About 56,000 pictures of more than 40 pupils were taken by a remote tracking system controlled by officials from the Lower Merion School District in Philadelphia.
The pictures, which included at least one of a pupil asleep, were taken in an effort to find missing school Apple laptops.
Blake Robbins, a pupil of Harriton High School who was then 15, was paid $US175,000 which is to be placed in a trust. He discovered, through evidence unearthed when he sued the authority, he had been photographed 400 times in two weeks.
School officials said the pupil had damaged or destroyed two laptops, and had not paid the $US55 insurance fee to be allowed to take another home.
Jalil Hassan, a second pupil who filed a lawsuit against the school authority, was awarded $US10,000. The remaining $US425,000 of the settlement will be paid to the boys' lawyer.
The school said the US Attorney's Office, the FBI and the Montgomery County district attorney had cleared it and its employees of criminal wrongdoing in the case.
''That was an important moment for us - it confirmed the results of an independent investigation and the district's own initial findings,'' the school district said in a statement.
''The district acknowledged and apologised for any mistakes and addressed them immediately. We revised our policies and procedures, reaffirmed our commitment to technology and put safeguards into place to ensure the privacy of our students, staff and school families.''
The school district settled the case once its insurer agreed to cover up to $US1.2 million in costs and liabilities.
A school statement said: ''Although we would have valued the opportunity to finally share an important, untold story in the courtroom, we recognise that in this case, a lengthy, costly trial would benefit no one …
''We also wanted to be sensitive to the welfare of the student involved in the case, given the possible ramifications of what would have been a highly publicised trial.''