Antitrust Law Daily Wrap Up, ADVERTISING—N.D. Cal.: Approval granted to Facebook “Sponsored Stories” settlement, (Aug 27, 2013)

By Thomas Long, J.D.

The federal district court in San Francisco yesterday granted a motion for final approval of a settlement agreement between Facebook, Inc. and a class of Facebook members who alleged that Facebook violated California’s publicity rights law and unfair competition law by using their names and likenesses to promote products and services through Facebook’s “Sponsored Stories” program (Fraley v. Facebook, Inc., August 26, 2013, Seeborg, R.). The settlement class consists of approximately 150 million Facebook users.

The settlement will result in small cash payments to class members who filed claims, as well as cy pres payments of $10 million dollars to certain organizations involved in internet privacy issues. The settlement also requires Facebook to make changes to the Statement of Rights and Responsibilities (SSRs) governing use of its site, and to implement additional mechanisms giving users greater information about, and control over, how their names and likenesses are employed in connection with Sponsored Stories.

The plaintiffs alleged that Facebook, without its users’ consent, featured users’ names and likenesses in commercial advertising, making significant profits from the practice. Facebook, however, contended that the Sponsored Stories program was a feature of the social networking site voluntarily participated in by users, through which users knowingly chose to indicate that they “like” certain entities or activities. Even if users had never read Facebook’s SSRs, they knew that their “likes” typically will appear on the “newsfeeds” of their Facebook friends, subject to their individual privacy settings. Sponsored Stories, in Facebook’s view, did nothing more than take information users have already disclosed to their “friends” and redisplayed it to the same persons, in a column that also contained more traditional paid advertising. According to the court, that the plaintiffs faced substantial hurdles in showing that they were injured by Facebook’s conduct, proving lack of consent, and identifying class members sufficiently to secure class certification.

The court previously had denied a motion for preliminary approval of an agreement that did not provide for monetary relief directly to class members. Although the plaintiffs’ chances of obtaining a judgment awarding statutory damages might be remote, the court said, their potential availability had to be considered in evaluating the fairness of the settlement.

The parties submitted a new proposal to the court, which included a payment of $15 per claimant. Because the number of claimants was small, this figure would still leave sufficient funds remaining for attorney fees, costs, expenses, and a distribution to the cy pres recipients, the court noted. Although this method of providing recompense to injured parties was not ideal, in the court’s view, it was fair, reasonable, and adequate, given that there was little to indicate that class members suffered any pecuniary harm as the result of appearing in Sponsored Stories. In addition, the record suggested that under the plaintiffs’ best case scenario, they would be able to show Facebook’s profits attributable to the alleged misappropriation were in the range of $73 million, or approximately 60 cents per class member.

The court noted that the only factor weighing against approval of the monetary component of the settlement was the theoretical availability of statutory damages of $750 per violation of California Civil Code §3344, the state’s publicity rights law. However, because of the sheer size of the class, it was not plausible that class members could recover the full amount of the statutory penalties, as such a judgment would pose due process concerns and threaten Facebook’s existence.

Seventeen objections were submitted in conformance with the requirements of the preliminary approval order, made on behalf of 29 class members. Some objectors asserted that the settlement did not appropriately address issues concerning a subclass of minors, specifically that the settlement would not ensure valid parental consent to a minor’s participation in Sponsored Stories. According to the court, the objectors did not persuasively show the settlement to be improper. The Children’s Online Privacy Act (COPPA) may well preempt claims based on any failure by Facebook to obtain parental consent for members of the minor class. COPPA expressly preempts state requirements that are “inconsistent” with the federal statute, so COPPA could bar any efforts by plaintiffs to use state law to impose a parental consent requirement for minors over the age of 13.

The court overruled objectors’ contentions that the settlement should not be approved because the proposed payments to class members were too small. In the court’s view, the settlement was the product of arms-length negotiations and compromise.

“Although the monetary relief to each class member is relatively small and the percentage of class members who submitted claims is limited, the settlement as a whole provides fair, reasonable, and adequate relief to the class, in light of all the circumstances, including the low probability that a substantially better result would be obtained through continued litigation,” the court said. “The injunctive relief, while not incorporating all features that some of the objectors might prefer, has significant value and provides benefits that likely could not be obtained outside the context of a negotiated settlement, even if plaintiffs were to prevail on the merits.”

The case is No. C 11-1726 RS.

Attorneys: Jonathan E. Davis (The Arns Law Firm) for Angel Fraley. Matthew D. Brown (Cooley LLP) for Facebook, Inc.

Companies: Facebook, Inc.

Cases: Advertising CaliforniaNews