Court Rejects Preliminary Approval of Facebook Settlement – Is There a way to Navigate Mega-Sized Class Actions?

You may have heard that Facebook announced the settlement of a 70+ million member class action.  The lawsuit alleged that Facebook acted inconsistent with its policies and procedures governing the use of its site when it publicized users’ “likes” of advertisements without compensating the users or providing a means to opt out.  The lawsuit brought claims for alleged violations of California Civil Code § 3344, which provides for statutory damages of $750 per violation.  As Judge Seeborg pointed out, assuming a class of 100 million persons, the lawsuit created $750 billion in exposure for Facebook.

The cash-less settlement proposed by the parties paid $10 million to an un-named organization involved in internet privacy issues (known as a cy pres recipient), and up to $10 million to be paid to class counsel.  The concept with cy pres is that you make a payment to an organization that will be engaged in activity that will benefit the entire class when it uses the money provided, usually when class members cannot be located but also used in circumstances where a payment to each individual is not feasible.  Since cash-less, there was no contemplated payment to the class.

Contrary to some reports, the Court did not reject the settlement terms.  Rather, Judge Seeborg denied preliminary approval of the proposed settlement and requested that the parties provide further information to demonstrate the reasonableness of the proposed settlement. http://www.wired.com/images_blogs/threatlevel/2012/08/facebookjrection.pdf Having litigated and negotiated settlements in several class actions involving millions of putative class members, the settlement and the Court’s reaction provide an opportunity to discuss a number of issues that confront defendants in these mega-sized class actions.

When it comes to cash settlements, does size matter?

An obvious hurdle in resolving cases with such a large class is that any direct payment to the class is cost-prohibitive.  In the Facebook case, even a settlement of $10 per class member would result in a payment of $700 million or more.  Under the applicable rules, the Court must make its own determination as to whether the negotiated settlement is reasonable – to protect the interests of the absent class members.  The Court suggested that the question of whether a cy pres-only settlement is justified where the class size is too large for direct monetary relief is novel.  The Court asked the parties to brief this issue – a reason to watch this case.

However, cy pres was not the only relief offered in the settlement.  Facebook also agreed to make undisclosed changes with regard to the challenged “like” practices.  The Plaintiffs asserted that this injunctive relief achieved the primary purpose of the litigation.  Interestingly, the Court did not address the issue of whether the injunctive relief alone was sufficient consideration.  Judge Seeborg did reject the use of the value of the injunctive relief to determine the reasonableness of the $10 million amount of the cy pres.  The Court asked the parties to come forward with more detail.  Arguably, the significance of the injunctive relief could still be sufficient to permit the scope of the release sought.

In terms of negotiating a resolution, the costs to litigate can be magnitudes less than the proposed settlement amount.  However, in a case such as Facebook where the claims provide for statutory damages, even a remote chance of victory can result in a substantial amount of risk exposure (e.g., 10% chance of losing a $1 billion case is $100 million). Historically, defendants have relied on the concept first annunciated in a New York case (Ratnor http://www.leagle.com/xmlResult.aspx?xmldoc=1971599329FSupp270_1549.xml&docbase=CSLWAR1-1950-1985 ) to argue that ruinous liability for technical violations can be a basis for denying class certification based on inferiority of a class.  The 7^th Circuit’s decision in Murray v. GMAC however has sharply curtailed the availability of that defense. http://caselaw.findlaw.com/us-7th-circuit/1455607.html

Still no solution in sight

As a result defendants, like Facebook, which have been looking for creative ways to resolve these cases, remove the risk and move on with their businesses may now have fewer alternatives.  While some may herald the end of cash less settlements (presumably as a jab at class counsel fees), the result will mean protracted litigation and a waste of judicial resources.  The fix for this would be caps on class action awards on all claims that include statutory damages (like the FDCPA or VPPA).  Until that happens, the quagmire created by mega-sized class actions based on statutory damages will continue to hamper the judiciary and business.  The landscape much just become even more complicated.