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Google will start a fund worth $8.5 million to help pay for lawyer expenses and provide funding for nonprofits focused on privacy education after settling a class-action lawsuit slamming Google Buzz’s privacy issues, it announced today.

The Google Buzz privacy controversy ended up all but crushing the budding status-update service, Google’s response to Facebook and Twitter. The financial cost is tiny: Google is preparing to pay out about one tenth of a percent of its quarterly revenue to pay for its missteps. Google brings in around $25 billion a year, and just last quarter brought in nearly $7.3 billion.

But the blow to Google’s image, and the lingering perception that Google is tone-deaf when it comes to social media and user privacy, have proven far more costly. Google has recently spent hundreds of millions of dollars acquiring companies to build up its presence in social networking.

Google had hoped to build Buzz on top of its large base of users for its free email service, Gmail. It publicly admitted to automatically enrolling its Gmail users in Buzz and publicly exposing their email contact data, according to the lawsuit website. Google’s previous promise of $2,500 for complainants listed in the class-action lawsuit appears to no longer be in effect. Google even sent an email message out to every Google Buzz user, just to let them know they weren’t getting a dime from the lawsuit. A quarter of the $8.5 million fund is there to pay the lawyers involved in the lawsuit.

Google Buzz launched in February this year, and was designed to integrate seamlessly with the inboxes of users of Google’s Gmail email service. The integration worked a bit too well, stirring up a hornet’s nest after users discovered any Buzz user could see their entire list of contacts. Granted, Google quickly remedied the privacy woes in its social tool, but the damage was done by that point. Google has since introduced a much more visible way to hide your contacts.

Does Google deserve what essentially equates to a free pass over a privacy fiasco of this magnitude? Peeved Buzz users have until December 6 to try to sue the pants off the Internet giant one again before the class action comes to a close.

And if they’re really ticked off after that, they can studiously avoid Google’s as-yet-unannounced social networking services.

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