Facebook has been forced to pay out $10 million to charity, after five users from California filed a lawsuit when their ‘likes’ appeared in sponsored stories without their permission.

Sponsored stories are a new revenue stream for Facebook, a direct form of Internet marketing which highlights friends’ likes in Timelines, so brands/products get positive exposure along with endorsements from peers.

According to court documents made public over the weekend, the lawsuit, filed in a federal court in San Jose, alleged  Facebook had violated state law by publicising  “likes” in the sponsored stories feature, without paying users, or providing them with a way to opt out of the feature.

Introduced in early 2011,  sponsored stories appear on a user’s Facebook page when someone on their friend list has “liked” a brand page or product on the site. The sponsored story appears as a highlighted ‘status update’, usually consisting of the friend’s name and their picture, alongside whatever product or service they had previously “liked” or commented on.

The lawsuit charges that the terms of use on the social networking site “mislead its users into believing that they can prohibit the use of their name and profile picture in advertisements.”

US district judge, Lucy Koh stated that the plaintiffs had shown that economic injury could occur from Facebook’s use of their names, likenesses and photographs.

She wrote: “California has long recognised a right to protect one’s name and likeness against appropriation by others for their advantage.”

Although Facebook has agreed to what is commonly known as a “cy-press settlement” – in which the funds of the settlement can be donated to charity – a judge still needs to approve the settlement.

Chief executive of Facebook, Mark Zuckerberg, was quoted in the lawsuit, according to the Daily Mail, as saying that a trusted referral, such as those offered by sponsored stories, formed the “Holy Grail” of advertising.

However, this legal settlement – reached last month – could put a huge  question mark over the future of this feature. Whilst the case was tried on local California law, other Facebook users could try to bring similar actions in their own countries. Early estimates believe as many as one in three US Facebook users could have a case for complaint.

The move pours more pressure on Facebook to find meaningful and profitable revenue streams, following a disappointing flotation on the stock market which saw share prices dip almost immediately.

Facebook declined to comment on the settlement.

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