Meta battle with California AG could have ‘astronomical’ consequences

If New Mexico created the blueprint for taking on Meta, California could determine the company’s fate when it comes to critical changes at Facebook and Instagram.

Opening arguments begin Tuesday in the trial that California Attorney General Rob Bonta is co-leading against Meta, following a litany of allegations that the company fostered addictive behavior in teens and children. The jury was seated last week in Oakland’s federal courthouse.

The trial involves a coalition of 29 state attorneys general in a unified case against Meta that was brought in 2023, and will be argued by lawyers representing California, Colorado, New Jersey and Kentucky. The stakes are enormous as leading government officials across the country push for Meta to be held accountable for allegedly violating federal and state laws, including the Children’s Online Privacy Protection Act (COPPA) and various consumer protection statutes.

Industry experts are calling it social media’s “Big Tobacco” moment, with Meta as the centerpiece. In the 1990s, tobacco companies were forced to pay billions of dollars for misleading the public about the safety and potential harms of their products, and subsequently saw their power and influence dramatically diminished.

Earlier this month, Meta lost a case in New Mexico that will require the company to make some changes to its services and pay nearly $1 billion. But California carries such power and influence that a bad result in Meta’s home state could lead to much steeper penalties, including a broader overhaul that forces fundamental alterations to key algorithms.

“California matters more than any other jurisdiction in the U.S.,” said Julia Powles, executive director of the UCLA Institute for Technology, Law and Policy. “It’s where they are subject to the greatest legal reach, and it’s a jurisdiction watched around the world.”

New Mexico AG Raul Torrez, fresh off his court victory, told CNBC that the consequences could be “astronomical” for a company that gets 98% of its revenue from online advertising. Meta CEO Mark Zuckerberg is relying on the cash generated by the company’s dominant ad business to fund his massive bet on artificial intelligence, which could cost as much as $145 billion this year.

The judge in New Mexico ordered Meta to pay $567 million into an abatement fund as part of a second phase of a case involving child sexual exploitation allegations. A jury there ruled in March, during the trial’s first phase, that Meta must pay $375 million for violating the state’s unfair practices act. Meta said it disagreed with the New Mexico ruling and plans to appeal.

Torrez called it a “pretty substantial judgment,” but was quick to note how it pales in comparison to what could be coming.

“This is a state with some 2 million people,” Torrez said. “If you map that same argument onto California or Florida or Texas or New York, I mean, that’s a potentially massive and a market shifting force.”

Torrez said that plaintiffs’ focus on app design features and alleged misrepresentations on safety “really provides a blueprint for other states to hold them accountable.” It’s an approach that allows states to avoid Section 230 of the Communications Decency Act, which has generally shielded tech companies from legal exposure due to third-party content on their platforms.

Meta and Google’s YouTube lost a case in March, when a jury in Los Angeles determined the companies were negligent and failed to warn users of the dangers associated with using their platforms.

Bonta, who was appointed to the AG role in 2021 by Gov. Gavin Newsom, said in a statement last Monday that one of his most important jobs is to “protect our children from harm.”

“Meta designed a dangerous product for young users, knew it to be dangerous, and then lied to children, families, and the community about how dangerous it was,” he said. “We are ready to hold Meta accountable for its role in fueling the mental health crisis of American children and look forward to trial.”

Meta said in a statement that the AG coalition’s “limited claims are unsubstantiated and their financial demands are vastly disproportionate.”

“The AGs offer no proof anyone in their states was misled, claim benign features like having an additional Instagram account somehow harmed their residents, and attempt to penalize Meta for industry-wide challenges like age verification,” Meta said.

Meta’s attorneys have previously said that the consolidated State AG trial could lead to damages as high as $1.4 trillion. Lawyers representing the states told presiding federal judge Yvonne Gonzalez Rogers last week that $200 billion is a more likely amount.

“You could wake up with a headline judgment that is, as I’ve said, astronomical,” Torrez said.

Michael Coffey, a defense litigator and founding partner of New York law firm Coffey Modica, said it’s the kind of case that can define the career of a state AG, while the victims could potentially end up getting very little of the ultimate payout.

“It’s all going to go to government, and then they’re going to dole it out, and then the plaintiffs’ bar is going to take a cut out of it,” Coffey said.

Money aside, the potential design changes Meta would have to implement if the company loses in California could be far more damaging, said Laura Marquez-Garrett, an attorney with the Social Media Victims Law Center.

“They have the ability that private plaintiffs typically do not have to actually force these companies, through the court system, to change their business model, their design decisions, all of that,” Marquez-Garrett, who worked on the recent Los Angeles case, said during a Friday media briefing.

The State AGs said in a court filing that they’re seeking “permanent injunctive relief, on a nationwide —rather than state-by-state — basis, to restrain Meta’s unlawful acts and practices” for any violations related to COPPA. If Meta is found to have violated the federal law, the states want the company to delete all of the personal data for children under 13 as well as the “algorithms and models” that were trained using that information.

Regarding any violations of state consumer protection laws, the attorneys representing the states said in the filing they want Meta to be forced to remove “certain addictive design features,” including infinite scroll, autoplay, ephemeral content, beauty filters and “engagement-optimized algorithms.”

Torrez conceded that his team didn’t get all the design changes it was seeking, like eliminating infinite scroll and altering the company’s recommendation algorithms. The judge in the case said that some of those changes could conflict with Section 230 and First Amendment protections, and that imposing them would be unfair because rivals like TikTok and YouTube would still retain the features.

Torrez said he plans to turn to the legislative process with a social media bill and consumer protection law updates that are intended “to capture a whole range of business practices that are common in the digital economy.”

Meta and its social media rivals face multiple other lawsuits around the nation, including a big federal trial expected to commence in Northern California next year involving a collection of school districts. The first of multiple consolidated school district trials was set to begin this summer, but Meta, YouTube, TikTok and Snap all settled.

The way Torrez sees it, Wall Street is underestimating the potential significance of a loss in California and is just looking at New Mexico “in isolation.” Meta’s stock is down 11% this year, but most of the concern expressed by analysts has to do with the company’s massive capex bill for AI infrastructure rather than fears about a potential deterioration in the ad business.

“The analysts aren’t pricing this correctly right now,” Torrez said. “That California judgment by itself could be gargantuan enough that it changes the ability of this company to do what it needs to finance into the future.”

WATCH: Meta’s federal trial moves forward, accused of violating children’s privacy laws.