U.S. judge rejects settlement in Facebook Sponsored Stories case

A U.S. District Court judge has rejected a proposed settlement in a lawsuit that alleges Facebook violated users' rights by using their names and recommendations of advertisers to be publicized through a Sponsored Stories program.

The lawsuit, which seeks class-action status, was filed in the Northern District of California by five Facebook members on behalf of as many as 100 million users of the social networking site.

The settlement proposal calls for Facebook to change its Statement of Rights and Responsibilities ("SRRs") and to implement certain additional mechanisms to give users greater information about, and control over, how their names and likenesses are employed in connection with sponsored stories, according to court documents.

The proposal also indicates that Facebook has agreed to make a payment of $10 million dollars to certain organizations involved in Internet privacy issues, and provides that the plaintiffs may apply for an award for attorney fees of up to $10 million, without objection by Facebook.

However, Judge Richard Seeborg in a Friday ruling denied a motion for preliminary approval of the proposal.

"In this instance there are sufficient questions regarding the proposed settlement that it would not be appropriate simply to grant the motion and postpone resolution of those issues to final approval," Seeborg wrote.

A key issue concerns the potential size of what might be considered adequate compensation for Facebook users considering that 100 million possible members could be involved in a class action case.

"To arrive at a fair settlement amount in compensation for past damages, the plaintiffs' potential recovery at trial must be estimated, and then appropriate discounts applied for the uncertainties, risks, and costs of litigation," Seeborg wrote. "At the hearing, Facebook argued the $10 million figure represents a fair estimate under just such an analysis. That well may be so, but the present motion does not provide adequate support for the conclusion."

The proposed $10 million fee Facebook would pay to privacy organizations was noted by Seeborg to be a "cy-pre" fee -- in class action suits a fee paid by the defendant when direct payment to all the members of the class is not feasible.

"Can a cy pres-only settlement be justified on the basis that the class size is simply too large for direct monetary relief? Or, Notwithstanding the strong policy favoring settlements, are some class actions simply too big to settle?" Seeborg asked.

Seeborg said that the two sides could amend the proposal and resubmit it.

"We continue to believe the settlement is fair, reasonable, and adequate," Facebook said in a media statement. "We appreciate the court's guidance and look forward to addressing the questions raised in the order."

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