Facebook Agrees to Settle Class Action Lawsuit over “Sponsored Stories”

Facebook has agreed to settle a lawsuit alleging that its "Sponsored Stories" feature used and publicized users' "likes" without compensating them or giving them the choice to opt out, according to a court document filed on Tuesday, May 22. The proposed class action lawsuit was filed in a San Jose, California federal court.

According to court documents, the suit could have included nearly one in three Americans, with billions of dollars in damages. The terms of the settlement were not disclosed in court filings.

A "Sponsored Story" on Facebook is an ad that appears on a user's Facebook page, and usually features a friend's name, profile picture and a recommendation that the person "likes" the advertiser. According to the complaint, the social network's "Sponsored Stories" were a "misleading advertising scheme," which used material Facebook members shared on their profile pages. When a member "likes" something, uses the site's "Check-in" function or plays a game integrated with Facebook, the member's profile information can end up "appearing as an endorsement in a paid advertisement," reads the complaint.

Five Facebook users filed a lawsuit against Facebook last year, claiming that their right to publicity under California law has been violated by the site's "Sponsored Stories" feature. The lawsuit cited comments from CEO Mark Zuckerberg, who said that a trusted referral is the "Holy Grail" of advertising, and from COO Sheryl Sandberg, who stated that the value of a "Sponsored Story" ad is at least double and up to three times the value of a standard ad featured on Facebook without a friend endorsement.

Facebook sought to dismiss parts of the lawsuit last year, but the judge in the case, U.S. District Judge Lucy Koh, rejected the attempt. According to the judge's order, the plaintiffs had articulated a coherent argument of how they were economically affected by the use of their names, photographs and "likes." "California has long recognized a right to protect one's name and likeness against appropriation by others for their advantage," Koh wrote in her order.

According to a Facebook court filing on Tuesday, May 22, the social networking company and the plaintiffs have executed "a term sheet memorializing their settlement in principle." As part of class action settlements, companies often agree to adjust their policies and procedures, in addition to paying damages. A hearing on class action certification is set for Thursday, May 24.