Popular photo-sharing app Instagram received coal in its stocking after announcing new terms of service just before the holidays.

Under its updated Terms of Service, the Facebook-owned company assumed the right to license photos posted on the site to third parties, including advertisers, without paying licensing fees, or obtaining users’ permission, or even providing prior notice to the person who posted.

Instagram did not claim ownership of the photos, but its Terms of Service stated that by uploading their photos, users “hereby grant to Instagram a nonexclusive, fully paid and royalty-free, transferable, sublicensable, worldwide license to use the Content that you post on or through the Service.”

In addition, the agreement stated that “You agree that a business or other entity may pay us to display your user name, likeness, photos (along with any associated metadata) and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you.”

Even minors were included, although those under 18 were required to warrant that a parent had agreed to let him or her post the photo that Instagram could license for advertising purposes.

A public outcry ensued. Diverse users ranging from National Geographic to Kim Kardashian threatened to stop using the site once the terms were set to take effect. Legislators also weighed in, with Rep. Edward J. Markey (D-Mass.), co-chair of the Bipartisan Congressional Privacy Caucus, noting that “A picture is worth a thousand words; posting one to Instagram should not cost you your privacy.”

Relenting to the pressure, Instagram retracted the proposed changes and released new Terms of Service without the licensing provision. In blog posts, cofounder Kevin Systrom called the outcry a misunderstanding and said the company would return to its October 2010 terms.

“Our intention in updating the terms was to communicate that we’d like to experiment with innovative advertising that feels appropriate on Instagram. Instead it was interpreted by many that we were going to sell your photos to others without any compensation. This is not true and it is our mistake that the language is confusing. To be clear, it is not our intention to sell your photos,” he wrote. “Going forward, rather than obtain permission from you to introduce possible advertising products we have not yet developed, we are going to take the time to complete our plans, and then come back to our users and explain how we would like for our advertising business to work.”

The site then posted updated proposed Terms of Service to take effect January 19. But even the amended changes received criticism. In addition to mandating arbitration of most claims against the site, the terms prohibited users from bringing class action suits and capped certain kinds of damages at $100.

One user filed a federal lawsuit in response to the changes even before they took effect, alleging that the site is “taking its customers’ property rights.” In order to reject the Terms of Service, users must quit the site, which forfeits their rights to photos previously shared, the plaintiff argued. “In short, Instagram declares that possession is nine-tenths of the law and if you don’t like it, you can’t stop us,” according to the complaint.

To read Systrom's blog post following the introduction of the New Privacy Policy & Terms of service, click here.

To read his blog post regarding the decision to revert back to the original advertising section, click here.

To read the complaint in Funes v. Instagram, click here.

Why it matters: The proposed changes cost Instagram many users and damaged its reputation. Users were horrified that they had no control over the use of their images, while celebrities like Kardashian complained that her endorsement and licensing deals could be reduced. As social media companies struggle to justify their market value, and expensive purchases (e.g., Instagram’s hefty $741 million price tag), they will continue to seek ways of monetizing user information. However, if pushed too far, users will revolt, as they did here.