The U.S. Supreme Court is currently reviewing a pivotal case that could absolve Facebook from a securities fraud lawsuit.
Reuters reported that the high court's decision hinges on whether Facebook should have disclosed a prior data breach involving Cambridge Analytica in its risk statements.
On November 6, the justices heard arguments pertaining to Facebook’s appeal to terminate a lawsuit initiated by shareholders, led by Amalgamated Bank. The shareholders contend that Facebook’s failure to disclose the 2015 data breach was a misleading omission under the Securities Exchange Act of 1934.
The case shines a spotlight on Facebook’s non-disclosure of the breach, which impacted over 30 million users. The breach itself became public in 2018, causing significant financial repercussions for the tech giant and leading to numerous U.S. government investigations and hefty fines.
The lawsuit’s revival by the 9th U.S. Circuit Court of Appeals after its initial dismissal by U.S. District Judge Edward Davila brings this case before the Supreme Court’s conservative 6-3 majority, which seemed split on the interpretation of risk-factor disclosures.
During the proceedings, Facebook’s lawyer, Kannon Shanmugam, argued that disclosures concerning risks are inherently focused on future possibilities and that past breaches do not necessarily need to be detailed if they are not immediate threats. This standpoint was met with varying responses from the justices.
Chief Justice John Roberts and Justice Clarence Thomas questioned the implications of mentioning potential risks without acknowledging past occurrences, highlighting the potential for investors to be misled by such omissions.
Justice Elena Kagan emphasized the importance of considering not just outright falsehoods but also potentially misleading omissions in disclosures.
“We’re not looking only to lies or complete false statements,” she noted, underscoring the broader implications of what constitutes misleading information.
Justice Samuel Alito also weighed in, questioning whether all risk evaluations should be assumed forward-looking, thereby probing the foundational aspects of disclosure requirements.
The debate extended to what extent companies must discuss past incidents when presenting potential future risks. Kevin Russell, representing the shareholders, suggested that an acknowledgment of past incidents, such as the Cambridge Analytica event, could have mitigated misleading impressions.
This discussion is critical as it sets a precedent for how companies might have to handle disclosures of risks and past incidents moving forward, potentially affecting the entire corporate landscape.
The Supreme Court’s decision, expected by the end of June, will significantly impact not only Facebook but also how companies disclose information to investors about potential and past risks.
The Biden administration has sided with the shareholders, emphasizing the administration’s stance on corporate transparency and accountability in investor communications.
As the legal community and investors alike await the ruling, the outcome of this case could redefine the boundaries of corporate responsibility in the digital age.
