Facebook Inc (FB) Vulnerable In Instagram Lawsuit

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When Facebook Inc (NASDAQ:FB) purchased Instagram for $1 billion last year, it paid for more than just a photo sharing service. Instagram brought with it a group of highly talented software designers, a bunch of patents, and liability for any legal mistakes the company might make. It is the last of these that is making the news today.

Facebook Inc (FB) Vulnerable In Instagram Lawsuit

Instagram changed its terms of service a little while ago, earning it the ire of many users. A civil class action law suit was filed against the company last week. The suit charges Instagram with breach of contract and was filed in San Francisco.

The suit alleges that the photo sharing service was “making a grab for customer property rights”. Instagram’s new terms of service initially stated that the firm could use and sell photos stored on its site without user permission. That section was removed after a huge backlash from users.

Facebook Inc (NASDAQ:FB) has pledged to stand behind Instagram in this; its first major lawsuit. A Facebook spokesperson alleged that the complaints brought against Instagram were without merit. The company, unsurprisingly, is standing fully behind its subsidiary.

It is impossible to tell if the new terms of service put in place by Instagram came from inside the company, from Facebook, or were the product of a dialogue between the two companies. If it was entirely Instragram’s idea, or based on general principles from Facebook poorly implemented by Instagram management, there could be friction between the firms in the future.

Mistakes like the new terms of service are not easy to defend to shareholders, though they may be easier to defend in court. After Instagram rolled back on the controversial changes, it is difficult to prove that any damages are due to the service’s users. Interestingly, the new terms, in an unchanged article, take away users’ right to sue the company in a class action law suit.

Facebook Inc (NASDAQ:FB) made a $1 billion investment into Instagram, ruptures between the service and its users might reduce the value of that service to nothing. Social service grow and decline geometrically rather than arithmetically. If a single person leaves, their friends follow.

Instagram has not yet suffered this fate in a measurable way, but if it continues to cause rifts between itself and its users, it can expect to go the way of Myspace, Bebo and Friendster. Facebook Inc (NASDAQ:FB) will have to work hard to protect its assets.

This lawsuit, like so many other class actions filed against large corporations, may not go anywhere. It is important for traders with an interest in Facebook Inc (NASDAQ:FB) to take note of its instance, even if its outcome is meaningless.

As Facebook Inc (NASDAQ:FB) grows, it is likely to acquire new services at a regular rate. If the Instagram acquisition is a reasonable example, at least some of these acquisitions are likely to be very large. If they are mismanaged, even momentarily, as Instagram has been in its terms of service PR, Facebook could feel the brunt of the loss of large amounts of its value, as brands associated with it and its own are discounted in value.

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