June 19, 2012

Facebook's Post-IPO Headaches Continue: Social Giant Pays Big To Settle Lawsuit Accusing It of Operating a "Misleading Advertising Scheme" — Company Forks Out $10 Million To Quell Uprising Over Its "Sponsored Stories" Initiative

Facebook is paying $10 million to settle a lawsuit over ads that it called sponsored stories, bringing an end to the suit that alleged the company's behavioral-targeting initiative benefited from its users' "likes" without giving them compensation or a chance to opt out. The social giant's attorney Michael Rhodes confirmed the total, which will be given to charity, this weekend. A judge still needs to approve the settlement. The privacy scandal erupted as a result of Facebook allowing companies, starting in early 2011, to pay to retransmit users' activities to their friends' pages — i.e., if a user clicked the "like" button for a brand, the click might show up as a "sponsored story" on friends' pages. The lawsuit was brought by five of Facebook's users in 2011. If successful, it could have resulted in billions of dollars in loss for the social network, according to Reuters, which first reported the story. Some Facebook users sued, saying that Facebook used their images for commercial activity, even though Facebook had argued that the plaintiffs did not show they were hurt by the practice, an AP news release reports. Sponsored stories show up on Facebook's user pages, showing them information taken from their friends — information that can include friends' pictures, names and likes tagged to products and companies. The lawsuit called the advertisements a "misleading advertising scheme," Bloomberg News reported. "California has long recognized a right to protect one's name and likeness against appropriation by others for their advantage," wrote U.S. District Judge Lucy Koh, as reported by Reuters. Previous court documents make mention of the potential size the lawsuit could have achieved if it became a full, class-action issue — one in three Americans could have been involved, which could have ended up costing Facebook a titanic sum of money if it lost the suit. According to Facebook CEO Sheryl Sandberg, the inherent value of a "sponsored story," or an advertisement based on a friend's personal "experience" with a product or service, is worth two to three times that of a conventional advertisement, PC Magazine reports.

PC Mag describes the scenario they call every Facebook user's worst nightmare — he makes a joke about Viagra, another adult-related product, or even just some generic product or service that you don't necessarily want the entire world to know that you buy or use. Then, without your knowledge, your picture starts appearing next to thumbnails within Facebook's "Sponsored stories" sidebar, implying that you have an interest in said product or service or would wholeheartedly recommend it to all of your friends, PC Magazine reports in an article by David Murphy.

News that a settlement had been reached came in late May, but no details were given on how much Facebook would have to pay. The report that the social network would have to pay $10 million came this weekend, the LA Times reports.