For $8.5 million, Google recently settled a class action lawsuit alleging that its social networking feature, Buzz, violated users’ privacy.

Launched in February as the company’s answer to competitive social networking sites, Google Buzz was instantly attacked by critics. As originally presented, Buzz was automatically added to all users of Gmail, Google’s e-mail system, and the program then turned users’ frequent e-mail contacts into followers.

The users’ information and followers were also made public by default, including photos and information shared in other Google products, such as the Picasa photo-sharing site.

In response, a putative class action lawsuit was filed in California federal court, alleging that Buzz violated federal privacy law. The Electronic Privacy Information Center also filed a complaint with the Federal Trade Commission, requesting an investigation.

The suit – which alleged violations of the Electronic Communications Privacy Act, the Stored Communications Act, the Computer Fraud and Abuse Act, and public disclosure of private facts – included all Gmail users in the United States.

Under the terms of the settlement, the company will “undertake wider public education about the privacy aspects of Buzz,” and the plaintiffs may make further recommendations to Google about such education. Google also acknowledged that the company has addressed privacy issues, while the plaintiffs agreed that privacy threats no longer exist. Finally, Google agreed to create an $8.5 million settlement fund, which will go toward “existing organizations focused on Internet privacy policy or privacy education” after fees and costs.

Each of the seven named plaintiffs can receive up to $2,500 and the plaintiffs’ attorneys could receive up to $2 million. A hearing on the preliminary approval of the settlement is set for September 27.

To read the proposed settlement in In Re Google Buzz User Privacy Litigation, click here.

Why it matters: The same day that the settlement was announced, Google said it plans to simplify its privacy policies by cutting their length by 22%. “To be clear, we aren’t changing any of our privacy practices,” wrote a Google lawyer on the company’s official blog. “We want to make our policies more transparent and understandable.” The Buzz lawsuit was just one of many class actions filed recently over allegations of privacy violations, including against Classmates.com and litigation against Google because it intercepted data while mapping its Street View service. Internet companies should ensure that their privacy policies are up to date or be prepared to face civil litigation or regulatory intervention.