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Judge rejects Facebook's 'Sponsored Stories' settlement

Federal judge says settlement of class-action suit over ad feature that displays images of users doesn't explain how Facebook's payout fee was arrived at.

A judge has rejected Facebook's settlement of a class-action suit regarding an ad feature that publicizes users' "Likes" of products and services to their Facebook friends but doesn't pay the users for the endorsements or allow them to opt out.

U.S. District Judge Richard Seeborg in San Francisco, who had expressed skepticism about the proposed "Sponsored Stories" settlement at the beginning of August, rejected it yesterday, saying he had "serious concerns," according to a report in Wired. And he specifically wondered how the amounts to be paid out by the social network had been determined.

Under the proposed deal, Facebook would have given its users more control over how their Likes were handled and would have allowed users under 18 to opt out of Sponsored Stories. The ad feature displays -- for a user's Facebook friends -- the user's name, picture, and a tagline asserting that the person likes a particular advertiser. The ads first appeared only in Facebook's right column, but they got shuffled to member news feeds, as "sponsored" stories, at the start of the year.

The proposed deal also required Facebook to pay $10 million to the plaintiff attorneys and $10 million to nonprofit groups such as the Electronic Frontier Foundation that specialize in protecting online privacy.

But Facebook had said the new user control over Sponsored Stories would wind up costing it nearly $125 million in advertising revenue. And that left Seeborg to wonder: If the Sponsored Stories feature -- and the forced participation of users -- was pulling in at least that much cash, why was Facebook paying out $20 million to settle the suit, and not some other amount?

Seeborg wrote of a concern that the attorneys for the plaintiff class "may 'have bargained away something of value to the class,'" Wired reported, and that the amount of the payout "was merely plucked from thin air." He also asked the attorneys in the case to explain why no money was going directly to Facebook users, Reuters reported. Seeborg said Facebook and the various lawyers in the case were free to modify the settlement proposal to address his concerns, the news agency said.

"We continue to believe the settlement is fair, reasonable, and adequate," Reuters quoted a Facebook representative as saying in a statement. "We appreciate the court's guidance and look forward to addressing the questions raised in the order."

Wired noted that if Seeborg had approved the deal, Facebook members in the U.S. would have been sent a notice allowing them to join the case or opt out. Class members could have objected to the terms as well.