Judge rejects Facebook's 'Sponsored Stories' settlement offer

A U.S. judge says Facebook's settlement offer to close a class-action suit on an ad feature doesn't say how the figure came about, and wonders why it isn't more.
Written by Zack Whittaker, Contributor

The judge overseeing Facebook's proposed settlement offer in the 'Sponsored Stories' class-action suit has rejected the deal, according to sister site CNET.


Upated to add Facebook's statement:

U.S. District Judge Richard Seeborg cited skepticism and "serious concerns" about how much will be paid out by the social network, and whether the proposed settlement figure had been pulled out of thin air.

'Sponsored Stories' allows Facebook to match up people's 'likes' of products and services with friends' profiles in order to generate more advertising revenue. After all, we're conditioned to like something if a friend does. But the advertising platform didn't let users opt-out; one of the critical elements to the suit.

Facebook would have given $10 million to the plaintiffs' lawyers and another $10 million to non-profit groups and charities that specialize in online privacy, such as the Electronic Frontier Foundation.

As a result of an earlier ruling, more than 150 million U.S. users of Facebook are now eligible to opt-out of having some of their features removed from the sponsored advertisements, thanks to an earlier court ruling.

But Seeborg wondered: if Facebook's new user privacy control feature will cost $103 million in advertising revenue as estimated by an "expert economist" -- a figure previously redacted by court documents -- why was $20 million in total pegged to settle the suit and not any other figure? Why not $30 million, or $50 million for that matter? And why aren't the plaintiffs receiving any direct compensation from Facebook?

The lawsuit would likely ding Facebook's revenue, after chief executive Mark Zuckerberg claimed such sponsored ads were the "holy grail" of advertising. Earlier court documents showed that the value of a sponsored ad was at least twice, and up to three-times that of a standard ad, according to Facebook chief operating officer Sheryl Sandberg.

But an earlier GigaOm story noted Seeborg's bid to unseal a number of documents relating to the case, in which both parties agreed not to disclose certain figures. One of those figures relates directly to how much each individual user is 'worth' to the world's largest social network.

That's the killer figure, and Facebook won't let it go without an almighty fight. That's where things will get interesting. It's not uncommon to see such documents redacted and sealed before a lawsuit, but any company in a competitive and ready-to-recover industry such as advertising will want to hold onto the ingredients of its secret sauce for as long as possible.

The official statement from Facebook said, "We continue to believe the settlement is fair, reasonable, and adequate. We appreciate the court’s guidance and look forward to addressing the questions raised in the order. We are confident we can address the issues raised by the court without substantially revising the settlement."

Facebook's advertisement revenue could reach $5.8 billion in 2012, according to forecasts. 

Image credit: Facebook.

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