Meta Investor Suit Over Proper Disclosure Troubles Supreme Court (1)

The US Supreme Court had difficulty deciding what companies must say about past events when warning investors about future risks, in a case dealing with fallout from an unauthorized misuse of Meta Platforms Inc.'s Facebook user data.

Several justices were concerned Wednesday that allowing the multi-billion-dollar investor suit against Facebook’s parent to continue would dramatically expand business liability, and could eventually lead to over-disclosure.

It would be giving investors a “blank check,” Chief Justice John Roberts said.

But Justice Neil Gorsuch said the entire court was concerned about companies purposely misleading investors through half-truths.

Investors sued over 2016 Facebook SEC filings treating the risk of unauthorized use of user data as a hypothetical when the company knew that political consulting firm Cambridge Analytica had already accessed information on 30 million users in 2015.

Facebook’s stock price plunged and its market capitalization fell by $100 billion after the public discovered the full scope of the scandal in 2018.

Justice Elena Kagan said the disclosures aren’t complete lies, but are misleading.

“It’s not a black and white thing,” she said.

Ultimately, the court might decide to leave it up to the Securities and Exchange Commission to clarify its regulations.

Given the potential implications for both companies and investors, “why does the judiciary have to walk the plank on this?” Justice Brett Kavanaugh wondered.

Risk Disclosures

The question the justices agreed to consider is whether a company’s risk disclosures are false or misleading when they don’t say the risk has already occurred.

A federal trial court granted Facebook’s motion to dismiss the proposed call action but the US Court of Appeals for the Ninth Circuit revived it. The company’s statement that the risk of unauthorized data use “could” occur when it actually had was enough to prove falsity at the motion to dismiss stage, the Ninth Circuit said.

The justices appeared dissatisfied with both Facebook’s categorical rule and the investors’ more nuanced one.

Arguing for the tech giant, Paul, Weiss’ Kannon Shanmugam agreed that there are times when a statement about future risks can imply that something didn’t happen in the past. But that can only happen when the company has also expressly said something false about the past.

“If the statement had said Meta has never experienced an episode of data misuse involving its users, but if it did, it would do harm to Meta’s business or reputation, of course, in that context, the statement would be false or misleading if there had been an episode in the past,” Shanmugam said.

But a company’s statement about future risks, on its own, doesn’t imply anything about the past, he said.

That’s saying context matters, Justice Amy Coney Barrett said. And that “makes it not easily susceptible to a categorical rule,” she told Shanmugam.

Barrett and others kept coming back to a hypothetical from Kagan in which a company discloses a risk of fire but doesn’t disclose that there had recently been a fire that destroyed 50% of the plant.

If “there’s been such substantial damage to a plant that production capacity is operating at 50 percent,” Kagan said that’s “going to be of interest to the investor.”

Gorsuch noted that “we’re all concerned about the 50 percent.”

As Justice Samuel Alito explained, the “intuition is that a statement that simply blandly says that there’s a possibility of a risk can, in context, be extremely misleading if there is a high probability of the risk materializing.”

Kevin Russell, arguing for the investors, called the misuse of 30 million users’ private data a “ticking time bomb.” And yet, the company “hadn’t said boo about this.”

Russell said the justices should reject the company’s “categorical” rule that these “statements are always agnostic about whether the risk has transpired in the past.”

Because the case comes to the court on a motion to dismiss, Russell said the question isn’t whether Facebook’s statements were agnostic to the past.

It’s instead “whether we have plausibly alleged that a reasonable jury can conclude that these statements falsely implied that the omitted event had not occurred,” he said.

Barrett suggested both rules went “too far” and that it was difficult for the court to “articulate what the line is.” She suggested that maybe the court shouldn’t be drawing the line itself.

Roberts, too, suggested that the SEC should do the line drawing.

In “such a complicated scenario of that sort, sometimes it’s ‘yes,’ sometimes it’s ‘no,’” Roberts said, it seems like the court should leave it up to the SEC “to exercise its expertise with respect to it.”

The case is Facebook Inc. v. Amalgamated Bank, U.S., No. 23-980, argued 11/6/24.