Facebook to settle privacy lawsuit over ads

Facebook Inc. is settling one of the only privacy-related class actions facing the newly public company that hasn't been dismissed by a judge for lack of standing, according to court papers filed Monday evening.

The complaint in the proposed class action filed in San Jose federal court alleges that the site's "Sponsored Stories" publicize users' images and names to advertise products without paying them or letting them opt out.

Terms of the settlement were not disclosed. Even though the case is settling, it must still go through the class certification process, through which details of the deal should become public, attorneys said. A class certification hearing has been set for May 31.

Five Facebook members sued the social networking site in April 2011, alleging that the "Sponsored Stories" feature violates their right to publicity under California law. Launched on Jan. 25, 2011, "Sponsored Stories" are paid advertisements that appear on someone's Facebook page when a friend "likes" an advertiser, complete with that person's name and photograph.

It's unclear why Facebook decided to settle the case. But lawyers say it's noteworthy that the suit is one of the few privacy suits against the site to survive a motion to dismiss. Most filed in federal court have been dismissed because plaintiffs weren't able to prove they'd been harmed by alleged privacy violations.

But plaintiffs in this case were able to show U.S. District Judge Lucy Koh that their statutory rights of publicity under California state law could have been violated and that they could be entitled to damages, said Keri Campbell, a litigation partner at Kelley Drye & Warren in Los Angeles, who was not involved in the case. In December, Koh rejected Facebook's attempt to dismiss the suit.

"Plaintiffs have adequately alleged unlawful, unfair and fraudulent conduct," Koh wrote in her 38-page order.

And that put Facebook in a difficult spot as the case moved forward toward possible class certification, where it would be more difficult and expensive to settle, Campbell said.

"For defendants, it's a precarious position to be in," Campbell said. "The case moves on to the merits, and your procedural defenses are for the most part gone."

A week after Koh rejected in part Facebook's motion for a dismissal, Gibson, Dunn & Crutcher litigation partner S. Ashlie Beringer filed an appearance in the case. She's working alongside a team from Cooley headed by litigation chair Michael Rhodes and partners Matthew Brown and Jeffrey Gutkin.

Facebook and the plaintiffs have executed a term sheet memorializing the settlement "in principle," according to a filing by Rhodes on Tuesday.

A Facebook spokesman declined to comment and Rhodes did not respond to a request for comment.

The plaintiffs in the case are represented by partners Jonathan Davis and Robert Arns and of counsel Steven Weinmann from The Arns Law Firm in San Francisco and Jonathan Jaffe from Jonathan Jaffe Law in Berkeley. They did not respond to calls for comment.

The settlement could be an attempt by Facebook to clean up past liability and reassure investors, as well as advertisers, after a lukewarm initial public offering, said Eric Goldman, an associate professor at Santa Clara University School of Law and director of the High Tech Law Institute.

"Facebook has doubled-down on its sponsored stories offering," Goldman said. "If Facebook brokers a settlement that legitimizes its sponsored stories offering, then that would be worth quite a bit to Facebook — especially with all of the questions swirling about Facebook's future revenues."

The deal may signal that Facebook is tired of fighting privacy battles on so many different fronts, said Ronald Camhi, chair of Michelman & Robinson's advertising, marketing and media practice in Los Angeles. At a minimum, the settlement will give Facebook some talking points when it meets with regulators, politicians and others to discuss how it protects users' privacy, he said. Facebook can use the settlement to illustrate that it takes privacy issues seriously and will fight suits that don't have merit.

Now it can also say it will settle cases, too. But the settlement is hardly the end of Facebook's privacy troubles, Camhi said.

"Facebook has put themselves in the line of fire of privacy advocates," Camhi said. "At the end of the day, they're using user information to maximize profits, and privacy advocates are at odds with that."

(Published by The Recorder - May 22, 2012)