A federal judge has approved a $9 million settlement in a class action suit alleging Netflix violated the Video Privacy Protection Act by keeping former customers’ personal information and video rental history past the statutorily allowed time period.

Under the VPPA, video service providers must delete information about former users after one year. The plaintiffs – consolidated from six different class actions – claimed that Netflix kept a “veritable digital dossier” of former subscribers, including their credit card numbers, billing and contact information, and a highly detailed account of their programming viewing history.

After mediation, the parties reached a settlement, to which U.S. District Court Judge Edward J. Davila granted preliminary approval.

Netflix declined to admit fault but agreed going forward to “decouple” the rental history from subscribers’ identification data one year after cancellation of the service.

The $9 million will establish a common fund which will pay settlement expenses, incentive awards for named plaintiffs, and attorneys’ fees. The remainder will be distributed to cy pres recipients selected by the parties that are “not-for-profit organizations, institutions, or programs that educate users, regulators, and enterprises regarding issues relating to protection of privacy, identity, and personal information through user control.”

Calling the settlement “fair, reasonable, and adequate,” the judge certified a class estimated to be “tens of millions” of current and former subscribers.

“In light of the minimal monetary recovery that would be realistically recoverable by individual settlement class members and the immediate benefits offered to the class by the injunctive relief and cy pres donations, the settlement agreement is deserving of preliminary approval,” he wrote.

Judge Davila also said the settlement terms compared favorably to other online consumer privacy cases, including class actions against Google and Facebook, which settled for $8.5 million and $9.5 million in cy pres charitable payments, respectively.

To read the settlement order in In re: Netflix Privacy Litigation, click here.

Why it matters: Although Judge Davila gave his preliminary approval to the settlement (a final approval hearing was set for December 2012), it may still face challenges. Class settlements that are heavy on cy pres payments and light on plaintiffs’ compensation have recently been the subject of greater scrutiny. One recent example: Facebook’s proposed settlement over its “Sponsored Stories” ad feature, where the social network agreed to pay $20 million to a settlement fund, of which the plaintiffs would not receive a penny. The proposed terms have received several objections and generated negative publicity for similar settlements.