Facebook Will Change Ad Service to Settle Lawsuit

Jun 22, 2012 06:52 AM EDT

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Facebook Inc has agreed to allow users more control over how their personal information is used in its "Sponsored Stories" ad feature, part of a deal to resolve litigation against the social networking company.

The value to Facebook members resulting from the changes is about $103 million, in the opinion of one economist hired by the plaintiffs. But the amount Facebook will actually pay to settle the case is just over $20 million, according to court documents filed on Wednesday.

A "Sponsored Story" is an advertisement that appears on a member's Facebook page and generally consists of another friend's name, profile picture and an assertion that the person "likes" the advertiser.

Five Facebook members filed a lawsuit seeking class-action status against the social networking site, saying it violated California law by publicizing users' "likes" of certain advertisers without paying them or giving them a way to opt out.

The case involved over 100 million potential class members.

Under the terms of a settlement agreement filed on Wednesday, Facebook members will be able to control which content can be used for Sponsored Stories. Facebook agreed to maintain these changes and other new disclosures for at least two years, according to court documents.

Attorneys for the plaintiffs say the changes to "Sponsored Stories" are worth $103.2 million, based on an economist's analysis of the revenue each ad brings to Facebook. Those figures were redacted in the court documents.

A Facebook representative declined to comment, and an attorney for the plaintiffs could not immediately be reached.

Facebook has agreed to pay $10 million to organizations devoted to educating people about how to use social networking technology safely. Groups set to receive money include the Electronic Frontier Foundation and the Center for Internet and Society at Stanford Law School, according to the court documents.

Facebook will also pay an additional $10 million for plaintiff attorneys' fees.

The settlement agreement must be approved by U.S. District Judge Lucy Koh in San Jose, California. She must weigh whether the deal's terms adequately benefit class members.

In the lawsuit, Facebook Chief Executive Mark Zuckerberg was quoted as saying that a trusted referral was the "Holy Grail" of advertising.

In addition, the lawsuit cited comments from Facebook chief operating officer Sheryl Sandberg, saying that the value of a "Sponsored Story" advertisement was at least twice and up to three times the value of a standard Facebook.com ad without a friend endorsement.

Koh said the plaintiffs had shown economic injury could occur through Facebook's use of their names, photographs and likenesses.

Plaintiff attorneys argued in court filings on Wednesday that the policy changes and charitable awards will constitute "significant benefits" for the class members.

The case in U.S. District Court, Northern District of California is Angel Fraley et al., individually and on behalf of all others similarly situated vs. Facebook Inc., 11-cv-1726.