Facebook’s Legal Battle Over Data Misuse Disclosure Reaches US Supreme Court

The US Supreme Court on Wednesday started hearing arguments in a securities fraud lawsuit filed by Facebook’s shareholders, who claim the social media giant misled them on how it managed sensitive user data. The case, initiated by Amalgamated Bank in 2018 as a class action, could ultimately raise the legal bar for shareholders seeking to hold companies accountable for alleged securities fraud, according to Reuters.

The lawsuit revolves around allegations that Facebook, now operating as Meta Platforms Inc., withheld critical information about a data breach involving British political consulting firm Cambridge Analytica. The breach, dating back to 2015, reportedly exposed the personal data of over 30 million Facebook users, some of which was allegedly used in connection with Donald Trump’s 2016 presidential campaign. The shareholders argue that Facebook violated the Securities Exchange Act of 1934, which mandates transparency for publicly traded companies on risks that could impact their business, per Reuters.

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 marks one of two high-profile securities cases before the Supreme Court this month, the other involving Nvidia, an AI chipmaker, facing similar accusations of misleading investors. If the Court rules in favor of Meta and Nvidia, it may set a precedent that complicates the path for private litigants seeking to hold corporations accountable for alleged fraud, potentially reshaping the future of securities litigation in the United States.

During Wednesday’s hearing, Facebook’s attorney, Kannon Shanmugam, argued that the company’s statements regarding data misuse risks were forward-looking, rather than admissions of past incidents. However, the justices posed pointed questions challenging Facebook’s stance. Notably, Justice Clarence Thomas questioned whether Facebook’s risk disclosures were indeed misleading by failing to mention a breach that had already occurred, noting that “a reasonable person could look at the statement and assume” the risk was merely hypothetical.

In response, Shanmugam contended that a hypothetical framing of the risk did not imply that no previous incident had taken place. “We don’t think a reasonable person would draw that inference from a statement of this variety,” he argued, emphasizing that Facebook’s disclosure statement was not intended to suggest that a data breach had never occurred.

Facebook’s stock took a hit following the 2018 media exposure of the Cambridge Analytica scandal, prompting widespread scrutiny, U.S. government investigations, and congressional hearings. According to the plaintiffs, the company’s failure to disclose the breach sooner affected shareholder value and prompted this legal action seeking financial compensation. At the core of the case is the contention that Facebook misrepresented the likelihood of user data being improperly accessed, despite having already experienced a breach.

Related: Meta Enhances User Data Control, Resolving German Antitrust Dispute

Justice Elena Kagan highlighted another critical element in the case, stressing the distinction between outright falsehoods and potentially misleading omissions. “We’re also looking to misleading statements or misleading omissions,” Kagan said, underscoring that disclosures could still mislead investors even without constituting an outright lie.

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

Both cases underscore the Supreme Court’s evolving approach to securities regulation and investor protections. In recent years, the Court has narrowed the powers of the U.S. Securities and Exchange Commission (SEC), the federal agency tasked with overseeing securities fraud. Now, the justices’ decisions in these cases could further limit the ability of private plaintiffs to challenge companies over alleged securities law violations, setting a high standard for evidence of corporate misconduct.

The stakes for Meta and Nvidia are significant: a ruling that raises the bar for private securities lawsuits could shield companies from a wave of shareholder claims, especially in industries like tech, where risks associated with data, privacy, and emerging markets are increasingly scrutinized.

Source: Reuters