Netflix has canceled its $1 million contest aimed at finding a better recommendation engine in the wake of a privacy lawsuit settlement. The company informed its users today via the company blog, noting that it had "reached an understanding" with the Federal Trade Commission, leading it to ditch the Netflix Prize contest.

Netflix first announced the contest—actually the sequel to its original contest—in August of 2009. The goal was to crowdsource its active user base to write a more intelligent recommendation engine based on users' past rentals. This is something Netflix already does, of course, but there's always room for improvement; the company wanted to find the Next Big Thing™ by offering $1 million to the person with the best algorithm.

Part of the contest involved Netflix disclosing what it considered to be anonymized user data to those trying to come up with solutions. This, however, led to a lawsuit by a closeted lesbian mother who argued that Netflix had not sufficiently anonymized the information and that she (among others) could be easily outed due to her own rental history. Indeed, within weeks of the data being released, researchers had found a way to use an external data source to decode an individual's viewing history with surprising accuracy, but Netflix did not immediately withdraw the contest.

The FTC eventually got involved and spent the following months discussing the issue with Netflix. That brings us to today: Netflix has officially settled the lawsuit and, as part of the settlement, is giving up the contest. "The resolution to both matters involves certain parameters for how we use Netflix data in any future research programs," wrote Netflix's Chief Product Officer Neil Hunt.

This doesn't mean Netflix is giving up on improving its recommendation engine—Hunt ended the blog post by saying the company would continue to explore better options—but the company will have to come up with new ways to "collaborate with the research community."