The U.S. Supreme Court on Wednesday took on an attempt by Meta Facebook to thwart a federal securities fraud lawsuit brought by shareholders who accused the social media platform of misleading them about misusing user data.
The justices heard arguments in Facebook’s appeal of a lower court’s decision that allowed the 2018 class-action lawsuit led by Amalgamated Bank to proceed. The lawsuit seeks unspecified monetary damages in part to recover the lost value of Facebook shares held by investors. It’s one of two cases coming before them this month (the other involving AI chip maker Nvidia on Nov. 13) that could lead to rulings that make it harder for private litigants to hold companies accountable for alleged fraud. values.
At issue is whether Facebook violated the law when it failed to detail the earlier data breach in subsequent disclosures about business risks and instead described the risk of such incidents as purely hypothetical.
Facebook argued in a Supreme Court brief that it was not required to disclose that the risk it warned about had already materialized because “a reasonable investor” would understand the risk disclosures to be forward-looking statements.
“When we think about these questions, we’re not just looking for lies or completely false statements,” liberal Justice Elena Kagan told Kannon Shanmugam, Facebook’s lawyer. “We also look for misleading statements or omissions.”
Conservative Justice Samuel Alito asked Shanmugam: “Isn’t it true that a risk assessment always looks forward?”
“It is. And that is essentially what underlies our argument here,” Shanmugam responded.
The plaintiffs accused Facebook of misleading investors in violation of the Securities Exchange Act, a 1934 federal law that requires publicly traded companies to disclose their trading risks. They claimed the company illegally withheld information from investors about a 2015 data breach involving British political consulting firm Cambridge Analytica that affected more than 30 million Facebook users.
U.S. District Judge Edward Davila dismissed the lawsuit, but the San Francisco-based U.S. Court of Appeals for the Ninth Circuit revived it. The Supreme Court’s ruling is expected at the end of June.
The Cambridge Analytica data breach sparked US government investigations into Facebook’s privacy practices, several lawsuits and a US congressional hearing. In 2019, the U.S. Securities and Exchange Commission filed an enforcement action against Facebook over the matter, which the company settled for $100 million. Facebook paid a separate $5 billion fine to the US Federal Trade Commission over the issue.
The Supreme Court has a conservative majority of 6 to 3. Some of the conservative justices appeared to indicate that reasonable investors would interpret statements contained in forward-looking risk factor disclosures as describing matters that may have occurred in the past.
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“For example, if you leave my house and I say, ‘You might slip on the stairs,’ you wouldn’t say, ‘Well, that’s never happened before.’ Your inference would be: That has happened and that is why I am giving you the warning,” John Roberts, the conservative chief justice, told Kevin Russell, a lawyer for the shareholders.
But conservative Justice Clarence Thomas pressed Shanmugam on whether the company’s risk statement was misleading.
“The problem is that the reasonable person could look at the statement and assume that because it only talks about future probabilities of this harm or this event occurring, it never happened,” Thomas said. “So why wouldn’t one read this and assume it never happened?”
Shanmugam responded: “We do not believe that a reasonable person would draw that inference from such a statement. “When a statement 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 shares fell following 2018 media reports that Cambridge Analytica had used improperly collected Facebook user data in connection with Donald Trump’s successful 2016 US presidential campaign.