Meta dodges 'Big Tobacco' nightmare with $18 billion settlement in child-safety lawsuit

By William Gavin and Christine Ji

The social-media giant's agreement with state officials removes a cloud that was hanging over its stock, analysts say

A lawsuit accused Meta, which is led by CEO Mark Zuckerberg, of designing Facebook and Instagram in ways that would "entice" younger users.

Shares of Meta Platforms rose in choppy trading on Wednesday as Wall Street assessed the implications of the social-media company's settlement in a closely watched legal battle over child safety.

The settlement came during the second week of a California federal trial over claims brought by a coalition of states that accused Meta (META) of designing Facebook and Instagram to "entice, engage and ultimately ensnare" children. Meta was also accused of misleading the public over the safety of its platforms and improperly collecting the personal data of children who used its services.

Meta said in a statement that the agreement involves a payment of about $18 billion over the next decade. A court filing had listed the payment amount at $16.68 billion. Ahead of the multistate trial, Meta had revealed in a court filing that it was facing statutory penalties up to $1.4 trillion - nearly as much as the company's $1.48 trillion market capitalization.

The company said it expects to accrue a legal expense of $10 billion in the current quarter related to the agreement. Meta said that charge was not factored into its third-quarter financial outlook, which it said remains otherwise unchanged.

The trial had been seen as a cloud over Meta's stock. "Everybody has been comparing this to Big Tech's 'Big Tobacco moment,'" Rob Lalka, a professor at Tulane University's Freeman School of Business, told MarketWatch.

While there were similarities - in the sense that both legal battles involved claims that executives knew their products were addictive, yet misled the public - Lalka flagged that Meta's payment is far smaller than Big Tobacco's $240 billion Master Settlement Agreement paid over decades to settle state public-health claims.

"The reality is that this is not a financial settlement that is significant, at least in terms of the 'Big Tobacco' comparison," Lalka noted. "They're doing this to protect themselves from other court cases and further scrutiny."

Opinion: Meta is facing its 'Big Tobacco' moment - and investors can profit

In a blog post, Meta said that teenagers will face a two-hour daily time limit cumulatively across Facebook and Instagram, and will only be able to turn that off with the permission of their parents. The apps will also be blocked by default from midnight to 6 a.m., and notifications will be muted by default from 8 a.m. to 3 p.m.

C.J. Mahoney, Meta's chief legal officer, said in a statement that the changes will "empower parents" to manage their kids' access to social media. He called on YouTube and TikTok, respectively owned by Alphabet (GOOG) (GOOGL) and ByteDance, to implement the same framework.

About 30% of Meta's payments being released hinge on both YouTube and TikTok agreeing to implement that framework and agreeing to jointly match that figure. Both YouTube and TikTok in June reportedly settled lawsuits that claimed their platforms harmed a minor's mental health. That individual also sued Snap (SNAP) and Meta, settling with the former and dropping the case against the latter, according to the BBC.

The debate about social media and child safety rages on, as Meta faces a slew of similar lawsuits similar to this one. In a Wednesday note, BMO analyst Brian Pitz acknowledged that the settlement could relieve some pressure about child safety, but he believes "it could reinvigorate Congress to increasingly regulate social platforms."

"One of the things about Meta that concerns me is lawsuits like this," George Schultze, founder of Schultze Asset Management, told MarketWatch. "Not just social-media lawsuits, but general antitrust concerns."

In the past, Meta has managed to dodge court-ordered spinoffs of Instagram and WhatsApp, but the company's core business remains under a legal microscope.

However, Schultze said that Meta's position as a "Magnificent Seven" company means that automated index inflows likely have a bigger influence on the stock than headline-driven developments.

Others on Wall Street were taking this settlement as a victory. "While this does not completely clear Meta of other outstanding lawsuits, we believe the financial details and platform adjustments are relatively benign," Baird analyst Colin Sebastian wrote in a Wednesday note. Meta dodged the "worst-case whispers" of much steeper financial penalties and algorithm changes, he added.

Evercore ISI analyst Mark Mahaney wrote Wednesday that the settlement could be a catalyst for Meta shares, which have been "materially dislocated" due to regulatory concerns and fears about artificial-intelligence spending levels.

Wednesday's development "significantly addresses" the overhang of youth-safety lawsuits over Meta's stock, Mahaney wrote in a note. "The risk and the issue may not be fully resolved, but it appears to be largely resolved." As a result, "we have a stock opportunity that we believe is highly compelling," Mahaney added.

Meta shares were up as much as 4.1% earlier Wednesday, before reversing lower and then clawing back into positive territory. They closed up about 1%.

The agreement with the coalition of states came just a few months after Meta was ordered to pay nearly $1 billion in a New Mexico state court ruling that required the company to put limits on how young people use its platforms.

"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," California Attorney General Rob Bonta said in a statement.

Bonta said that Meta "has agreed to make massive transformations that will reduce the risk of harm from its platforms - and will do it within months."

-William Gavin -Christine Ji

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

08-26-26 1758ET