Meta's legal liabilities are potentially astronomical ($200B-$1.4T), threatening to disrupt its core advertising business model and future revenue.

On August 7th, 2026, Meta was forced to pay $942 million of civil penalties to the state of New Mexico. The lawsuit was related to the addictive nature of Facebook and Instagram and the negative impacts this has on children.

But, this Meta lawsuit is different. It strikes at the core of the company's business model and how they were able to become so profitable in the first place. And, this is just the beginning.

Meta is now being sued by California, Colorado, and New Jersey. If these states win, Meta's liabilities could be astronomical with estimates ranging from $200 billion to $1.4 trillion.

In this video, we'll take a deep dive into the legal case against Meta and how this could mark a major turning point for social media in America.

Meta is one of the largest and most profitable businesses in the history of the world. In 2025, the company had 3.6 billion daily active users across its various apps. The world population is 8.4 billion, of which 1.55 billion live in China or Russia, where Meta is banned.

Excluding those two countries, there are about 6.9 billion people, of which about 2 billion do not have internet access. So, Meta's total addressable market is about 4.9 billion people.

Out of that 4.9 billion people, more than 70% of them use at least one of Meta's apps every day.

For one company to become so ubiquitous across the entire world is almost unprecedented. In 2025, Meta generated $200 billion dollars revenue and reported an operating profit of 83 billion dollars.

They would have generated over 100 billion dollars of profit had it not been for the 19 billion dollars they wasted on their metaverse segment.

In 2011, Meta generated 3.7 billion dollars of revenue and had 480 million daily active users. By 2025, users had grown sevenfold to 3.6 billion, but revenue grew 54-fold to 200 billion dollars.

Thus, we can see that Meta's financial success comes not only from garnering a huge user base, but also from extracting ever larger amounts of money from each user. Substantially all of Meta's revenue comes from advertising.

The more ads each user sees, the more revenue Meta generates.

Meta does not disclose how many ads it shows each quarter, but each year they do disclose the percentage change in ad impressions. We can compare this to the number of daily active users.

Since 2015, the number of daily active users has increased by 228% while the number of ad impressions has increased by 775%.

This means that the average Meta user watches 3.4 times more ads per day than they did 10 years ago. Now that Meta has saturated the market, the only way they can continue growing revenue is by showing each user more ads.

And the easiest way to show you more ads is to keep you glued to your screen for more hours each day.

Over the past decade, Meta's made a series of decisions to increase user engagement and ad revenue, no matter the cost. This has resulted in unintended but well-understood consequences for the company's billions of users.

In 2021, a Facebook product manager named Frances Haugen became a whistleblower, leaking hundreds of pages of internal company documents to the media in what would become known as the Facebook Files.

Meta has internal key performance indicators that it tracks, and managers are assessed on. One of these KPIs is the number of sessions per day. A session is defined by each time a user logs back onto Facebook or Instagram.

One of the ways that Meta increases the number of daily sessions is with the excessive use of push notifications. The obvious concern is that people will become distracted. It can be difficult to get anything done when every 10 minutes you get a notification from Instagram telling you about your friend's latest post.

This concern was so obvious that at some point in the mid-2010s, Meta created an internal team called the Wellbeing Team. At this point, the company had not yet changed its name to Meta, but I'll just refer to them as Meta for simplicity.

The Wellbeing Team was tasked with researching potential harms to Meta's users and coming up with solutions. They analyzed the potential harms of social media addiction amongst users.

They conducted research by analyzing usage data as well as conducting surveys of Facebook users. The Wellbeing Team estimated that 12.5% of Facebook users display symptoms of problematic use.

Problematic use means the user experiences negative results on key aspects of their life and a feeling of guilt or loss of control. Maybe you're underperforming at your job or school because you waste too much time on Facebook.

Or maybe you don't get enough sleep because you stay up until 3:00 a.m. scrolling through Instagram.

In an internal company presentation, the Wellbeing Team included quotes from Facebook users. A 22-year-old woman was late to her cousin's wedding because she was distracted using Facebook.

A 30-year-old man almost fell out of a train because he was looking at his phone. A 20-year-old woman stays up until 2:00 a.m. using Facebook even though she has to wake up at 6:00 a.m. These people understand that their Facebook use is problematic but struggle to reduce their screen time.

A 24-year-old woman compares Facebook to an addiction. A 32-year-old man compares it to alcohol.

So, what could Meta do to mitigate these harms? For starters, they could reduce the insane number of push notifications, but this would reduce the number of ad impressions. So, of course they won't do that.

Instead, Zuckerberg disbanded the Wellbeing Team in 2019.

Another big issue from the Facebook files is the impact Instagram has on minors, especially teenage girls. The idea is that when you constantly see Instagram models with seemingly perfect bodies and lives, this can make you feel inadequate or worthless by comparison.

This can lead to mental health issues amongst teenagers. In extreme cases, this can lead to thoughts of self-harm or even worse.

According to an internal meta presentation, 66% of teen girls on Instagram experience negative social comparison compared to 40% for teen boys. 52% of teen girls who experience negative social comparison on Instagram said it was caused by images related to beauty. 32% of teen girls said that when they felt bad about their bodies, Instagram made them feel worse.

Being primarily an image-based platform, Instagram emphasizes portrayals of physical attractiveness and ostentatious displays of wealth. This makes it uniquely harmful for body image issues.

This is confirmed by Meta's own analysis. An internal presentation showed that Instagram is uniquely prone to body comparison as compared to YouTube, TikTok, or Snapchat. This results in mental health outcomes including eating disorders, body dysmorphia, body dissatisfaction, depression, and loneliness.

In 2023, the state of New Mexico sued Meta under a New Mexico law called the Unfair Practices Act. While this is a New Mexico law, almost every other state in the country has very similar laws in their own books.

So, this case can be used as a precedent for future lawsuits by other states.

New Mexico alleged that Meta steers and connects users, including children, to explicit, exploitative, and abusive materials and facilitates human trafficking. State authorities found numerous profiles on Facebook and Instagram which sell illegal images of minors.

New Mexico authorities reported all these illegal accounts to Meta, but Meta only removed half of them.

To be clear, all of this type of activity is technically banned by Meta. Meta has automated systems which analyze profiles and posts and will ban accounts that appear to be engaged in illegal activity, but criminals can pretty easily get around these restrictions by intentionally misspelling words or relying on euphemisms and code words.

While not included in the New Mexico lawsuit, Meta's facing similar controversy related to the huge number of fraudulent advertisements on its platforms. If you spend any time on Facebook or Instagram, you've almost certainly seen these.

Like send one Bitcoin to this address and Elon Musk will send you two Bitcoins back. That kind of thing.

To be clear, these types of scams exist on all social media platforms, but the scale of these scams on Meta appears to be far larger than anywhere else. Recently, Reuters gained access to internal Meta documents which estimate that 10% of the company's total revenue comes from scam ads.

This translates to 15 million scam ad impressions per day and probably tens of billions of dollars of victim losses per year.

In internal discussions, Meta admits that it does a worse job at cracking down on scam ads compared to its largest competitor, Google. For a platform as large as Meta's, it's impossible to prevent all scam advertisements, but Meta has made conscious decisions which have made Facebook and Instagram far worse than they have to be.

They have automated systems which flag suspicious activity, but they only ban an advertiser if they're 95% certain to be committing fraud. This percentage is calculated by algorithms Meta has developed internally.

So, what happens if an advertiser is only 90% certain to be committing fraud? Meta charges them higher ad rates as a penalty. The idea is to dissuade suspect advertisers from placing ads.

This is a very charitable view of Meta's motivations. By their nature, financial scams have extraordinarily high profit margins, and scammers are happy to pay a high cost per click.

Instead of banning suspected fraudsters, Meta is demanding a larger cut of the ill-gotten gains.

An internal Meta document estimated that in the second half of 2024 alone, Meta generated $3.5 billion from fraudulent advertisements. This is a trade-off between maximizing revenue and user safety.

Meta appears to be airing more on the side of revenue than safety.

The next part of the lawsuit relied heavily on the Facebook files leaked by Frances Haugen in 2021. Meta has long been aware of the negative mental health consequences suffered by many teenage Facebook and Instagram users.

Since at least 2021, this has been the focus of intense public criticism. New Mexico argues that despite all of this, Meta has failed to take reasonable steps to solve these problems.

In 2020, Meta beta tested something called Project Daisy. For a select number of accounts, the number of likes on each post was hidden. If fully implemented, the policy would work as follows.

For big-time influencers, nothing would change. The number of likes on their posts would still be displayed, but for smaller accounts owned by normal people, the number of likes would not be made public.

The idea is to prevent the type of social media addiction that can arise by always obsessing about the number of likes you receive on each of your posts.

In October of 2020, the Meta researchers in charge of the project Daisy beta test recommended to their superiors that they should implement this new policy. Meta's senior leadership ignored this recommendation and never implemented it.

In a public interview, Instagram chief Adam Mosseri said, "For some people, hiding public like counts help people focus less on the number and more on the content. But for others, it didn't really matter much."

Unquote. According to New Mexico, this statement was false. Meta knew that hiding the like numbers would significantly improve mental health for many of its users, but they were more concerned with engagement and maximizing ad impressions.

Unfortunately, the evidence to support this claim was redacted from the publicly released version of the lawsuit. So, there's not much more we can say about this.

The crux of the lawsuit is that Meta and Mark Zuckerberg repeatedly made public statements designed to convince users that they were doing everything in their power to make the platform as safe as possible, especially for minors.

But time after time, Zuckerberg made decisions that put profit over safety.

As just one example, in 2021, Zuckerberg testified that he did not set goals around increasing the amount of time that people spend on the platform. Yet in private emails to Meta executives, he set explicit targets for increasing time spent on Facebook and Instagram.

This constitutes a deceptive trade practice because users and parents were being misled.

Being a trillion-dollar corporation, Meta has far more experience and capacity than the average Facebook or Instagram user. Meta takes advantage of this asymmetry in a grossly unfair manner, thus constituting an unconscionable trade practice.

Exploitation was built into Facebook's DNA from the very beginning. Sean Parker was an early Facebook executive and served as the company's first ever president in 2004. He has recently become critical of the company and gave the following description of the early days, "The thought process that went into building these applications, Facebook being the first of them, was all about how do we consume as much of your time and conscious attention as possible.

That means that we need to sort of give you a little dopamine hit every once in a while because someone liked or commented on a photo or a post or whatever. And that's going to get you to contribute more to content and that's going to get you more likes and comments.

It's a social validation feedback loop, exactly the type of thing that a hacker like myself would come up with because you're exploiting a vulnerability in human psychology." Unquote.

On August 7th, the court decided in favor of New Mexico and ordered Meta to pay an eye-popping $942 million of penalties, of which $375 million is a civil penalty paid to the state.

The remaining $567 million is classified as restitution for the victims. This is put into a special fund controlled by the state, which will pay for mental health treatments for kids, hiring psychologists at schools, and things of that kind.

$942 million is not a lot of money for Meta. It's about 5 days worth of their profits. But New Mexico is a very small state. It's huge in terms of land mass, but the vast majority of it is uninhabited desert.

The state has 2 million inhabitants, which is less than 1% of the US population.

The precedent of New Mexico's massive victory provides a huge incentive for other states to get in on the action. Just 10 days after the New Mexico ruling, a trial against Meta began in California with the California Attorney General as the main plaintiff.

The lawsuit is being joined by Colorado, Kentucky, and New Jersey. These four states have a combined population of 60 million, which is three times the size of New Mexico.

The Attorney Generals talk about harm being done to children and the fact that Meta pursued profits over safety and lied about it. It's extremely similar to the New Mexico lawsuit.

California has a huge advantage in that they can analyze all of Meta's attempted defenses from the previous lawsuit to preemptively counter them. In my opinion, California is almost certain to prevail.

The main question revolves around the scope and scale of the damages.

Media headlines talk about a sensational 1.4 trillion dollars of potential liability, but it's important to know that this is Meta's own number. The company's attorneys produced it an estimate of theoretical maximum exposure derived by multiplying per violation statutory penalties across the effective user base in California, Colorado, Kentucky, and New Jersey.

Meta has been circulating it publicly to argue that the states are chasing an outlandish payout disproportionate to their claims.

But this is a straw man argument. A 1.4 trillion dollar fine would bankrupt Meta and would run into constitutional limits of excessive penalties. The attorneys general have never stated a specific number publicly.

California's attorney general has told the court that roughly

200 billion dollars is a lot of money, but Meta could theoretically pay it over a period of time. For comparison, Meta's burned about 100 billion dollars on its ridiculous metaverse ambitions over the past five years.

The attorneys general want to force Meta to make its products less addictive. For example, they want to eliminate the infinite scroll, autoplay, ephemeral contents, and beauty filters, plus recommendation systems rebuilt to prioritize well-being over engagements.

Such restrictions will make Facebook and Instagram far less addictive and thus far less lucrative. Over the years, Meta has developed highly sophisticated software algorithms to recommend content and target ads.

These ads are trained on user-generated data, including children.

The attorneys general are trying to force Meta to delete any algorithm that is trained at least in part on underage data. Future algorithm deployment would also be heavily regulated.

This could materially degrade Meta's ability to target advertisements.

If the states are successful in implementing these restrictions, this could be far more impactful than even a $200 billion fine, as it would disrupt Meta's existing business model and impair its ability to generate revenue for the indefinite future.

Zuckerberg has understood for a long time that this type of legal and regulatory action was in the cards. This may explain some of his seemingly bizarre business decisions. It's probably not a coincidence that the company changed its name to Meta less than a year after the sensational leak of the Facebook files.

On its face, the metaverse is a bewildering business enterprise. Meta has been burning about $20 billion per year for the past 5 years. Consumer adoption is minuscule, and it has become the subject of widespread ridicule across the internet.

You don't need an MBA to see that this is a huge waste of money. Yet, Zuckerberg refuses to give up. If you're Mark Zuckerberg, you already own one of the most profitable businesses in the history of the world.

Why do you need to gamble so much money on this speculative new endeavor? It seems irrational, but what if you knew that the massive profits from your social media monopoly are not sustainable?

What if you knew that lawmakers and attorneys general will eventually crack down? In that case, you might want to diversify by building a new business line that could theoretically grow to a big enough scale to offset the expected decline of social media. The metaverse is meant to fulfill this role.

Today, approximately 98% of Meta's revenue still comes from advertising. The diversification push has thus far failed, but you can see from Zuckerberg's perspective that was worth a try.