Will This Settle Facebook’s Sponsored Stories Fiasco?

Facebook (NASDAQ:FB) has proposed a $20 million settlement in a class action lawsuit accusing the social network of violating users’ rights with its “Sponsored Stories” advertising feature. The offer was revised upward after a U.S. judge rejected an earlier agreement.

The new settlement agreement, which was filed on Saturday in U.S. District Court in San Francisco, drops earlier provisions that would have set aside up to $10 million for plaintiffs lawyers’ fees. It also allows users to apply for a cash payment of up to $10 each.

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The initial settlement proposal was rejected by U.S. District Judge Richard Seeborg in August because it provided no money to class members. Instead, that agreement set aside $10 million to be given to charities involved in Internet privacy issues.

The new agreement, which is still subject to Seeborg’s approval, allows forsome, but not all, of the funds to go to charity, and only if there is any left after users’ claims, attorneys’ fees, and other expenses. However, the agreement does provide that, if it is not economically feasible to pay all users a cut of the settlement, that the court may still designate the entire amount for charities.

While the $20 million loss will certainly be felt by Facebook, it won’t be as hard as the blow to its “Sponsored Stories” feature, one of the company’s recent attempts to better monetize its massive user base, which last week passed the 1 billion mark.

The social network’s “Sponsored Stories” feature violated California law by publicizing users’ “likes” of advertisers without any compensation or the ability to opt out. As part of both settlement proposals, Facebook agreed to give users more control over how their information is used, and the ability to opt out of the feature, which could dramatically reduce its audience, thus decreasing its value as an advertising platform.

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