Facebook's methods of displaying "Sponsored Stories" could breach California state law, which gives citizens and celebrities alike the right to control how their names and pictures are used for commercial purposes and endorsements.
U.S. District Judge Lucy Koh in San Jose rejected Facebook's legal appeal to dismiss the lawsuit on Friday, after finding that the 'Sponsored Stories' adverts may violate state law.
The ruling comes less than a month after Facebook settled a heavy, wide-ranging complaint by the U.S. Federal Trade Commission, and agreed to two-decades worth of stringent checks and monitoring.
"Sponsored Stories" that appear on the social network relies on users being told what their friends "like", including fan pages, company brands and even Facebook itself.
But California's right of publicity statute prohibits use of another's name, voice, signature or photograph, or likeness for advertising or soliciting without the person's prior consent.
Users of the world's largest social network, an estimated 850 million, cannot opt out of the sponsored advertisements.
"Sponsored Stories" were rolled out in January. The suit claims "unfair practices", as they were members of the social network before the January release, and were not asked to opt-in to the advertisement system.
Koh cited comments in her 38-page ruling saying that while online privacy suits had struggled in previous cases to gauge effectively the level of damages suffered, the plaintiffs in this case said they should be entitled to gain advertisement revenue in return from their inadvertent endorsements.
But the case remains at a delicate, early stage, with many facts in dispute, Koh acknowledged, writing that the publicity and unfair practices claims present "novel issues of state law for which there is no binding authority".
Facebook's advertisements are at the forefront of its revenue intake. The social network is expecting to make $3.8 billion alone from advertisement revenue this year, nearly 90 percent of its total intake. It is estimated this figure could rise to $6.9 billion in 2012, Bloomberg reports.
Facebook is preparing for its public flotation, thought to be worth $100 billion after its initial public offering, putting the world's largest social network about half of Google's market cap of $190 billion.