Facebook has agreed to shut down its much maligned Beacon advertising system in order to settle a class-action lawsuit.

The lawsuit, filed in August of last year, alleged that Facebook and its Beacon affiliates like Blockbuster and Overstock.com violated a series of laws, including the Electronic Communications Privacy Act, the Video Privacy Protection Act, the California Consumer Legal Remedies Act and the California Computer Crime Law.

The proposed settlement, announced late on Friday, calls not only for Facebook to discontinue Beacon, but also back the creation of an independent foundation devoted to promoting online privacy, safety and security. The money for the foundation will come from a US$9.5 million settlement fund.

"We learned a great deal from the Beacon experience. For one, it was underscored how critical it is to provide extensive user control over how information is shared. We also learned how to effectively communicate changes that we make to the user experience," said Barry Schnitt, Facebook's Director of Policy Communications, in a statement.

Facebook is looking forward to the creation of the foundation, which the company expects will team up with existing safety and privacy organizations, Schnitt said.

The settlement agreement needs to be approved by the U.S. District Court for the Northern District of California, San Jose Division, where the lawsuit was filed.

Beacon, launched with much fanfare in November 2007, quickly became one of Facebook's biggest nightmares. Intended as a key piece of Facebook's "social ads" strategy, Beacon was designed to broadcast back to their friends the actions that Facebook members took on participating Web sites.

The idea was that these notifications would act as a new form of "social" advertising, because they amount to endorsements of products made by trusted friends.

Unfortunately, Facebook members found Beacon complicated to understand, as well as intrusive and stealthy. Many people were horrified to find out that their friends were being informed of actions, like purchases, they had undertaken in other Web sites.

Security experts and privacy advocates soon joined the chorus of critics. Although Facebook modified Beacon several times, it never took off and has been languishing in obscurity.

Despite the Beacon fiasco, Facebook executives regularly say the advertising business of the privately-held company is solid and growing. In addition to offering traditional online ads like banners and pay-per-click ads, Facebook has continued developing social ads and marketing vehicles, like its Facebook Pages, which organizations can use to promote their brands and products.