• by Wendy Davis  @wendyndavis, August 16, 2011

Defunct ad company NebuAd has agreed to a $2.4 million settlement of a class-action privacy lawsuit stemming from tests of its controversial behavioral targeting technology.

Two-thirds of the settlement will go toward various privacy organizations, while seven Web users who brought suit will receive between $1,000 and $5,000 each, according to papers filed Tuesday in federal court in the Northern District of California. The lawyers representing the consumers will receive up to $800,000 in attorneys' fees.

If approved by U.S. District Court Judge Thelton Henderson, the settlement agreement will end the 3-year-old lawsuit filed against NebuAd. The litigation grew out of behavioral-targeting tests conducted in 2007 and 2008 by NebuAd and six ISPs.

Lawsuits are still pending against four ISPs that partnered with NebuAd: Bresnan, Cable One, Embarq and Wide Open West. A case against a fifth ISP, Knology, was sent to arbitration, while a lawsuit against CenturyTel was dismissed in June.

NebuAd partnered with ISPs to gather data about Web users' activity and then determine which ads to serve them based on their searches or the sites they visited. The technology was more controversial than older forms of behavioral targeting because ISPs could provide data about everything consumers did online, including their searches and activity at non-commercial sites.

The Web users who sued alleged that NebuAd and its ISP partners violated a host of federal and state laws.

NebuAd said its data collection was anonymous, and that consumers could opt out of the program. But most of the ISPs that tested NebuAd's service only provided notice of the program by quietly revising their online privacy policies. Privacy advocates said that method didn't provide adequate notice to consumers because they had no reason to suspect a change in terms.

NebuAd's emergence sparked congressional hearings in 2008 about online privacy. Faced with pressure from lawmakers, ISPs suspended plans to work with the company. NebuAd folded in 2008.

The money for the settlement is coming from NebuAd's insurers, St. Paul Fire & Marine and AXIS Surplus, according to court records. The agreement also calls for former CEO Bob Dykes and co-founder Kira Makagon to testify in the ongoing litigation against ISPs who worked with the company.