The plaintiffs suing Facebook said their privacy had been violated as Facebook used their likeness in ads without their permission.
Sponsored stories highlight brands that user has liked and the story will then appear in the newsfeeds of the user’s friends.
The ad will appear with the user’s name, profile picture, and a comment that the user "likes" an advertiser.
Facebook originally attempted to have the lawsuit thrown out by a U.S District Judge rejected Facebook’s attempt for dismissal.
The lawsuit said that Facebook did not give users the chance to opt out of having their photo used.
The terms of the settlement have not been disclosed but the social network has reached an agreement "in principle" according to a filing on Tuesday.
The sponsored stories lawsuit is not the only one Facebook has seen since going public.
Facebook shareholders are also suing Facebook for allegedly hiding negative information before its IPO.
The lawsuit has also been filed against CEO Mark Zuckerberg and several banks for allegedly withholding critical information ahead of Facebook’s IPO.
According to Reuters the lawsuit was filed in the U.S. District Court in Manhattan and accuses the defendants of withholding important information before Facebook’s IPO.
The information said to be withheld was "a severe and pronounced reduction" in forecasts for Facebook’s revenue growth.
The concealed information about Facebook’s value being significantly less than projected is a reminder of what many analysts had previously said about Facebook’s high share price, deeming it presumptuous and overpriced.
The plaintiffs assert that the forecast information was only told to a select group of preferred investors and not the entire community.
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