A U.S. District Court judge rejected the proposed settlement in a class-action suit against Classmates.com that would have required the site to pay up to $9.5 million for false advertising, saying it “offered very little to class members.”

The suit, filed in 2008, claimed that the site deceived customers into purchasing “gold” memberships by sending an e-mail that an old classmate wanted to get in touch. Users paid to join the site only to find that no one was looking for them, according to the suit.

Last April, U.S. District Court Judge Richard A. Jones gave preliminary approval to a class settlement that required the site to update its privacy policy and provide additional disclosures. All registered users of the site – estimated at roughly 50 million people – would be given the right to claim a $2 coupon toward the purchase of paid membership.

A subclass of users – those who had actually upgraded and paid for their membership after receiving a message from the site, estimated at about 3 million people – would be offered an additional $3 cash payment.

Classmates.com admitted no wrongdoing under the settlement and capped its total cash payout at $9.5 million. Given the number of individuals who failed to respond to the notice of the settlement or decided to opt-out of the class, Classmates.com would have wound up paying only about $52,000.

Following the final approval hearing, Judge Jones refused to sign off on the settlement.

The $2 coupon “is hard to conceive [of] as a benefit to the class,” he wrote, noting that it will either go unused by a majority of class members (who never spent a dime on the site) or “will transform a non-paying registered user into a paying Classmates customer. This is the hallmark of a promotion for Classmates, not a benefit conferred in a bilateral resolution of a dispute.”

And the additional $3 cash payment for a subclass of plaintiffs “seems designed to ensure that Classmates would pay very little in cash compensation,” the court said, and “provides relatively little incentive to participate in the settlement.”

Further, the injunctive relief “is notable in that it does not stop any of the practices that led to this action. It does not require Classmates to stop sending deceptive e-mails. It does not require Classmates to stop compromising the security of its users’ accounts. Instead, it requires more disclosure, disclosure that is highly unlikely to make a difference to class members. This is a marginal benefit at best,” Judge Jones wrote.

The court also noted that while the vast majority of potential class members did not react to notice of the settlement, those who did responded in an “overwhelmingly negative” manner. Class members “mocked” the $2 coupon, dismissed the $3 payment as “paltry,” and the record “does not contain a single favorable word from a prospective class member about the injunctive relief,” the court said.

To read the court’s rejection of the settlement in In Re Classmates.com, click here.

Why it matters: Judge Jones criticized every element of the parties’ proposed settlement and even questioned the plaintiffs’ valuation of the claims of potential class members, noting that class counsel focused on the amount that class members paid for their site membership. He reminded class counsel that it had included an additional claim based on Washington’s Commercial Electronic Mail Act, which provides statutory damages of $500 per violation for deceptive e-mails. “There are, of course, numerous obstacles to recovering statutory damages for a putative class action as large and geographically dispersed as this one. But the possibility of a $500 award puts the settlement offer of $3 (to about 3 million people) and an offer of a weak injunction and a $2 coupon for Classmates’ benefit (to about 50 million people) in a much different perspective,” Judge Jones wrote. While the parties have since informed the court they have renegotiated and reached an agreement in principle to settle the litigation upon new terms, they face a skeptical judge.