The social network's controversial 'sponsored stories' policy allows companies to use the profile pictures of subscribers who 'liked' their pages for online marketing campaigns.
The dispute began last year, with Facebook describing the case as "without merit". Details of the settlement were not disclosed and Mark Zuckerberg's company has declined to comment.
Consumer rights groups were hoping that the legal dispute, the first of its kind to make it to court, would set a precedent for policing Facebook's practises, The Telegraph understands.
Facebook initiated its high-profile stock market flotation last week, but has struggled to maintain its initial valuation ever since. Its stock slumped 5.2% in trading today to $32 a share, down from the launch price of $38 last Friday (May 18).
The social network has revolutionised the way people share information online, but there have been concerns over how it will transfer the massive user base into sustainable revenue-generating opportunities.