Meta Platforms is facing one of the most serious legal threats of its 22-year history—and it couldn’t come at a worse time for the company as it navigates a tricky and costly transition to the artificial-intelligence era.
In March, the company suffered defeats in landmark court cases in California and New Mexico that accused it of giving priority to growth over the safety of its underage users. Thousands more lawsuits by individuals, school districts and more than 40 state attorneys general are pending in state and federal courts. Together, they could put the company on the hook for many billions of dollars in damages and weaken the federal protections that have historically shielded it from liability for harmful content on its platform.
Meta is currently in the midst of a trial over claims by the attorney general of Tennessee, one of dozens of states that have said the company misled its users about the safety of its platform. In August, Meta will go to trial in federal court in Oakland over claims from four attorneys general. In that litigation, the states have asked for damages of up to $1.4 trillion—a sum nearly equivalent to Meta’s $1.5 trillion market capitalization. Another trial in that consolidated set of cases is slated for February.
Recent cases have brought mixed results. In May, Meta settled with a Kentucky school district ahead of a trial planned in Los Angeles. It notched a win this month after the teenage plaintiff in another case dropped his suit without receiving any payment from Meta, after settling with co-defendants YouTube, Snap and TikTok. Meta said it would continue to fight “baseless” lawsuits, noting the plaintiff had created his account only six months before filing the suit.
The lawsuits, which argue that social-media services are designed in ways that cause mental-health problems in young people, are finally getting in front of juries after working their way through courts for years and overcoming attempts by the companies to have them dismissed.
While the personal-injury lawsuits seek only monetary damages, the state and school district cases go further, asking courts to order Meta to alter some of the features and dynamics that have made its products sticky enough to attract 3.5 billion users. With user growth across its family of apps already slowing to a standstill in the first quarter, adverse changes could be punishing to Meta’s core business.
Meta has expressed willingness to work with the states and schools to continue to make its products safe while calling the estimate of more than $1 trillion in damages absurd. “A sanction of that size has no analog in the history of consumer protection enforcement,” the company said in a filing.
Even if that number ends up shrinking, the collective financial impact of the cases could be significant. The company warned investors that a loss in the New Mexico case alone could yield $3.7 billion in damages once the second phase of the trial has concluded.
The timing is far from ideal for Meta, which, after long dominating the market for social networking services, is racing to retrofit its business to a world in which AI is rapidly becoming the focus of competition. Meta Chief Executive Mark Zuckerberg has said success in this new age is “not a given.”
Meta is planning up to $145 billion in capital spending this year, largely to buy chips and build out its data centers, and earlier this year it laid off 8,000 employees, in part to fund its AI plans. Analysts are expecting the company to report its first quarter of negative free cash flow when it announces its second-quarter earnings Wednesday.
“It comes down to, How can they handle this? How are they prepared to handle this?” said Brian Mulberry, who manages a portfolio at Zacks Investment Management that includes Meta stock. “I do think it’s a real risk for sure.”
Tech analyst Josh Beck, of Raymond James, is taking a wait-and-see approach before deciding what to make of the trials.
“I think it’s something that’s out there. It’s coming up a little bit more,” he said. “But we need to see a little more direction before people become concerned.”
A Meta spokeswoman said in a statement that the company would continue to defend itself vigorously while focusing on providing “safe, age-appropriate experiences parents tell us they want for their teens.”
“Every case is different, and the outcome of one doesn’t dictate the outcome of another,” the spokeswoman said.
Social-media companies have long been insulated from many legal threats because a federal law, Section 230 of the Communications Decency Act, shields them from liability for others’ content on their platforms. Judges around the country, however, are letting many cases go to trial on a theory that says their products are designed intentionally to addict people, sidestepping arguments that rely on claims of harmful content.
Meta has consistently denied wrongdoing in response to lawsuits alleging user harm and in court has pointed to new safety features for teenagers’ accounts and other product changes it has already made as evidence that it is giving priority to safety over growth. It is heavily promoting teen accounts, building stricter supervision controls, putting limits on late-night notifications and installing compulsory break reminders.
Meta has said the litigation is trying to fix a sprawling societal issue with a patchwork of court rulings that, if successful, wouldn’t stop young people from using other types of social media. It has said it would rather address social-media content and design-related issues with federal legislation that applies to the whole industry versus hashing these cases out one-by-one in court. The company plans to appeal the verdicts in Los Angeles and New Mexico.
But the tech giant has shown signs of willingness to compromise. In June, it settled one of the cases slated for trial in federal court, and it raised the prospect of altering some of its platform features as part of the second phase of the trial in New Mexico, where a judge is weighing further damages requested by the state.
Meta’s chief privacy and compliance officer, Michel Protti, testified that the company would be willing to consider changes requested by the state, including making all users under 18 private by default and requiring parent consent to be public and to block notifications during school hours by default, with some exceptions. Meta called many of the requests technically unfeasible, and Protti testified that some had “high potential to grind all our global product development to a halt.”
For Meta, the damages awarded to plaintiffs to date—$6 million to the 20-year-old woman in Los Angeles (split between Meta and YouTube) and $375 million to the state of New Mexico—are a small drop in the bucket for a company that brings in more than $200 billion a year. But it is the precedent the verdicts set that might become an issue.
“You wouldn’t want to keep losing these cases in a row. They make a ton of money, but they could be looking at billions in liability,” said data-privacy lawyer Phil Yannella, who is not involved in the lawsuits. “No company is going to ignore that.”
Write to Erin Mulvaney at erin.mulvaney@wsj.com and Meghan Bobrowsky at meghan.bobrowsky@wsj.com
