Facebook: The Legal Update

| About: Facebook (FB)

Summary

Max Schrems plans to sue Facebook Ireland for violation of data protection and privacy laws. The class action lawsuit claims $671.45 per participating user in damages.

WhatsApp has over 500 million users globally. The Facebook/WhatsApp deal is yet to receive regulatory approval from the European Commission.

The Austrian lawsuit can act as a hurdle in the company's plan to enter the e-money transfer, and e-commerce business. The WhatsApp deal should receive approval for its monetization.

In this article, I will discuss the recent legal updates associated with Facebook (NASDAQ:FB).

Austrian class action lawsuit

Facebook Ireland is responsible for processing user data outside the U.S. and Canada. In August 2014, Max Schrems announced a suit of Facebook Ireland for violation of data protection and privacy laws. The list of violations include the privacy policy, participation in the PRISM program, tracking on webpages via the Like button, Facebook's graph search, apps on Facebook, "big data" systems that spy on users or the non-compliance with access requests.

Schrems has invited all Facebook adult users residing outside the U.S. and Canada to participate in the class action lawsuit filed in Vienna, Austria. The website www.fbclaim.com is designed for this purpose. Roland ProzessFinanz, a German legal financing provider will fund the legal cost of this lawsuit. In return, Roland ProzessFinanz will get 20% of the awarded amount, if the lawsuit is won. The lawsuit claims $671.45 (€500) per participating user in damages. More than 17,000 Facebook members have joined the class action lawsuit.

The Austrian class action lawsuit isn't the first action taken by Schrems. In 2011, Schrems requested Facebook to disclose all of the information it had about him, after which he received a stack of 1,222 pages. In 2012 Schrems made the company abandon its photo tagging suggestion feature in Europe, claiming that the feature violated Facebook users' privacy.

Implications of the lawsuit

In April 2014, the company applied to the Central Bank of Ireland for a regulatory approval that would make it an e-money institution. In my article "Facebook: Opportunities and Challenges in E-Money Space", I had mentioned how Facebook can target the opportunities in the global remittance business. Last month, the company started testing "Buy" button that allows users to directly purchase from the News Feed and pages without redirecting users to merchant website or app. This feature is being tested across a few small and medium-sized businesses in the U.S. Once this feature is tested successfully, Facebook can enter the e-commerce business.

Facebook has over 1 billion users outside the U.S. and Canada, out of which 292 million are from Europe. In Q2 2014, the company earned 28.31% of its revenue from Europe, and 26.71% from Asia and Rest of the World. Facebook needs to address privacy concerns, and security risks to build trust among its users. In my opinion, any negative outcome from the Austrian lawsuit can create a hurdle for Facebook as it plans to enter the e-money transfer, and e-commerce business. In addition, Facebook may have to compensate the lawsuit participants, if the verdict doesn't come in its favor.

Regulatory approval for WhatsApp deal

In April 2014, the Facebook-WhatsApp deal received regulatory approval from the U.S. Federal Trade Commission. The deal is yet to receive regulatory approval from the European Commission (or EC). Facebook requested the EC to conduct a single review that will cover the 28 nations, to avoid antitrust reviews by multiple European Union countries. During the acquisition, Facebook agreed to pay WhatsApp $1 billion in cash and $1 billion in Class A common stock based on the average closing price of 10 trading days prior to such termination, if the deal doesn't close by August 19, 2014. The company may extend this date to August 19, 2015, if certain closing conditions applicable to Facebook other than the receipt of certain regulatory approvals have been satisfied by August 19, 2014.

The EC has sent questionnaires to several technology and online-messaging companies to know the merger effects on competition in their markets. The questionnaires also review how companies control and use personal data when they offer services. The European telecom industry has been lobbying against the deal, arguing that over-the-top operators like WhatsApp use their infrastructure but aren't regulated or taxed. The deal opponents argue that Facebook could gain an unfair advantage over others by gaining monopoly over user data. However, Facebook is confident that it will receive the approval from the EC.

WhatsApp has over 500 million active users globally. This medium is used to exchange 50 billion messages, 100 million videos, and 700 million photos daily . WhatsApp charges $0.99 per subscriber after one year free subscription. A Techcrunch report mentions that Facebook could use WhatsApp for remittances, and money transfers between users in different countries. This will help Facebook to monetize WhatsApp through e-money transfer platform. The EC approval is the last and the most important step in the deal closure, as it will enable Facebook to fulfill the objective behind acquiring WhatsApp.

Conclusion

I would conclude by saying that Facebook has a good user base outside the U.S. and Canada which it can use to enhance its revenue further. The company has to clear the legal issues related to the EC approval, and the Austrian class action lawsuit to achieve this objective.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.