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Facebook(s fb) and class action lawyers thought they had a deal over “Sponsored Stories,” a type of advertising in which Facebook had users endorse products without their permission. But a federal judge has now kiboshed the $20 million settlement that would have resolved the matter.

In an order handed down in San Francisco on Friday, U.S. District Judge Richard Seeborg claimed that the payment amount was plucked out of “thin air” and questioned why $10 million of the settlement should go to the lawyers who filed the case:

there are serious concerns with the provision of the settlement agreement permitting plaintiffs to apply for up to $10 million in attorney fees without objection by Facebook.

The decision is significant because the judge called out a popular way that internet companies resolve online privacy complaints. In the past, courts have rubber-stamped similar deals involving Google Buzz (a social network onto which Google(s goog) dragged users against their will) and Facebook Beacon (a program where Facebook broadcast user purchases without permission). These and other cases produced multi-million dollar settlements but users saw nothing. Instead, the money was divided between lawyers and privacy groups who received so-called “cy pres” payments.

The case of the Sponsored Stories (in which the friends of one user saw him “Like” a jumbo tub of lubricant) has turned out differently. Rather than approve the deal, Judge Seeborg asked Facebook and the lawyers to come back and provide a better explanation of how they arrived at the numbers. He also noted that the California law under which the lawsuit was filed provides damages of $750 for each violation.

The judge acknowledged that it might be impractical for Facebook to make individual payouts to a class that may include more than 70 million members. But he added that he wanted more specifics before he let the company make a payment to privacy groups instead.

Seeborg also noted that the injunctive part of the settlement — the part that will allow Facebook users in the future to say whether or not their “Likes” can be used as endorsements — fails to provide any economic benefit to users.

The judge’s ruling is below; key parts of the decision are highlighted. For more on the story, see Wired and BusinessWeek.

Facebook Sponsored Stories Rejected