Despite the fact that class members will not receive any compensation, the Ninth Circuit approved the “fundamentally fair” settlement terms in a lawsuit brought by users who alleged that Facebook’s Beacon program violated their privacy rights.

The class action suit was filed after the company launched Beacon, which integrated with other companies to share information about Facebook users – like a movie they had rented from Blockbuster, or in the case of one plaintiff, a diamond ring purchased on Overstock.com as a surprise for his wife.

The parties agreed to a $9.5 million settlement, which required the social networking site to spend $6.5 million to create a new charity organization, the Digital Trust Foundation, to fund and sponsor privacy-related programs. The company also agreed to terminate the Beacon program.

But several plaintiffs objected, arguing that the inclusion of Facebook’s director of public policy on the three-person Foundation board created an unacceptable conflict of interest that would prevent the organization from acting in the interests of the class.

In a 2-1 decision, the Ninth Circuit disagreed.

“We do not require . . . that settling parties select a cy pres recipient that the court or class members would find ideal,” U.S. Circuit Court Judge Procter Hug, Jr., wrote for the majority. “Defendants often insist on certain concessions in exchange for monetary payments or other demands plaintiffs make, and defendants can certainly be expected to structure a settlement in a way that does the least harm to their interests. Here, in exchange for its promise to pay the plaintiff class approximately $9.5 million, Facebook insisted on preserving its role in the process of selecting the organizations that would receive a share of that substantial settlement fund by providing that one of its representatives would sit on DTF’s initial board of directors, and the plaintiffs readily agreed to this condition. That Facebook retained and will use its say in how cy pres funds will be distributed so as to ensure that the funds will not be used in a way that harms Facebook is the unremarkable result of the parties’ give-and-take negotiations.”

The panel also rejected the contention that the dollar amount of the settlement was too low, as certain plaintiffs were potentially eligible for $2,500 per violation of the Video Privacy Protection Act. After evaluating the fairness of the settlement as a whole, the court said the plaintiffs with a VPPA claim represented only a fraction of the estimated 3.6 million member class.

“Ultimately, we find little in [the objectors’] opposition to the settlement agreement beyond general dissatisfaction with the outcome,” the court said.

In his dissent, U.S. Circuit Court Judge Andrew J. Kleinfeld bemoaned the fact that the plaintiffs would not “get one cent.” “This settlement perverts the class action into a device for depriving victims of remedies for wrongs, while enriching both the wrongdoers and the lawyers purporting to represent the class,” he wrote. “Facebook deprived its users of their privacy. And now they are deprived of a remedy.”

To read the court’s opinion in Lane v. Facebook, click here.

Why it matters: Judge Kleinfeld’s dissent cited another recent Ninth Circuit opinion addressing a false class action settlement. In that case, the court set aside a $10.6 million deal in a suit alleging that Kellogg made false claims that its Frosted Mini-Wheats cereal could improve cognitive development. Even though class members were set to receive $2.75 million, the court said a charitable donation of $5.5 million worth of cereal did not have a sufficient nexus to the plaintiffs’ underlying claims. The majority in the Facebook case acknowledged that the cy pres recipient was not “ideal,” but found the creation of the Foundation had a sufficient nexus to the plaintiffs’ claims, as it would benefit class members and “further the purposes of the privacy statutes that form the basis for the class-plaintiffs’ lawsuit.”