By John Kruzel
WASHINGTON (Reuters) -The U.S. Supreme Court began hearing arguments on Wednesday in a bid by Meta’s Facebook to scuttle a federal securities fraud lawsuit brought by shareholders who accused the social media platform of misleading them about the misuse of its user data.
Facebook appealed a lower court’s decision allowing the 2018 class action led by Amalgamated Bank to proceed. It is one of two cases coming before them this month – the other one involving artificial intelligence chipmaker Nvidia – that could lead to rulings making it harder for private litigants to hold companies to account for alleged securities fraud.
The arguments were ongoing.
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 business risks. They claimed the company unlawfully withheld information from investors about a 2015 data breach involving British political consulting firm Cambridge Analytica that affected more than 30 million Facebook users.
Conservative Justice Clarence Thomas pressed Kannon Shanmugam, the lawyer for Facebook, 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, that it never occurred,” Thomas said.
“So why wouldn’t one be able to read this and assume that it never happened?” Thomas asked.
Shanmugam replied, “We don’t think that a reasonable person would draw that inference from a statement of this variety. Where a statement says ‘if something occurs, harm may follow from that’ – I don’t think it’s a necessary premise of that statement that the event has never occurred.”
Facebook’s stock fell following 2018 media reports that Cambridge Analytica had used improperly harvested Facebook user data in connection with Donald Trump’s successful U.S. presidential campaign in 2016. The suit seeks unspecified monetary damages in part to recoup the lost value of the Facebook stock held by the investors.
At issue is whether Facebook broke the law when it failed to detail the prior data breach in subsequent business-risk disclosures, and instead portrayed the risk of such incidents as purely hypothetical.
Facebook argued in a Supreme Court brief that it was not required to reveal that its warned-of risk had already materialized because “a reasonable investor” would understand risk disclosures to be forward-looking statements.
“When we think about these questions, we’re not looking only to lies or complete false statements,” liberal Justice Elena Kagan told Shanmugam. “We’re also looking to misleading statements or misleading omissions.”
U.S. District Judge Edward Davila dismissed the lawsuit in 2021 but the San Francisco-based 9th U.S. Circuit Court of Appeals in a 2-1 ruling revived it in 2023.
“The problem is that Facebook represented the risk of improper access to or disclosure of Facebook user data as purely hypothetical when that exact risk had already transpired,” Judge Margaret McKeown wrote in the 9th Circuit decision.
A ruling by the Supreme Court is expected by the end of June.
The Cambridge Analytica data breach prompted U.S. government investigations into Facebook’s privacy practices, various lawsuits and a U.S. congressional hearing at which Meta Chief Executive Mark Zuckerberg was grilled by lawmakers.
The U.S. Securities and Exchange Commission in 2019 brought an enforcement action against Facebook over the matter, which the company settled for $100 million. Facebook paid a separate $5 billion penalty to the U.S. Federal Trade Commission over the Cambridge Analytica issue.
The Supreme Court on Nov. 13 is due to hear arguments in Nvidia’s similar appeal to avoid a securities class action accusing it of misleading investors about how much of its sales went to the volatile cryptocurrency industry.
The Supreme Court in prior rulings has limited the authority of the SEC, the federal agency that polices securities fraud. Its rulings in the Facebook and Nvidia cases now could make it more difficult for private litigants to hold companies liable for such conduct.
(Reporting by John Kruzel; Additional reporting by Andrew Chung; Editing by Will Dunham)
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