Absolutely talk to an attorney and see what your rights are!
Also, have your daughter check her privacy settings on her Facebook account to make sure that your sister isn't randomly reading her posts and making up stories about them. My own family just went through something very similar to this with a mentally ill family member who would see someone's post ... you know, just something inoccuous like "I'm so mad right now, I could scream!" and assume it was about them and go to other family members screaming that everyone hated them. Didn't matter that the post was about being mad because the toaster broke or someone drank all the milk for breakfast, it always came down to the mentally ill fam. member interpreting it to be about them.
Make sure that your sister doesn't have access to yours or your daughter's facebook posts.