Facebook will have to pay $15 for each of the nearly 614,000 users whose personal details appeared in ads on the site without their permission.
The names and pictures of an estimated 150 million Facebook members were used in Sponsored Stories, but only those who responded to an email from the site earlier this year will be compensated.
Privacy organizations will also receive some of the $20 million settlement.
The payout was approved by a US court on Monday following a class action filed against Facebook in 2011 by five of its users.
The group said their details had been used to promote products and services through the site’s Sponsored Stories programme, without paying them or giving them the choice to opt-out.
A Sponsored Story is a tailored advertisement that appears on members’ Facebook pages, highlighting products a user’s friends have endorsed or “liked” on the site.
US District Judge Richard Seeborg acknowledged that the $15 payments were relatively small, but said it had not been established that Facebook had “undisputedly violated the law”.
He added that the claimants could not prove they were “harmed in any meaningful way”.
The court estimated that Facebook had made about $73 million in profit from the Sponsored Stories featuring details of the 150 million members.
The settlement also requires Facebook to make changes to its “Statement of Rights” and to give users more information and control over how their details are used in the future.
This move was estimated by the plaintiff’s lawyers to cost Facebook $145 million in advertising revenue.
Approximately 7,000 Facebook users opted out of the settlement altogether, allowing them to bring their own legal action against the social network.