facebookCross-posted at WLF’s Forbes.com contributor page

Over the past year, we’ve applauded several positive developments from courts in the Ninth Circuit (here and here) where judges closely scrutinized and rejected the use of the cy pres device in class action settlements. Just last week we read at the Point of Law blog and elsewhere about a Third Circuit ruling which rejected an absurd cy pres distribution in an antitrust class action settlement.

A Ninth Circuit decision yesterday, McCall v. Facebook, Inc., blows up that recent trend. It was actually an indecision — a denial of a request for rehearing en banc by objectors to a class action settlement approved by a three-judge panel of the Ninth Circuit last year in Lane v. Facebook, Inc.  In Lane, the panel approved a class action settlement with zero dollars going to the purportedly harmed class members, $3.2 million to the lawyers, and around $6.3 million in cy pres to an organization called “Digital Trust Fund” (DTF) which did even not exist prior to the settlement. Type “Digital Trust Fund” into your search engine; you’ll find a for-profit company with that name, but no charity.

Thankfully, we aren’t the only ones who thought that was quite curious. Six judges dissented from the Ninth Circuit’s denial of rehearing en banc. They forcefully note that the cy pres award violates both of the two requirements for such awards: 1) reasonably certain to benefit the class and 2) advance the objectives of the statutes utilized in the suit.

On the first requirement, the dissenters wrote that under Ninth Circuit precedent, cy pres recipients must have “‘a substantial record of service'” in addressing the wrongs alleged in the underlying suit. But DTF has “no record of service” and the “‘charity’ is simply a bespoke creation of this settlement.” According to the Lane opinion, DTF’s directors include a former director of privacy activist EPIC and a former ACLU counsel who happens to currently be a Facebook policy director.

On the second requirement, the dissenters argued that DTF’s mission to protect online privacy through education and “user control,” while laudable, did not relate to the purposes of the federal and state laws applied in the class action complaint against Facebook. Those law, the dissenters posited, addressed Internet companies’ “unauthorized access or disclosure of private information.” While the dissenters did not note the makeup of DTF’s board, that factor seems implicitly acknowledged in the opinion’s parting words:

[The DTF] can’t teach users how to protect themselves from Facebook’s deliberate misconduct. Unless of course the DTF teaches Facebook users not to use Facebook. That seems unlikely.”

Litigating or settling is a calculated decision every business defendant must make. One part of the risk calculus must be: will settlement inspire more resource-diverting class action lawsuits? The risk of that occurring to this particular defendant, and to targets of online privacy class actions in general, just went up thanks to the Ninth Circuit’s Lane ruling and its refusal to rehear the case. The ruling also makes a mockery of a civil litigation process which exists not as a vehicle for enriching lawyers or facilitating donations to “charities,” but to facilitate compensation for the actually injured.

We hope that former WLF publication author Scott Nelson and his colleagues at Public Citizen Litigation Group (which represented the objectors in McCall) follow the en banc dissenters’ lead and seek cert in the U.S. Supreme Court on the cy pres issue.