A District Judge has denied, without prejudice, a settlement hammered out by Facebook and plaintiffs in a class-action suit directed at the companies advertising practices – more specifically their Sponsored Stories ads.

The original suit involved five California plaintiffs that claimed Facebook had violated privacy laws with the manner in which they run their Sponsored Stories. Mainly, the plaintiffs complained that Facebook was guilty of using their likenesses in Sponsored Stories without their consent, compensation, or the choice to opt out. A few months ago, the parties reached a settlement outside of court that called for Facebook to pay $10 million in a cy pres settlement to charity, and up to an additional $10 million in legal fees.

The settlement also included instructions for Facebook to change the way Sponsored Stories are employed and explained, a “penalty” that Facebook said would amount to over $120 million in damages.

Now, District Judge Richard Seeborg has rejected the settlement due to questions regarding the monetary amount of the settlement. Earlier this month, Seeborg put the settlement on hold, citing these same concerns with the tangible cash payout to the privacy victims. And now he’s denied this version outright.

In his order, Seeborg notes that the settlement fails to actually provide any relief to class members. Although he acknowledges that cy pres payments are common in case where “the proof of individual claims would be burdensome or distribution of damages costly” (Facebook has upwards of 100 million U.S. users), he says that under California law, each plaintiff could, in theory, be entitled to up to $750 in damages.

California Civil Code §3344, however, under which plaintiffs’ claims are brought, provides for statutory damages of $750 for any violation. It very well may be, as Facebook argues, that plaintiffs’ chances of obtaining a judgment awarding such statutory damages to class members are remote, but their potential availability must be considered in evaluating the fairness of any settlement. Merely pointing to the infeasibility of dividing up the agreed-to $10 million recovery, or the relatively small per-use revenue Facebook derived, is insufficient, standing alone, to justify resort to purely cy pres payments.

Basically, is the possible class size so large that it justifies this cy pres settlement?

Seeborg also questions the specific amount of the cy pres payment. “Assuming that it may be appropriate to approve a settlement that provides for no cash distribution to class members in this case, the question will remain as to whether $10 million in cy pres recovery is fair, adequate, and reasonable,” he says.

So it’s apparent that the settlement is on hold for at least a little while now, which leaves the other aspects of the settlement hanging in the wind. These policy-oriented stipulations would see Facebook give users more control over Sponsored Stories as well as amend their terms of service to provide more clarity and detail on the practice.

“Facebook will create an easily accessible mechanism that enables users to view the subset of their interactions and other content that have been displayed in Sponsored Stories. Facebook will further engineer settings to enable users, upon viewing the interactions and other content that have been used in Sponsored Stories, to control which of these interactions and other content are edible to appear in additional Sponsored Stories,” said the settlement.

It also allowed for minors to opt out of being featured as Sponsored Stories altogether.

As of now, adults cannot opt out of the Sponsored Stories program.

[Via Wired]