FILE PHOTO: Facebook app logo is seen in this illustration taken, August 22, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
WASHINGTON (Reuters) -The U.S. Supreme Court grappled on Wednesday over 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.
The justices heard arguments in Facebook's appeal of 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 on Nov. 13 - that could lead to rulings making it harder for private litigants to hold companies to account for alleged securities fraud.
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.
The Supreme Court has a 6-3 conservative majority. Some of the conservative justices seemed to indicate that reasonable investors would read statements in forward-looking risk-factor disclosures as outlining issues that may have occurred in the past.
"For example, if you're leaving my house and I say, 'You might slip on the steps,' you wouldn't say, 'Well, that's never happened before.' Your inference would be: that 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 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."
'ALWAYS FORWARD-LOOKING'
Conservative Justice Samuel Alito asked Shanmugam, "Isn't it the case that an evaluation of risks is always forward-looking?"
"It is. And that is essentially what underlies our argument here," Shanmugam responded.
Conservative Justices Brett Kavanaugh and Neil Gorsuch asked Shanmugam whether other disclosure requirements in regulatory filings might be available for companies to outline the kind of past events at issue in this case.
Roberts, however, questioned Shanmugam on the use of other disclosure provisions.
"Is your position basically that 'don't worry about half-truths'" in disclosing the risk factors, "because the basic problem is already going to be disclosed 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 substantial scale,'" Russell said. "I think that would have removed any misimpression that an event like what happened in Cambridge Analytica hadn't occurred."
President Joe Biden's administration supported the shareholders in the case.
U.S. District Judge Edward Davila dismissed the lawsuit but the San Francisco-based 9th U.S. Circuit Court of Appeals revived it. The Supreme Court's ruling 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. 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 issue.
(Reporting by John Kruzel; Additional reporting by Andrew Chung; Editing by Will Dunham)
