Facebook's legal battle over data misuse disclosure reaches the US Supreme Court

The U.S. Supreme Court on Wednesday began hearing arguments in a securities fraud lawsuit filed by Facebook shareholders who claim the social media giant misled them in its management of sensitive user data. The case, launched as a class action by Amalgamated Bank in 2018, could ultimately raise legal hurdles for shareholders seeking to hold companies accountable for alleged securities fraud, according to Reuters.

The lawsuit centers on allegations that Facebook, now trading as Meta Platforms Inc., withheld key information about a data breach involving British political consulting firm Cambridge Analytica. The 2015 breach reportedly exposed personal data of over 30 million Facebook users, some of which was allegedly used in connection with Donald Trump's 2016 presidential campaign. According to Reuters, shareholders argue that Facebook violated the Securities Exchange Act of 1934, which requires publicly traded companies to be transparent about risks that could affect their business.

Meta appealed to the Supreme Court after a 2023 ruling by the San Francisco-based 9th U.S. Circuit Court of Appeals allowed the lawsuit to proceed. The court's decision is one of two high-profile securities cases before the Supreme Court this month. The other involves Nvidia, an AI chip maker that faces similar allegations of misleading investors. If the court rules in favor of Meta and Nvidia, it could set a precedent that will make it harder for private litigants seeking to hold companies accountable for alleged fraud and potentially change the future of securities litigation in the United States.

During Wednesday's hearing, Facebook's lawyer Kannon Shanmugam argued that the company's statements about data breach risks were forward-looking and not admissions of past incidents. However, the judges asked pointed questions that questioned Facebook's stance. Specifically, Justice Clarence Thomas questioned whether Facebook's risk disclosures were actually misleading because it failed to mention a breach that had already occurred, noting that “a reasonable person could look at the statement and assume” that the risk was merely hypothetical be.

Shanmugam responded that a hypothetical presentation of the risk does not mean that an incident has not previously occurred. “We do not believe that a reasonable person would draw that conclusion from a statement of this nature,” he argued, emphasizing that Facebook's disclosure statement was not intended to create the impression that a data breach never occurred.

Facebook shares took a dive following media exposure of the Cambridge Analytica scandal in 2018, which led to widespread investigations, US government investigations and congressional hearings. According to the plaintiffs, the company's failure to disclose the breach earlier impacted shareholder value and led to this lawsuit for monetary damages. At the heart of the case is the allegation that Facebook misrepresented the likelihood of improper access to user data even though a breach had already occurred.

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Justice Elena Kagan highlighted another critical element of the case, emphasizing the difference between outright falsehoods and potentially misleading omissions. “We also pay attention to misleading statements or misleading omissions,” Kagan said, emphasizing that disclosures could mislead investors even if they are not an outright lie.

The lawsuit, originally dismissed by U.S. District Judge Edward Davila in 2021, was revived by the 9th Circuit in a 2-1 decision. Justice Margaret McKeown, writing for the majority, argued that Facebook's portrayal of the data breach risk as hypothetical was misleading because the breach had already occurred, according to Reuters. The legal debate over such disclosures extends beyond Facebook, as Nvidia is also seeking Supreme Court intervention in a similar case related to cryptocurrency sales reporting.

Both cases highlight the Supreme Court's evolving approach to securities regulation and investor protection. In recent years, the court has limited the powers of the U.S. Securities and Exchange Commission (SEC), the federal agency tasked with monitoring securities fraud. Now, the judges' decisions in these cases could further limit the ability of private plaintiffs to challenge companies for alleged violations of securities laws, thereby setting a high standard for evidence of corporate wrongdoing.

The stakes are high for Meta and Nvidia: A ruling that raises the bar for private securities lawsuits could protect companies from a wave of shareholder lawsuits, particularly in industries like technology, where risks related to data, privacy and emerging markets are increasingly underplayed be taken under the magnifying glass.

Source: Reuters