How A New Court Ruling Upends Facebook's Sponsored Story Strategy

A court decision in October said Facebook users couldn’t sue over being placed in ads because their endorsements had no economic value. Now the same court appears to have reversed itself, a development that could spell trouble for the social network’s grand advertising plans.

In a ruling handed down late Friday, a San Francisco federal court said plaintiffs could go forward with a class action suit that accuses Facebook of wrongfully exploiting their “Like” button activities.

In one example, a Facebook user named Angel says she hit the “Like” button to get a free trial of Rosetta Stone’s translation software. Soon after, a sponsored story appeared in her friends’ news feeds showing her picture near an ad and the headline “Angel Frolicker likes Rosetta Stone.” Other plaintiffs who hit “Like” to view a photo or enter a promotion say their “Likes” were similarly hijacked.

Friday’s decision is the first time that Facebook users have made headway in court over false endorsement claims. In October, the same San Francisco court threw out a case involving users whose images were used to endorse Friend Finder, a “find your friends” service.

The earlier case failed after a judge found that, unlike celebrities or models, ordinary Facebook users’ images did not have any economic value. Even though the social network may have used their images without permission, it didn’t matter because the images didn’t have any “commercial value.”

The crucial difference in the new ruling is that, this time, the Facebook provided evidence to show that their profiles did have economic value. Here is an excerpt from the key paragraph of Friday’s decision:

By contrast, Plaintiffs here have quoted explicit statements by Facebook’s own CEO and COO that friend endorsements are two to three times more valuable than generic advertisements sold to Facebook advertisers. Plaintiffs here have furthermore identified a direct, linear relationship between the value of their endorsement of third-party products, companies, and brands to their Facebook friends, and the alleged commercial profit gained by Facebook

To support this finding, US District Judge Lucy Koh quoted Facebook COO Sheryl Sandberg’s saying, “This is the illusive goal we’ve been searching for, for a long time; [m]aking your customers your marketers. […] 68% more people are likely to remember seeing the ad with their friend’s name. […] 300% more likely to purchase.” The plaintiffs, who supplied the quote, say the data is corroborated by market research firm, Nielsen Company.

The upshot of the ruling is that it’s a possible game-changer for part of Facebook’s marketing strategy. If everyone’s “Like” has an economic value, the company may have to determine a way to compensate users for their endorsements or else obtain their permission.

But it’s early days. Although California law provides $750 for a wrongful endorsement, the plaintiffs will still have to establish at trial they are entitled to this.

Facebook is also saying that they have a right under the First Amendment to use the endorsements. Judge Koh, however, expressed skepticism that the Facebook “Likes” were “newsworthy” content protected by free speech. This too would have to be determined at trial.

Finally, the case only applies to Facebook users in California, a state whose celebrity-driven economy has strong laws to protect endorsements. Facebook users in other states do not have the same level of protection.

A Facebook spokesperson provided the following comment: “We are reviewing the decision and continue to believe that the case is without merit.”

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