• by Wendy Davis , Staff Writer @wendyndavis, March 12, 2010

Facing a consumer class-action privacy lawsuit and a Federal Trade Commission inquiry, Netflix is dropping its ill-conceived plan to release data about consumers as part of a new contest to improve its recommendation engine.

The video rental company also agreed to follow "certain parameters" regarding the use of consumers' data in the future. Additionally, it's abandoning plans for a new contest.

Last August, Netflix said it intended to publicly release data including customers' gender, ages, ZIP codes and previously rented movies as a sequel to its earlier contest for a better recommendation engine.

Netflix hoped that researchers would use that data to figure out how to better predict users' tastes, but the company clearly ignored the overwhelming likelihood that individuals would be identified.

Among the first to draw attention to the issue was University of Colorado law professor Paul Ohm, who publicly implored the company to changes its mind. "Researchers have known for more than a decade that gender plus ZIP code plus birthdate uniquely identifies a significant percentage of Americans (87% according to Latanya Sweeney's famous study)," Ohm wrote. He added that researchers will be able "to tie many people directly to these supposedly anonymized new records" even without birthdays.

In fact, when Netflix released some data for its previous contest, two University of Texas computer scientists reported that it was possible to identify users by comparing reviews of obscure movies on Netflix with reviews on Imdb.com that were published under screennames.

In December, four Netflix users sued the company. They sought damages on behalf of people whose information was released by Netflix in the past and also sought an injunction prohibiting Netflix from making any information available about their video records. One of the four, who sued under the pseudonym Jane Doe, alleged that she was a closeted lesbian who would be harmed if people figured out that she had rented a number of "gay-themed" movies from Netflix.

While the lawsuit got some press last year, news of the FTC's involvement in the matter was kept quiet. But it shouldn't be surprising that the FTC intervened, given that the commission has repeatedly indicated that it's concerned about Web users' privacy.

What's more surprising is that even with a lawsuit and FTC inquiry, it still took the company several months to officially back away from the planned data release. One would expect that Netflix executives could have figured out on their own -- long before things escalated into a class-action lawsuit -- that their plan had insurmountable flaws.