Supremes asked to mull legality of Silicon Valley privacy 'slush funds'

When watchdogs don't watch

Analysis Nothing expresses Silicon Valley's cynicism about privacy like its fondness for rewarding its friends from privacy class-action settlements – while class members get nothing. Now the US Supreme Court has been invited to consider whether such settlements are fair.

These so-called cy pres settlements exploit a legal quirk, ("as near as") which was traditionally used in rare situations when a legal trust was dissolved. Any leftover money would go to charity.

Google was the first to pioneer a new use for this. In 2011 Google offered $8.5m to settle the "Buzz" class action. After the lawyers took their $2m cut, $6m was spread around just 12 privacy groups – and none went to individual class members. The Electronic Frontier Foundation received $1m, which exceeded the group's individual contributions for 2008/09.

Facebook liked what it saw. In 2012, it used the privacy settlement process to compensate not the 150 million potential members of the class action – but to a new "privacy group". Facebook even wanted to sit on the new group's board.

The moral hazard here is obvious. Why should a citizens' group fight for the citizens, when it can boost its own bank balance instead? Non-profit digital rights group the Electronic Frontier Foundation (EFF) received $1m from Google, which exceeded its individual contributions for 2008/09. The use of cy pres inverted the incentive structure, encouraging the watchdogs to get cosy with the serial offenders.

At the very least, it gave the impression that the watchdogs were compromised. Julian Assange cited the cy pres settlement as warning. "The EFF is a great group, and they've done good things for us, but nonetheless it is significantly funded by Google, or people who work at Google," he said in a 2014 interview.

The EFF gave Google and Facebook top marks for privacy in a 2014 report.

"Quite a racket, these class actions: Uninjured plaintiffs + a defendant anxious to settle = millions in attorneys' fees and donations to activist groups (which in turn = more litigation)," snarked one legal blog.

The cy pres cash distributions only came to light when the Electronic Privacy Information Centre (EPIC) complained it hadn't got in on the cut.

In one of the oldest privacy class actions, originally filed in 2010 by Paloma Gaos over Google's leaking of personal data via http referrer headers, the defendants rewarded their former law school.

Hard-up "victims" of this privacy violation included the Stanford Law School Center for Internet and Society; the Berkman Center for Internet & Society at Harvard; and Carnegie-Mellon University among others.

Two lawyers at the Center for Class Action Fairness (CCAF), part of the Competitive Enterprise Institute, backed Gaos in appealing the money-go-round. The court recognised that cy pres presented a huge risk of corruption.

Google's $8.5m class-action privacy payout goes to: Lawyers' alma maters, web giant's pals


They pointed out that the American Law Institute's Principles of the Law of Aggregate Litigation recommended that a "cy pres remedy should not be ordered if the court or any party has any significant prior affiliation with the intended recipient that would raise substantial questions about whether the selection of the recipient was made on the merits".

But in a narrow split decision (PDF), the appeals court approved the payouts.

The dissenting appeals judge, Judge Wallace, thought that the allocation of almost half of the funds to the class counsel's alma maters raised a "red flag" – particularly since one had barely done any internet privacy work.

Of the final sums in the $8.5m the settlement fund, $3.2m was swallowed up by "attorneys' fees, administration costs, and incentive payments to the named plaintiffs. $5.3m or so was allocated to six cy pres recipients" who dutifully promised "to devote the funds to promote public awareness and education, and/or to support research development, and initiatives, related to protecting privacy on the internet".

Having been denied a review of the case in October, the CCAF has asked the Supremes to consider such settlements.

"An $8.5m class-action settlement that awards absent class members no relief at all in exchange for their claims – no money, no alteration of the defendant's allegedly injurious conduct, not even coupons – is not 'fair, reasonable, and adequate' by any measure," the CCAF argues.

The petition asks the highest court to intervene because of the inconsistency of the Ninth Circuit – similar cy pres settlements have been bounced out of other jurisdictions: "This Court's intervention is warranted to establish a nationwide standard for the use of cy pres awards in class-action settlements and thereby prevent counsel bringing nationwide class actions from flocking to the Ninth Circuit because it provides their putative clients the weakest protections against collusive settlements facilitated by cy pres awards."

It also cites the main areas of concern: the settlements don't compensate the victims a penny; they create a conflict of interest for the counsels representing the victims; defendants like Google and Facebook get to write their own "punishment".

You can read the full petition here (PDF). ®

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