Judge Denies $20 Million Facebook Sponsored Stories Settlement

In a surprise turn of events, a Facebook settlement worth $20 million is headed back to the negotiating table.

U.S. District Judge Richard Seeborg Friday denied the proposed settlement, which relates to a class action lawsuit filed last year first in U.S. District Court in California, which accused the social network of using Facebook users' images for advertising purposes--as part of its Sponsored Stories program--without compensating them, in violation of California law.

Facebook ultimately negotiated a proposed settlement that would pay $10 million to the lawyers who filed the class action lawsuit, plus up to $300,000 in costs, and agreed in advance to not contest any of that payout.

In addition, Facebook was set to award a $10 million "cy pres" payment, meaning that in lieu of being paid out directly to people affected, it's given to charities instead. Under the proposed settlement, the charity payouts would have gone to the Consumer Federation of America, Rose Foundation, Center for Democracy and Technology, Campaign for a Commercial-Free Childhood, Stanford Law School Center for Internet and Society, and the Electronic Frontier Foundation, reported Wired. But many privacy experts at organizations not included in the settlement dismissed the proposal, saying it did nothing to help the people who'd actually had their likenesses misused by Facebook. In addition, the settlement would only allow users to limit--but not opt out from--how Facebook employs their images as part of Sponsored Stories. Minors, however, could opt out.

[ Social media is big business. Learn Why McKinsey Values Social Economy At Up To $1.3 Trillion. ]

The judge presiding over the settlement, however, asked how all parties involved had arrived at the recommended sums. "There are serious concerns with the provision of the settlement agreement permitting plaintiffs to apply for up to $10 million in attorney fees without objection by Facebook," said Seeborg in his ruling. "The fact that the parties negotiated that 'clear sailing' provision separately from the cy pres payment does not wholly eliminate the concern that class counsel may 'have bargained away something of value to the class.'"

Facebook argued that providing direct compensation to affected users wasn't the best settlement course, since the per-user revenue that the social network derived from each person under Sponsored Stories was very little. But Seeborg noted that under the state's Unfair Competition Law, which prohibits businesses from profiting on people's likenesses without compensating them, the damages can be up to $750 per claim, irrespective of any advertising revenue Facebook may have earned. "There is no dispute here that it would be impractical to the point of meaninglessness to attempt to distribute the proposed $10 million in monetary relief among the members of a class that may include upwards of 70 million individuals," he said. "Even paying each class member the modest sum of $10 might require a settlement fund of $1 billion--assuming a class size of 100 million--apart from administration costs."

The judge said he wasn't recommending a $1 billion settlement--or, for that matter, any amount in particular. Instead, he called on the attorneys involved to provide better justification for why $10 million was an adequate cy pres award, demanded "concrete estimates of the likely class size," and told attorneys to tell him just how many affected people they could accommodate via a settlement fund. Finally, he noted that it was unusual for Facebook to have agreed to the attorneys' fees and cy pres award separately, as opposed to negotiating a lump sum, and said it suggested that the current cy pres award amount might be insufficient.

"Although it is not a precise science, plaintiffs must show that the cy pres payment represents a reasonable settlement of past damages claims, and that it was not merely plucked from thin air," he said.

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