Cross-posted by at WLF contributor site

Federal courts spent the last two weeks of 2011 cranking out notable rulings in many areas of law and affecting a broad range of American businesses. One particularly interesting decision came from the Northern District of California, a hotbed of online privacy-related class action litigation.  Judges there have generally been stiff-arming plaintiffs, as a November 28 Legal Pulse post discusses, but one suit against Facebook has now survived a motion to dismiss.

In Fraley et al. v. Facebookplaintiffs sued Facebook under California’s Right of Publicity Statute and its Unfair Competition Law alleging that the social networking giant’s “Sponsored Stories” program harmed them. A Sponsored Story appears on a Facebook friend’s page when another friend indicates he or she “likes” something. It includes the friend’s name, a photo, and the “like” assertion along with an advertiser’s logo. The plaintiffs argue that Facebook is using them to endorse products or services without their permission and without compensation, an action which allegedly earns Facebook additional advertising revenue.

Presiding Judge Lucy Koh had rejected class action plaintiffs’ arguments in other recent privacy cases, including the Low case discussed in our November 28 post. She saw the situation in Fraley as being much different, however. Judge Koh distinguished Fraley from those cases, noting that Fraley alleges a violation of a statutory right, which automatically confers standing. She also found that unlike in Low, where the economic harm involved unwittingly helping advertisers advertise to them, in Fraley the harm involved the economic value of a commercial endorsement to someone else.

Judge Koh’s reasoning isn’t entirely convincing on the difference between the two. As evidence that the value of these endorsements were “provable” and not “hypothetical,” the judge cited statements by Facebook executives noting the importance of friends’ referrals and broad market research by the Nielsen Company. Such scant evidence was enough, however, to meet the low legal bar for a motion to dismiss. As Professor Eric Goldman notes in a post, this part of the opinion “opens a very small hole in Article III jurisprudence,” but it could very well encourage copycat suits or variations by enterprising trial lawyers.

The court then analyzed Facebook’s argument that the plaintiffs failed to state a claim for which relief can be granted under the Right of Publicity and Unfair Competition laws. The key question under each law is whether a compensable injury occurred. Assessing arguments under the Right of Publicity law, Judge Koh rejected Facebook’s point that since the plaintiffs are not “celebrities,” their names and likenesses need to have some preexisting commercial value. She walked the legal tightrope on this by explaining that to their Facebook friends, “Plaintiffs are celebrities” when it comes to their opinions on products. Why? Because, once again, Facebook executives and The Nielsen Company say so. Judge Koh used essentially the same reasoning to find that the plaintiffs had met the standing requirement of the Unfair Competition law.

As Judge Koh herself points out, all these allegations of economic harm and the right to be paid for their Sponsored Story “endorsements” may not be enough to survive a summary judgment motion or win on the merits. But it was enough for the case to go forward, and forces Facebook to make a lesser-of-two-evils decision: fight on and spend millions more in legal fees and costs, or settle.