Brief:

• Facebook is in talks to pay $40 million to settle a class action from small advertisers that claimed they suffered damages when the social network miscalculated video metrics. The proposed court settlement says Facebook acknowledges errors in calculating viewership metrics without admitting to other allegations.
• The advertisers filed the suit in California federal court in 2016, alleging Facebook engaged in unfair business conduct by providing inaccurate metrics that overestimated how long users spent watching video ads. The plaintiffs later accused Facebook of fraud and of knowing about the miscalculations without disclosing the information for over a year.
• Facebook in 2016 apologized for the error that had overestimated the average duration of video ad viewing times. The ensuing legal battle centered on how much those erroneous metrics affected the advertisers' businesses. U.S. District Court Judge Jeffrey White will decide whether to approve the proposed settlement, which the plaintiffs and Facebook began to negotiate in June.

Insight:

The proposed legal settlement between a group of small advertisers and Facebook brings some closure to a dispute that aggrieved many marketers and was embarrassing for the social network. The lawsuit came after Facebook disclosed three years ago in its "Advertiser Help Center" that its measurement of average ad viewing time was artificially inflated because it only considered video views of more than three seconds. Video views of less than three seconds weren't included, inflating the average viewing time.

Media-buying giant Publicis Media, which at the time was responsible for about $77 billion of ad purchases on behalf of marketers, was notified that the average watch time was inflated by 60% to 80%, according to a Wall Street Journal report that quoted a letter Publicis sent to clients in 2016. The newspaper's report was later cited in the lawsuit brought by advertisers.

"This once again illuminates the absolute need to have 3rd party tagging and verification on Facebook's platform," Publicis said in the memo. "Two years of reporting inflated performance numbers is unacceptable."

The smaller advertisers in the lawsuit claimed that Facebook's erroneous data led them to misjudge the performance of video ads on the social network and how much money they should spend on its platforms, a claim that Facebook denied in court filings. Lawyers for the plaintiffs said they estimated a jury trial would have resulted in a damages award of between $100 million and $200 million, but that outcome was uncertain and would have been expensive to pursue, according to the proposed settlement.

A $40 million fine is a minor penalty for Facebook, which is on track to reach more than $60 billion in revenue this year. The company earlier this year agreed to pay a $5 billion fine to the Federal Trade Commission (FTC) following an investigation into its data-sharing practices that allegedly violated a previous order.

The biggest legal threat to the company comes from federal and state governments. Facebook faces four antitrust investigations from the Department of Justice, FTC, the House of Representatives Judiciary Committee and a group of state attorneys general led by New York. Whether those investigations eventually compel Facebook to undo its acquisitions of Instagram and WhatsApp likely will take years of legal wrangling unless they can reach a settlement.