Facebook Settling ‘Sponsored Stories’ Privacy Lawsuit

Photo: Marco Fieber/Flickr

Facebook is agreeing in “principle” to settle allegations that its “Sponsored Stories” advertising platform breached its users’ privacy.

Terms of the deal (.pdf) were not immediately disclosed. The suit, (.pdf) filed in April 2011, claimed that the social-networking site did not adequately provide a way to opt out of the advertising program that began in January 2011.

Sponsored stories work like this: If a Facebook user “likes” an advertiser, that user’s profile and picture may appear on some of their friends’ Facebook pages — in ads — stating that the person, indeed, “likes” that advertiser. Facebook also reserves the right to do this on ads that appear on sites other than Facebook, though it has not done that.

Facebook and class-action attorneys were set to hold oral arguments Thursday in a San Jose, California, federal courtroom on whether the case could proceed as a class action representing perhaps millions of Facebook users. The lawyers wrote U.S. District Judge Lucy Koh on Tuesday that they have executed “a term sheet memorializing their settlement in principle.”

The development comes on the third trading day following Facebook’s IPO. It closed at $31, down from the original $38 asking price on Friday. The settlement agreement will eventually become public and requires Koh’s signature.

In November, the Federal Trade Commission slapped Facebook’s hand and settled government charges it “deceived” users that their information would be kept private, although it was “repeatedly” shared with the public.

The FTC deal, among other things, required Facebook to submit to a privacy audit every two years for the next two decades. The accord, which carried no financial penalties, demands that the social-networking site obtain “express consent” of its 850 million users before their information “is shared beyond the privacy settings they have established.”

Regarding Tuesday’s settlement, the ad settings at issue are not contained in Facebook’s privacy settings, and instead are in a section called Facebook Ads under the main profile settings.

While terms of Tuesday’s settlement were not lodged with Judge Koh, we suspect they will be similar to a 2010 settlement in a different Facebook privacy flap.

In that case, a  federal judge approved a $9.5 million settlement to a class-action lawsuit challenging Facebook’s so-called “Beacon” program that monitored and published what users of the site were buying or renting from Blockbuster, Overstock and other locations without users’ permission.

The lawyers in that case were awarded about $3 million of the pot, and the remainder was earmarked for grants to study online privacy.

Facebook, without admitting wrongdoing, terminated the Beacon program, though much of it has resurfaced under the guise of Facebook’s so-called “frictionless sharing.”

Under the latest deal, Facebook users likely would have to opt in to participate in the “Sponsored Stories” program or be provided a clear mechanism to opt out. It was not immediately known whether Facebook would kill the “Sponsored Stories” program.

The five named plaintiffs in the case will likely receive several thousand dollars each, while Facebook likely will admit no wrongdoing.

The plaintiffs’ lawyers, who likely will reap millions in the latest case, did not immediately respond for comment. Facebook declined comment.