Facebook's Sponsored Stories Settlement Could Have Broader Implications

Sheryl Sandberg

Facebook is staying quiet on Tuesday’s settlement of a lawsuit brought by five members who objected to their likenesses being used in Sponsored Stories, and perhaps with good reason.

After all, court documents filed on behalf of the plaintiffs quote Chief Operating Officer Sheryl Sandberg as saying Sponsored Stories are two to three times more valuable than a standard Facebook ad. How Facebook proceeds in carrying out the settlement will not only dictate the future of a significant portion of its advertising revenue, but will also speak volumes on how Facebook will respond to regulation efforts.

The lawsuit accused Facebook of a “misleading advertising scheme” that implied that users who “liked” a certain product or brand had endorsed it when ads for that brand were displayed to their friends. “Even if members had read [Facebook's] terms of use, they could not know that their likenesses and names would be later used in Sponsored Stories ads sent to their Facebook friends,” the plaintiffs said in the complaint.

The lawsuit, as dictated by Facebook’s service terms, was filed in California but was later moved to federal court in San Jose. California is Facebook’s home state, but it is also a state known for having a consumer-friendly court system. Facebook hasn’t publicly commented on the settlement, and terms were not disclosed, but it presumably will require Facebook to either curtail the practice or make it an opt-in feature of membership.

Precedents Hint at Possible Paths

Facebook may, however, have a choice. It could choose to implement a new policy stemming from the settlement across the social network, much like it did when it reached a settlement with Irish authorities over the data it keeps. Or Facebook may only implement the policy in California, essentially creating a separate set of rules and mirroring the tactic Facebook took when it voluntarily agreed to comply with German privacy laws.

In Ireland, Facebook reached a settlement after users in that country and Austria raised complaints that Facebook was keeping user data that was thought to have been deleted. While the enforcement action Facebook agreed to in December only applied to its users in Ireland, where Facebook has its European headquarters, the agreement and policy changes extend to all Facebook users.

In Germany, however, Facebook said it would abide by a voluntary code of conduct after officials said the company’s practice of building profiles of users and the websites they visited, using tracking cookies, had run afoul of German privacy law. Like the California settlement, details of the code of conduct have not been made public, although Wired reported that details of the California law will eventually be released.

With Each New User, Regulation Grows More Complicated

Lawsuits, regulatory actions and settlements like the one announced Friday accent an ever-growing problem: With more than 80% of its nearly one billion members located outside of the U.S., Facebook is increasingly becoming difficult to regulate. 

An academic paper by Anupam Chander of the University of California-Davis School of Law, published last week, outlined how Facebook resisted some regulation attempts and complied (or at least bent) on others. Chander noted that if each state and country with jurisdiction over Facebook exerted its control over the site, there would be a confusing and often contradictory array of laws for users to understand.

At the same time, putting in a global, one-size-fits-all system also presents problems. Germany’s privacy laws, for example, may run counter to the United States' free speech standards, which may in turn violate France’s hate speech rules.

“With Facebook, we see both the company and governments stumbling over borders, uncertain which way to step or who should lead,” Chander wrote. “The jurisdictional dance here is hardly graceful, but is rather characterized by what we might call jurisdiction confusion.”

Often, in smaller jurisdictions, the penalties are too small to reform Facebook, and it's questionable if those jurisdictions have oversight of Facebook. In France, for example, Facebook didn’t send representation to a hearing, presumably because the 2,000 euro fine was less than it would have cost to hire an attorney for the day.

For its part, Facebook has generally resisted regulatory pushes by smaller and foreign jurisdictions, and its service terms say users must file complaints in California. “Even if California law offers a robust set of consumer protections,” Chander notes, “many users around the world may lack the resources to bring claims in California.”