Supreme Court hears Facebook’s bid to drop shareholder lawsuit over Cambridge Analytica scandal

The U.S. Supreme Court on Wednesday ruled on a bid by Meta’s Facebook to quash a federal securities fraud lawsuit filed by shareholders who accused the social media platform of misleading them about misuse of user data.

Justices heard arguments in Facebook’s appeal of a lower court’s ruling that allowed a 2018 class action lawsuit led by Amalgamated Bank to continue. It’s one of two cases coming before them this month — the other involving artificial intelligence chipmaker Nvidia — that could lead to rulings making it harder for private litigants to hold companies to account for alleged fraud. of securities.

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 alleged 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.

The Supreme Court has a 6-3 conservative majority. Some of the conservative justices seemed to indicate that reasonable investors would read statements into forward-looking risk factor disclosures describing matters that may have occurred in the past.

“For example, if you were to leave my house and I said, ‘You might have slipped down the stairs,’ you wouldn’t say, ‘Well, that’s never happened before.’ Your conclusion would be: this has happened and that’s why I’m giving you the warning,” Conservative Chief Justice John Roberts told Kevin Russell, a lawyer for the shareholders.

But conservative Justice Clarence Thomas deferred to Kannon Shanmugam, Facebook’s lawyer, on whether the company’s risk statement was misleading.

“The problem is that a reasonable person could look at the statement and assume that, because it only talks about the future likelihood of this harm or this event, that it never happened,” Thomas said.

“So why can’t someone read this and assume it never happened?” Thomas asked.

Shanmugam replied: “We do not think that a reasonable person would draw that conclusion from a statement of this kind. When a statement says ‘if something happens, harm may result from it’ – I don’t think it is a necessary premise of that statement that the event never happened.”

Facebook shares fell after 2018 media reports that Cambridge Analytica had used Facebook user data improperly collected in connection with Donald Trump’s successful 2016 presidential campaign. The suit seeks unspecified monetary damages in part for recovered the lost value of Facebook shares held by investors.

At issue is whether Facebook broke the law when it failed to detail the earlier 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 disclose that its foreclosed risk had already materialized because “a reasonable investor” would understand that risk disclosures are forward-looking statements.

“When we think about these questions, we’re not just looking for lies or false statements,” liberal Justice Elena Kagan said of Shanmugam. “We are also looking at misleading statements or misleading omissions.”

‘Always forward-looking’

Conservative Justice Samuel Alito asked Shanmugam: “Isn’t it the case that an assessment of risks is always forward-looking? Isn’t it inherently forward thinking? When you want to know what risk you face, you want to know what your future risk is, right?”

“It is. And that is basically what underlies our argument here,” Shanmugam replied.

Conservative Justices Brett Kavanaugh and Neil Gorsuch asked Shanmugam whether other disclosure requirements in regulatory filings could be available to companies to describe the type of past events at issue in the case.

Roberts, however, questioned Shanmugam about the use of other discovery provisions.

“Is your attitude basically that ‘don’t worry about half-truths'” in risk factor disclosure, “because the underlying problem will already be discovered under other provisions?”

Thomas asked Russell what else Facebook should have provided in its statement.

“So I think they could have said what they said, and then said something like, ‘Such improper disclosure or misuse or use of data has occurred in the past, including recently on a scale substantial,'” Russell said. “I think that would have removed any false impression that an event like what happened at Cambridge Analytica had not happened.”

President Biden’s administration supported shareholders in this case.

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 decision revived it in 2023. A a decision from the Supreme Court is expected at the end of June.

The Cambridge Analytica data breach prompted US government investigations into Facebook’s privacy practices, various lawsuits and a congressional hearing in which Meta CEO Mark Zuckerberg was grilled by lawmakers.

The 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 fine to the Federal Trade Commission over the Cambridge Analytica case.