• by Wendy Davis  @wendyndavis, July 17, 2013

A federal judge has dismissed a potential class-action lawsuit alleging that Instagram unlawfully changed its terms of service.

But U.S. District Court Judge William Alsup dismissed the case “without prejudice” to the consumers' right to sue Instagram in California state court. Mark Knutson, the lawyer who represents the consumers, tells Online Media Daily that he plans to file a new complaint next week in San Francisco Superior Court.

The lawsuit against Instagram stems from the company's highly publicized decision late last year to change its terms of service. When the photo service initially unveiled new terms, it appeared to claim the right to license users' photos for ads. That prospect sparked an immediate backlash and threatened defections.

Instagram quickly retreated from most of the proposed changes, but made some minor revisions to its terms of service. Among others, the new terms require users to agree to refrain from bringing class-action complaints in the future. The company also says that users who sue won't be able to recover more than $100 in damages.

The new terms prompted a potential class-action lawsuit, which alleges that Instagram broke its contract by imposing new terms. The lawsuit, by Lucy Rodriguez, specifically complains that the new terms will apply to material that users uploaded when the old terms were still in effect.

Instagram argued that the case be dismissed for several reasons, including that any consumer who didn't like the new terms could have stopped using the service. The company also says that the lawsuit shouldn't proceed because it didn't cause any tangible injury to users.

Alsup based his decision to dismiss the case on a purely procedural grounds: Rodriguez's claims stem from California law, not federal law. Therefore, she hadn't shown that the case belonged in federal court, as opposed to state court, he ruled.

The lawsuit also seems likely to face substantive hurdles, according to experts. Seattle-based lawyer Venkat Balasubramani said in a blog post last year that courts have ruled in other cases that people can't sue companies solely for revising their terms of service.