Meta stock wobbly after firm reaches $16.7B settlement in child safety trial

Meta Platforms META has reached a settlement to resolve claims from states that the company designed Instagram and Facebook to be addictive to children, misled consumers about the safety of its platforms, and improperly collected personal information from young users.

As part of the settlement, Meta agreed to pay $16.7 billion, with California expected to receive between $1.5 billion and $2.1 billion if the court gives final approval, according to California Attorney General Rob Bonta.

“Today, we have secured a settlement with Meta that will make social media less dangerous for our kids and make a world of a difference for children and their families,” Bonta said in a statement.

“Meta has agreed to make massive transformations that will reduce the risk of harm from its platforms — and will do it within months.”

The settlement was reached during a federal trial in California involving claims brought by 29 states, averting one of the most closely watched legal tests yet of allegations that social media companies have contributed to harm among young users.

The agreement was disclosed in a court filing on Wednesday outlining requirements Meta would have to implement under a proposed “consent judgement.”

Among the proposed changes are daily usage limits and “nighttime blocks” for teenagers using Facebook and Instagram.

Meta would also introduce “enhanced age assurance measures” designed to prevent children from accessing its apps and expand tools available to parents and guardians.

Meta shares rose more than 4% in premarket trading on Wednesday following news of the agreement.

However, the stock gave up most of those gains and was up by about 0.8% as the market opened.

States accused Meta of harming children

The federal trial covered claims brought by attorneys general in California, Colorado, Kentucky and New Jersey alleging that Meta violated state consumer protection laws.

The case also included claims from 29 states that Meta violated the federal Children's Online Privacy Protection Act by collecting personal information from users it knew were children without parental notification or consent.

The states alleged that Meta also used children's data to train machine learning and generative AI models.

The litigation forms part of a broader wave of lawsuits brought by states, local governments, school districts and individuals against Meta and other social media companies.

The cases allege that social media platforms contributed to a nationwide youth mental health crisis.

Meta has denied the allegations and maintained that it has taken significant steps to protect children on its services.

The company had also argued that it could not have misled consumers about whether its platforms were addictive because "social media addiction" is not a recognized psychiatric condition.

Before the trial, Meta said California, Colorado, Kentucky and New Jersey were seeking as much as $1.4 trillion in penalties.

The states had not specified a final figure but indicated at a pretrial hearing that the amount could be closer to $200 billion.

Settlement comes amid rising legal costs

The settlement arrives as Meta's legal expenses have increased significantly, and investors are already watching the company's spending closely.

Meta incurred $2.4 billion in legal fees during its latest quarter, contributing to an unusual decline in profit.

The company is simultaneously committing enormous amounts of capital to artificial intelligence infrastructure and development.

That spending has weighed on investor sentiment, with shareholders questioning whether Meta's AI investments will generate sufficient returns and how much pressure they will place on near-term free cash flow.

Child safety litigation had therefore represented an additional risk for investors, particularly given the possibility of substantial financial penalties and costly changes to Meta's platforms.

The settlement removes some of that uncertainty while potentially imposing significant operational changes on Facebook and Instagram.

Testimony preceded settlement

The agreement also came a day after Instagram chief Adam Mosseri testified in the trial.

Mosseri said he does not direct employees to withhold certain information about child safety and products from him in order to provide protection against potential litigation.

The settlement could now shift the focus from the courtroom to how Meta implements the proposed restrictions and whether the measures affect engagement among younger users.