The lawsuit, which seeks class-action status, was filed in the Northern District of California by five Facebook members on behalf of as many as 100 million users of the social networking site.

The settlement proposal calls for Facebook to change its Statement of Rights and Responsibilities ("SRRs") and to implement certain additional mechanisms to give users greater information about, and control over, how their names and likenesses are employed in connection with sponsored stories, according to court documents.

The proposal also indicates that Facebook has agreed to make a payment of $10 million dollars to certain organizations involved in Internet privacy issues, and provides that the plaintiffs may apply for an award for attorney fees of up to $10 million, without objection by Facebook.

However, Judge Richard Seeborg in a Friday ruling denied a motion for preliminary approval of the proposal.

"In this instance there are sufficient questions regarding the proposed settlement that it would not be appropriate simply to grant the motion and postpone resolution of those issues to final approval," Seeborg wrote.