By Dan Levine
SAN FRANCISCO (Reuters) - Facebook Inc has agreed to settle a lawsuit that alleged the site's "Sponsored Stories" feature publicized users' "likes" without compensation or the ability to opt out, according to a court document filed on Tuesday.
The proposed class action lawsuit, filed in a San Jose, California federal court, could have included nearly one of every three Americans, with billions of dollars in damages, court documents say.
The terms of the settlement are not spelled out in court filings. A Facebook representative declined to comment on the settlement, as did an attorney for the plaintiffs.
Facebook shares sank on Monday and Tuesday -- their second and third days of trading -- to end at $31, more than 18 percent below the initial public offering price of $38. Reuters reported late Monday that the consumer Internet analyst at lead underwriter Morgan Stanley cut his revenue forecasts for Facebook in the days before the offering, information that may not have reached many investors before the stock was listed.
A "Sponsored Story" is an ad that appears on a member's Facebook page, and generally consists of another friend's name, profile picture and an assertion that the person "likes" the advertiser.
Five Facebook members sued the social networking site last year, alleging that the "Sponsored Stories" feature violates their right to publicity under California law. The lawsuit featured comments from Chief Executive Mark Zuckerberg, stating that a trusted referral is the "Holy Grail" of advertising.
In addition, the lawsuit cited comments from chief operating officer Sheryl Sandberg, saying that the value of a "Sponsored Story" advertisement is at least twice and up to three times the value of a standard Facebook.com ad without a friend endorsement.
U.S. District Judge Lucy Koh had rejected Facebook's attempt last year to dismiss parts of the lawsuit. In her order, Koh said the plaintiffs had articulated a coherent theory of how they were economically injured by the use of their names, photographs and likenesses.
"California has long recognized a right to protect one's name and likeness against appropriation by others for their advantage," Koh wrote.
Facebook and the plaintiffs have executed a term sheet memorializing the settlement "in principle," according to a Facebook court filing on Tuesday. In addition to money damages, companies often agree to modify their policies and procedures as part of class action settlements.
A hearing on class action certification had been scheduled to take place on Thursday.
The case in U.S. District Court, Northern District of California is Angel Fraley et al., individually and on behalf of all others similarly situated vs. Facebook Inc., 11-cv-1726.
(Additional reporting by Nate Raymond in New York; Editing by Gary Hill, Bernard Orr)