A three-judge panel of the ninth circuit judges in San Francisco rejected Facebook's plea and the case will now go to trial unless the Supreme Court intervenes, TechCrunch reported on Friday.
"The suit alleges that Illinois citizens didn't consent to having their uploaded photos scanned with facial recognition and weren't informed of how long the data would be saved when the mapping started in 2011," the report added.
Facebook could face $1,000 to $5,000 in penalties per user for seven million people, which could reach a maximum of $35 billion.
Facebook started the facial recognition technology in 2011, when it would ask users to identify if people tagged in photos were friends they knew.
The facial recognition software "invades an individual's private affairs and concrete interests," said the judges.
"Facebook's facial recognition technology violated Illinois's Biometric Information Privacy Act (BIPA)," said the court document.
"Violations of the procedures in BIPA actually harmed or posed a material risk of harm to those privacy interests," it added.
BIPA provides for $1,000 dollars for each negligent violation and $5,000 for each intentional or reckless violation.
The lawsuit could make Facebook face billions of dollars in potential damages if it eventually loses the legal battle.
"Facebook has always told people about its use of face recognition technology and given them control over whether it's used for them. We are reviewing our options and will continue to defend ourselves vigorously," Facebook said in a statement.
The class-action poses a greater penalty than the record-breaking $5 billion settlement Facebook agreed to pay the US Federal Trade Commission (FTC).
( With inputs from IANS )