Seattle-based Classmates.com has agreed to pay up to $9.5 million to its users to settle a lawsuit that accused the social network of sending emails that made people believe their old friends from high school were reaching out to connect -- only to discover, after paying for a membership, that their long-lost buddies were nowhere to be found.

The proposed settlement, filed yesterday in U.S. District Court in Seattle, would designate $3 in cash for every Classmates.com member (dating back to Jan. 1, 2007) who upgraded to a "gold" membership on the site after receiving an email suggesting that they pay for premium access to see who had signed their online guestbooks. Documents filed in the case estimate that as many as 3.16 million people in the United States would be eligible for the payout.

Classmates admitted no wrongdoing as part of the settlement. (PDF, 61 pages) The deal is now awaiting court approval.

The filing of the settlement papers follows by less than two weeks the disclosure by Classmates parent company United Online Inc. that Steven B. McArthur, the president of the Classmates unit, had resigned from the company. Asked the specific reason for McArthur's departure, United Online spokesman Scott Matulis said via phone this morning that he didn't know. Matulis said he wasn't aware of the settlement.

[Update, Monday: We connected with McArthur via phone this afternoon, and he said he left Classmates on his own, and on good terms, to take a position with Hewlett-Packard in Palo Alto, Calif., as its senior vice president of consumer applications. He spoke in positively about his experience at Classmates.]

United Online said in its March 1 filing with the Securities and Exchange Commission that McArthur was being replaced on an interim basis by Frederic A. Randall Jr., its executive vice president and chief strategy officer, as Classmates president. The filing gave no reason for McArthur's resignation.

An email received from Classmates by Anthony Michaels, one of the plaintiffs in the case. (Source: U.S. District Court filing)

According to court papers submitted Friday in Seattle, United Online and Classmates turned over more than 35,000 pages documents in connection with the case. The filing does not detail the contents of those documents.

Under terms of the proposed settlement, Classmates.com members who upgraded to premium memberships after receiving one of the "guestbook" emails will be able to choose either a $3 cash payout or a $2 credit toward the future purchase or renewal of a Classmates.com membership. Depending on how many people take the cash credit, the total payout by Classmates under that provision could be measurably less than the maximum $9.5 million established by the agreement.

At the same time, the settlement also calls for Classmates to offer a $2 renewal/purchase credit to a much larger category of Classmates.com users -- everyone who has "registered with or subscribed to" Classmates.com dating back to Oct., 30, 2004. That would include all paying and non-paying members. Excluded from that part of the settlement are people eligible for the other $2 credit or $3 cash payment for upgrading based on a "guestbook" email.

The settlement includes a proposed two-year injunction restricting the way Classmates uses the term "guestbook," and requiring it to describe more clearly how the guestbook feature of the site works.

The settlement also calls for Classmates.com to pay attorneys for the plaintiff up to $1.3 million in fees, with the court determining the actual amount. The lead plaintiffs in the case, Anthony Michaels and David Catapano, would each receive $2,500 as part of that provision.

Separately, Classmates.com is among the companies that have come under scrutiny for their use of "post-transaction marketing" tactics -- in which customers are given additional offers as part of the online payment process, sometimes in such a way that they aren't aware that they're also signing up to pay more. A November 2009 U.S. Senate Committee report said Classmates made more than $70 million through its relationship with post-transaction marketing firms. United Online said Nov. 18 that its relationships with those firms would be "terminated or modified."

Classmates.com, founded in 1995, employed 239 people before moving from Renton to the Seattle waterfront last year. After an undisclosed number of layoffs last year, Classmates has since started advertising open positions again -- touting its profitability and longevity in its pitch to prospective applicants.

However, Classmates has been facing rising competition from Facebook and other social networks that offer similar features to a broader audience, and in many cases for free. Classmates.com experienced a 27 percent decline in U.S. monthly unique visitors in 2009, falling to 12 million in December, according to the comScore Networks research firm. Over the same time period, Facebook’s U.S. monthly unique visitors more than doubled, to nearly 112 million.

At a Goldman Sachs conference last month, United Online CEO Mark Goldston downplayed Facebook's potential threat to the Classmates business, saying he didn't consider Facebook a direct competitor. He noted that Classmates has 5 million paid subscriptions now, compared with 1.3 million when United Online bought the company in 2004. The Classmates Media unit posted $58.8 million in operating profit for 2009, up more than 24 percent from the previous year.

He called Classmates "the most profitable social network in the world."

Steven McArthur (United Online photo)

McArthur, a veteran of companies including Expedia and AOL, joined Classmates in 2007 as president, according to a cached version of United Online's corporate management team page, from which his bio has since been removed. We were unable to locate his phone number or email to contact him for comment. [See update above.]

The dispute over the "guestbook" email subject lines originally came to light in November 2008, when Michaels filed a complaint against Classmates.com in Los Angeles. In September 2009, after the case was combined with another and moved to federal court in Seattle, lawyers for Michaels and Capatano filed an amended complaint with additional details -- asserting that Classmates and United "profited tremendously from their false or deceptive e-mail subject lines and related marketing tactics."

Michaels, a San Diego resident, started receiving "numerous" emails from Classmates.com after he signed up for a free subscription in November 2006, according to the complaint. An excerpt from the filing:

Although he did not know when he received them that the e-mails were deceptive or omitted material information, the subject lines of the e-mails he received from Defendants routinely conveyed the reasonable impression that former classmates of his were actively trying to contact him through the Classmates.com website. As a result of receiving these e-mails that provided him with the reasonable expectation that others were looking for him, Plaintiff Michaels paid approximately $9.95 for a "Gold" membership subscription to www.classmates.com on about December 24, 2007. Shortly after paying for a "Gold" membership, Plaintiff Michaels tried to learn which "classmates" had "signed" his "guestbook," or "visited his profile." However, Defendants failed to inform Plaintiff Michaels prior to his paying for a "Gold" membership subscription that in fact no past acquaintances of his are trying to contact him.

Classmates.com said in an answer to the complaint that it "discloses to its users the nature of the www.classmates.com website and service, and those users are aware and fully understand the services that they are receiving and the nature of any communications that they receive from www.classmates.com." Classmates also argued that the unique nature of each user's situation precluded a class action.

Under terms of the proposed settlement, Classmates members eligible for a cash payout or credit will be notified by a settlement administrator and given deadlines and procedures for submitting a claim.