The U.S. Supreme Court on Wednesday weighed in on Meta Inc.'s Facebook's bid to quash a federal securities fraud lawsuit brought by shareholders who accused the social media platform of misleading about its misuse of user data.
The justices heard arguments in Facebook's appeal of a lower court's decision to allow a 2018 class action lawsuit led by Amalgamated Bank to proceed. This is one of two lawsuits filed against them this month, the other involving artificial intelligence chip maker Nvidia, as private litigants seek to hold the company accountable for alleged securities fraud. This could lead to judgments that make it difficult.
The plaintiffs accused Facebook of violating the Securities Exchange Act, a 1934 federal law that requires public companies to disclose business risks, and misleading investors. They alleged that the company illegally withheld information from investors about a 2015 data breach that involved British political consulting firm Cambridge Analytica and affected more than 30 million Facebook users.
The Supreme Court has a 6-3 conservative majority. Some conservative judges have suggested that reasonable investors would read forward-looking risk factor disclosure statements as outlining problems that may have arisen in the past. There seemed to be some people there.
“For example, if you were leaving the house and I said, “I might slip on the stairs,'' you wouldn't say, “Well, that's never happened to me before.'' Your guess. Here's the thing: That's what happened, so I'm issuing a warning to you,'' Conservative Chief Justice John Roberts told shareholders' lawyer Kevin Russell.
But conservative Justice Clarence Thomas pressed Facebook's lawyer, Kanon Shanmugam, on whether the company's risk descriptions were misleading.
“The problem is that a reasonable person might look at this statement and think that because it only talks about the future probability of this harm or this event happening, it never happened,” Thomas said. Ta.
“So why can't we read this and think it never happened?” Thomas asked.
Mr Shanmugam replied: If you have a statement that says, “If something happens, harm can result from it,” I don't think it's a necessary premise of that statement that the event never happened. ”
Facebook's stock price fell following media reports in 2018 that Cambridge Analytica used improperly collected Facebook user data in connection with the company's 2016 presidential election success. The lawsuit seeks unspecified monetary damages as part of recovering the lost value of investors' Facebook stock.
At issue is whether Facebook violated the law by not detailing previous data breaches in its subsequent business risk disclosures, and instead portraying the risks of such incidents as merely hypothetical. be.
Facebook said in its Supreme Court brief that “reasonable investors” would understand risk disclosures to be forward-looking statements, so there is no need to disclose that the risks warned have already materialized. he claimed.
“When we think about these issues, we're not just thinking about lies or outright false statements,” Liberal Justice Elena Kagan told Shanmugam. “We also look at misleading statements and misleading omissions.”
“Always positive”
Conservative Justice Samuel Alito asked Shanmugam: “Isn't risk assessment always forward-looking?” Isn't it inherently positive? When you want to know the risks you are facing, you also want to know the risks in the future, right? ”
“Yes, and that is essentially the basis of our discussion here,” Mr. Shanmugam replied.
Conservative Justices Brett Kavanaugh and Neil Gorsuch asked Shanmugam to provide other disclosures in regulatory filings by companies to outline past events at issue in the case. I asked if my requirements were available.
However, Mr Roberts questioned Mr Shanmugam about the application of other disclosure provisions.
“Is the basic position of 'don't worry about half-truths' about disclosing risk factors because the underlying issues have already been disclosed under other provisions?”
Thomas asked Russell what else Facebook should have provided in its statement.
“So they say what they said, and then they say things like, 'This kind of inappropriate disclosure and misuse and use of data has occurred on a significant scale in the past and recently.' I think I could have said that,” Russell said. “I think that would eliminate the misconception that something like what happened at Cambridge Analytica didn't happen.”
President Biden's administration sided with shareholders in the case.
U.S. District Judge Edward Davila dismissed the case in 2021, but the San Francisco-based 9th Circuit Court of Appeals reopened the case in 2023 in a 2-1 decision. The Supreme Court's decision is expected to be handed down by the end of June.
The Cambridge Analytica data breach has led to a U.S. government investigation into Facebook's privacy practices, various lawsuits, and Congressional hearings on Meta CEO Mark Zuckerberg from lawmakers. Ta.
The Securities and Exchange Commission filed an enforcement action against Facebook in 2019 over the issue, which the company settled for $100 million. Facebook paid a separate $5 billion fine to the Federal Trade Commission over the Cambridge Analytica scandal.
