Sponsored Stories Settlement Clears First Hurdle

Facebook-Gavel-AA deal to resolve a class-action lawsuit stemming from Facebook's sponsored stories program took a major step forward this week, when U.S. District Court Judge Richard Seeborg granted the agreement preliminary approval.

The deal requires Facebook to pay users up to $10 if they were featured in a "sponsored stories" ad. The company also agreed to allow minors under 18 to opt out of appearing in all sponsored stories ads, and to give adult users a mechanism to control their appearance in future sponsored stories -- but apparently only on an advertiser-by-advertiser basis.

That agreement "appears to be the product of serious, informed, noncollusive negotiations and falls within the range of possible approval as fair, reasonable and adequate," Seeborg wrote in a order tentatively approving the deal. In August, Seeborg rejected a prior settlement that didn't call for Facebook to compensate individual users.



Seeborg scheduled a hearing for next June, when he will hear arguments about whether to grant the deal final approval.

If the settlement is finalized, the deal will resolve a class-action lawsuit by a group of consumers alleging that Facebook's sponsored stories program violates a California law about endorsements. That law says companies need people's permission before using their names or images in ads. In the case of minors, companies need parental consent.

While the current settlement provides for small payouts to users who were featured in ads, it's not yet clear how much money -- if any -- individuals will receive. The terms require Facebook to create a fund of up to $20 million, a significant portion of which will probably go toward taxes, court costs and reimbursing attorneys. Whatever is left will be used to compensate individuals in the U.S. who appeared in sponsored ads. Those people can put in for $10 each, but the amount they receive will depend on how many people put in claims.

If the claims are so numerous that the fund can't pay applicants $10 each, they will receive a pro rata share. But if the pro rata share drops to less than $5, the judge will decide whether each user should receive a small award, or earmark the entire amount for public interest organizations and law schools.

The University of San Diego's Center for Public Interest Law and Children’s Advocacy Institute opposed the revised deal, arguing that Facebook should obtain opt-in consent to the program from the parents of minors.

Seeborg said in his ruling that Facebook and the Web users who sued should address that argument when they file a motion for final approval.

Internet legal expert Venkat Balasubramani, who has followed the litigation closely, says he believes Seeborg is leaning toward green-lighting the deal. Balasubramani adds that the revisions to the settlement -- including the potential payout to users -- appear to address some concerns about the plan.


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