From @RyanGlScott, ticket:11357#comment:117922:

Vanilla datatypes and data family instances are still inconsistent w.r.t. which type variables are considered "instantiated" in a Generic1 instance. For instance, this is rejected:

λ> data Proxy k (a :: k) = ProxyCon deriving Generic1

<interactive>:32:43: error:
    • Can't make a derived instance of ‘Generic1 (Proxy *)’:
        Proxy must not be instantiated; try deriving `Proxy k a' instead
    • In the data declaration for ‘Proxy’

And rightfully so, since the visible kind binder k is instantiated to *. But now it's possible to have an equivalent instance for a data family that squeaks past this check!

λ> data family ProxyFam (a :: y) (b :: z)
λ> data instance ProxyFam k (a :: k) = ProxyFamCon deriving Generic1

==================== Derived instances ====================
Derived instances:
  instance GHC.Generics.Generic1 (Ghci13.ProxyFam *) where
    ...

[Ryan needs] to investigate further to see why this is the case.