promising to be more user friendly.