Facebook Settles “Sponsored Stories” Class Action; “Friend Finder” Case Still Pending

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Virtually coinciding with the much-publicized Facebook IPO, the preeminent social networking company has agreed to a settlement “in principle” with Facebook members who alleged that the site used their endorsements of Facebook’s “Sponsored Stories” feature without their consent and without compensating them. Fraley v. Facebook, No. 11-cv-01726 (N.D. Cal. May 22, 2012) (Notice of Execution of Term Sheet) (available here). The settlement’s terms and scope have not yet been announced. However, as the parties must obtain judicial approval of the class action settlement, the papers submitted in support of both preliminary and final approval will indicate how class members are to be compensated, any injunctive remedies, and the attorneys’ fees sought.

The Fraley plaintiffs contend that, in essence, Facebook used them to create endorsements akin to celebrity endorsements, informing members’ “friends” that they “like” certain companies or products. See Fraley v. Facebook, Second Amended Complaint (June 6, 2011) (available here). According to internal valuations that were part of the Facebook IPO, friend-to-friend referrals are potentially more valuable than endorsements from famous people.

The case’s pivotal moment came in December 2011, when Northern District Judge Lucy Koh denied Facebook’s motion to dismiss, chiefly on the basis of evidence put forth by the Fraley plaintiffs confirming that Facebook attaches significant monetary value to the Sponsored Stories endorsements. See Fraley v. Facebook, Order Granting in Part and Denying in Part Defendant’s Motion to Dismiss (Dec. 16, 2011) (available here). Facebook CEO Mark Zuckerberg has stated that friend-to-friend endorsements are the “Holy Grail” of advertising, and COO Sheryl Sandberg estimates that the value of a Sponsored Stories endorsement is as much as 200 to 300 percent greater than a standard advertisement without a friend-to-friend endorsement. Order at 4.

Facebook also faces allegations of uncompensated endorsements in connection with its “Friend Finder” service. See Cohen v. Facebook, No. 10-cv-05282 (N.D. Cal. Nov. 22, 2010) (Class Action Complaint) (available here). In contrast to Judge Koh’s ruling in Fraley, Northern District Judge Richard Seeborg ruled that the Cohen plaintiffs failed to established how they were injured by Facebook’s failure to either obtain their consent for their Friend Finder endorsements or compensate them, despite the fact that California Civil Code § 3344 — the controlling law in both Fraley and Cohen — was enacted precisely to ensure that non-celebrities be paid for endorsements, just as celebrities customarily are. An appeal of Judge Seeborg’s ruling is currently pending before the Ninth Circuit Court of Appeals, with briefing scheduled to begin next month.