Facebook settles “Sponsored Stories” lawsuit for $10 million

June 19, 2012

$ Facebook LogoIf you use Facebook, you’ve likely seen “Sponsored Stories” about one or more of your friends endorsing a product or service that he or she has “Liked.”

Since these endorsements are made without the knowledge or consent of the people who make them (I know that doesn’t seem to make any sense), you may have often wondered what kind of endorsements that you yourself were making on Facebook (I know that I have).

However, because of a new settlement made public over the weekend, how these involuntary endorsements work may soon change.

The settlement comes out of a class-action lawsuit filed about a year ago by Facebook users who claimed that Facebook was unlawfully misappropriating its users’ names and likenesses without their consent.

In December of 2011, a federal court ruled on Facebook’s motion to dismiss the claims – a ruling which probably left Facebook scrambling to settle.

Why?

In response to Facebook’s argument that the economic damage alleged by the plaintiffs was speculative, the court found that the Facebook users had indeed alleged an actual economic injury because of Facebook’s actions.

The court could find the alleged economic injury to be actual because of numerous statements by Facebook executives – including ones by founder Mark Zuckerberg himself – stating that friend endorsements are two to three times more valuable than generic advertisements sold to Facebook advertisers.

The fact that a claim survives a motion to dismiss doesn’t guarantee that the claim will succeed when the final judgment is rendered, but the opinion bequeathing this survival often provides insight into the court’s thinking.

Here, the court recognized that the plaintiffs had alleged an actual economic injury.

And here’s the scary part for Facebook: how thorough the court was in its opinion makes me think that the biggest issue for the court to decide, if this had gone to trial, would have been how much each person suffered in damages.

Considering that the class in this action could have potentially expanded to all Facebook users who joined before January 25, 2011, the damages could have been staggeringly high.

By the way, what’s so important about January 25, 2011?

That’s when Facebook modified its terms and conditions to obtain consent “to use your name and [Facebook] profile picture in connection with [commercial, sponsored, or related] content, subject to the limits you place.”

Unfortunately for Facebook, it hasn’t yet obtained consent from the millions of users who joined before January 25, 2011, and, unless this settlement is broad enough to include legal waivers from each of these individuals (which is highly unlikely), Facebook will have to do something about this.

The simplest way to go would be to force all of these users to agree to the updated terms of use in order to keep using Facebook.

Of course, that would cause some controversy and bad press.

Is there a quieter way out of this pickle for Facebook?

Since Facebook is so (publicly) enthusiastic about allowing its users to adjust their own privacy settings, it seems likely that we could be seeing an option to “opt-out” of endorsing products and services – with the default set to “opt-in.”

The obvious drawback with this alternative is that many Facebook users will actually opt-out of endorsing their Facebook Likes, shrinking the pool of marketers that Facebook has to draw from.

Just about any option has its drawbacks, though.

But we can be sure, in light of the company’s recent IPO, that Facebook will choose whichever one loses it the least amount of money.