(Estimated time to read: 10 – 12 minutes)
On November 22, 2024, after full merits briefing and oral argument, the Supreme Court of the United States dismissed an appeal brought by defendants Facebook, Inc. (“Facebook”), Facebook CEO and Chairman Mark Zuckerberg, former Facebook Chief Operating Officer Sheryl Sandberg, and former Facebook CFO turned Chief Strategy Officer David Wehner (“Defendants”).[i] The Defendants’ appeal concerned whether Facebook’s risk disclosure statements in its 2016 annual report were false and misleading to investors. The per curium dismissal order consisted of just two sentences, leaving legal experts to speculate about why the Supreme Court chose not to issue an opinion.
Dismissals without an opinion such as this are relatively rare, and with the case slated to be remanded back to the federal district court, securities law practitioners are left speculating what the Justices granted certiorari, how the case might proceed from here, and what information (if any) can be gleaned for future securities class actions.
Readers may recall that in 2018, Facebook (now a wholly-owned subsidiary of Meta Platforms, Inc. (“Meta”), faced widespread scrutiny when news media unveiled that Cambridge Analytica Ltd. (“Cambridge Analytica”), a U.K.-based political consulting firm, had improperly collected personal data from approximately 87 million Facebook users in order to create data profiles of American voters. Information from these profiles was then allegedly sold to and used to consult with political campaigns, including notably the 2016 presidential campaign of Donald Trump. Amongst other things, the Cambridge Analytica scandal lead to a Federal Trade Commission investigation, ending with Facebook agreeing to pay a whopping $5 billion fine.
Though the news of Cambridge Analytica’s actions was first broken by The Guardian and The New York Times on March 17, 2018, Defendants had actually learned of Cambridge Analytica’s data harvesting over the course of 2015, but did not inform affected Facebook users. Rather, as detailed below, investors allege that Defendants mislead investors and committed securities fraud, such that when the truth came out in March 2018, Facebook’s stock price dropped 13% per share—equal to roughly $50 billion in Facebook’s market value at the time—thus causing investors, including retirement and pension funds, to lose money.
In the United States District Court for the Northern District of California (“District Court”), plaintiffs Amalgamated Bank (as a trustee for several funds) and Public Employees’ Retirement System of Mississippi filed their Third Amended Consolidated Class Action Complaint (“Complaint”) on October 16, 2020.[ii] The Complaint alleged, amongst other things, that Facebook had issued false and misleading statements to investors regarding its handling of its users’ data, including by issuing misleading risk statements in its 2016 annual report filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on February 3, 2017.[iii] Specifically, the plaintiffs alleged that Facebook misled investors by making the following risk statements:
The plaintiffs alleged that these risk statements were materially false and misleading because these risks were posed as mere hypothetical scenarios that had not occurred, when in reality Defendants knew that Cambridge Analytics had already improperly accessed and misused Facebook user data. Having chosen to speak on the issues implicated by these disclosures, the Defendants’ decisions to omit information of then-existing risks rendered the disclosures misleading. Thus, Defendants were alleged to have violated the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and SEC rule 10b-5 promulgated thereunder.
On December 20, 2021, District Court Judge Edward J. Davila granted Defendants’ motion to dismiss the Complaint, finding (amongst other things) that plaintiffs failed to adequately plead the falsity of the foregoing risk statements. In other words, the District Court found they were not actionably false or misleading statements because Cambridge Analytica’s misconduct was purportedly already known to the investing public when Facebook made the statements.[v] The District Court held that The Guardian and The Washington Post had already reported at the time Facebook issued the risk statements that Cambridge Analytica had improperly collected data from “a massive pool of unwitting US Facebook users.”[vi]
Plaintiffs appealed the District Court’s decision to the United States Court of Appeals for the Ninth Circuit. On February 8, 2023, a split Ninth Circuit panel reversed the District Court’s decision in part and remanded the case back to the District Court in part, finding amongst other things, that plaintiffs had adequately plead the risk disclosures as actionably false and misleading, given allegations that Defendants knew in 2015 that Cambridge Analytica had violated Facebook’s user data policies.[vii] Specifically, the Ninth Circuit majority found that while some details of Cambridge Analytica’s actions were public at the time of Facebook’s risk statements, the full extent of the damage—including to Facebook’s business and reputation—was not yet revealed. Therefore, the majority reasoned, the risk statements were adequately plead to be misleading in the Complaint.
The panel majority’s opinion referenced another recent Ninth Circuit case involving Google’s parent company, Alphabet Sec. Litig., R.I. v. Alphabet, Inc., 1 F.4th 687 (9th Cir. 2021). The Ninth Circuit reaffirmed its pleading standard for risk statements, writing “falsity allegations [are] sufficient to survive a motion to dismiss when the complaint plausibly allege[s] that a company's SEC filings warned that risks ‘could’ occur when, in fact, those risks had already materialized.”[viii]
Following the Ninth Circuit’s decision, Defendants filed a petition for a writ of certiorari in the Supreme Court of the United States to appeal the Ninth Circuit’s decision below.[ix] In doing so, defendant appellees-turned-petitioners suggested a circuit split existed, and advocated that Supreme Court adopt the position of the Sixth Circuit which “does not require companies to disclose any past events in its risk factors, and six other circuits require disclosure only if the company knows the past events will harm the business.”[x] The Defendants hypothesized that allowing the Ninth Circuit’s ruling to stand might require companies to “disclose past instances when a risk materialized even if those events pose no known threat of business harm.”[xi]
The Supreme Court granted certiorari with respect to the following question taken from the Defendants’ petition:
First, the circuits have split three ways concerning what public companies must disclose in the “risk factors” section of their 10-K filings. The Sixth Circuit holds that companies need not disclose past instances when a risk has materialized. The First, Second, Third, Fifth, Tenth, and D.C. Circuits hold that companies must disclose that a risk materialized in the past if the company knows that event will harm the business. The Ninth Circuit here adopted a third, outlier position requiring companies to disclose that a risk materialized in the past even if there is no known threat of business harm…
The questions presented are:
In other words, was the Ninth Circuit correct in stating that risk statements describing potential risks can be false and misleading under federal securities laws if the risks have already materialized?
Subsequent briefing involved numerous persons and entities filing briefs as amicus curiae for the parties, including the United States government, through attorneys with the SEC and the U.S. Office of the Solicitor General, who intervened on behalf of investors in the case.
On November 6, 2024, the Supreme Court heard oral argument.[xiii] Meta argued that the risk disclosures companies make in their SEC filings are inherently forward-looking, and that no reasonable investor would read such statements as asserting anything about whether the risks had transpired in the past, or whether such past events created a present harm to the company. Further, Meta argued that the Ninth Circuit’s decision gave rise to a problem where companies going forward would have to have to issue far lengthier risk statements, in order to disclose all possible past events that could cause present harm to the company and thus that could be material information for investors.
The investors countered that Meta was mischaracterizing the Ninth Circuit’s decision, and the problem identified by Meta was purely hypothetical in the case, because all courts recognize that events that do not pose a risk of harm to a company are not material to investors, and therefore do not need to be disclosed. Moreover, the investors argued, adopting Meta’s interpretation would give companies license to intentionally mislead investors about material events by describing such events as purely hypothetical.
Perhaps crucially, the investors argued that they actually agreed with Meta that a risk disclosure is not false or misleading if it doesn’t disclose the past occurrence of an immaterial risk. The investors reasoned that the scenario posed by Meta’s first question presented was inapposite to this case, because here Defendants did know that the risks had occurred and were occurring and presented “risk of ongoing or future business harm.”
During oral arguments, the Supreme Court justices spent a considerable portion of the two hour hearing posing theoretical scenarios to test Meta’s proposed rule, apparently trying to assess where to draw a line on whether or not past events—which could pose present risks to a company—need to be properly disclosed to investors. Some justices seemed to imply that limits on disclosure requirements were needed so that corporations do not need to disclose every past event that may harm a company presently, whereas other justices pointed to scenarios where investors would want to be told material information about the company they’ve invested in, implying that Meta investors had been misled by the company’s risk statements. Some legal observers noted that the justices in general appeared skeptical about whether the case was a good one upon which to base a universal rule.[xiv]
On November 22, 2024 the Supreme Court dismissed the writ of certiorari as improvidently granted, commonly referred to as a “DIG”[xv]—meaning that a majority of justices of the Supreme Court determined the Defendants’ petition to appeal was not worthy of a grant of certiorari. As a result, the Ninth Circuit’s opinion was not disturbed and the investors may proceed in their lawsuit against the Defendants.
While the Supreme Court often does not explain why it has “DIGed” a case, legal experts have opined several potential reasons. First, the Justices may have learned something after granting the petition (such as at oral argument) that lead them to determine the particular case was a poor vehicle for resolving the legal question posed. Second, the court may have perceived a “bait-and-switch” where the petitioner presented one issue or argument at the certiorari stage, and a different issue or argument in the merits briefing. Third, the Justices may simply have not been able to reach a consensus on how to dispose of the case.[xvi]
Here, the Supreme Court’s DIG lacked any explanation. However, it appears likely based on the justices’ questioning at oral arguments that the first scenario mentioned above applies: the Court possibly had difficulty in creating a clearly-defined, or “bright line”, rule for when a company has to disclose past events. Taking this assumption as true, the implication is that the question—whether or not a company has to disclose past events that may presently pose harm to the company—is highly fact-intensive and should be determined based on the facts of a specific case.
It is also possible that the second scenario above may have been implicated: that the Supreme Court may have felt that Meta and its co-Defendants switched the focus of their appeal from whether past events required disclosure (at the certiorari stage) to whether previously transpired risks created a present, ongoing harm for Facebook (at the merits stage).
Given that the Ninth Circuit’s decision stands, it is possible that investor-plaintiffs bringing securities fraud claims in Ninth Circuit are better protected than Sixth Circuit claimants in cases alleging misleading risk disclosures that conceal current or future harms arising from the known past materializations of risks.Nevertheless, investors nationwide should keep an eye out for instances where publicly-traded companies issue false or misleading risk statements, especially where there is evidence that the companies and their leadership know that risks are presently causing harm but do not disclose this to investors. Likewise, securities law practitioners—like those here at Levi & Korsinsky, LLP—will keenly monitor developments in the law, including whether the Supreme Court takes up review of any similar questions presented in the future.
[i] Facebook, Inc. v. Amalgamated Bank, No. 23-980, slip op. at 1 (U.S. Nov. 22, 2024) (Per Curiam), available at https://www.supremecourt.gov/opinions/24pdf/23-980_4f14.pdf
[ii] Third Amended Consolidated Class Action Complaint for Violations of the Federal Securities Laws, In re Facebook, Inc. Securities Litigation, No. 5:18-cv-01725-EJD (N.D. Cal. Oct. 16, 2020), ECF No. 142.
[iii] Facebook’s 2016 Annual Report on Form 10-K was filed February 3, 2017. See Complaint at ¶ 525; Meta Platforms, Inc., Form 10-K, File No. 001-35551 (SEC Feb. 3, 2017), available at https://www.sec.gov/Archives/edgar/data/1326801/000132680117000007/fb-12312016x10k.htm
[iv] Complaint at ¶ 527; Meta Platforms, Inc., Form 10-K, File No. 001-35551, at 12–13 (SEC Feb. 3, 2017), available at https://www.sec.gov/Archives/edgar/data/1326801/000132680117000007/fb-12312016x10k.htm
[v] In re Facebook, Inc. Sec. Litig., No. 5:18-cv-01725-EJD, 2021 U.S. Dist. LEXIS 242619, 2021 WL 6000058 (N.D. Cal. Dec. 20, 2021).
[vi] Sec. Litig. v. Facebook, Inc. (In re Facebook, Inc.), 87 F.4th 934, 950 (9th Cir. 2023).
[vii] Sec. Litig. v. Facebook, Inc. (In re Facebook, Inc.), 87 F.4th 934 (9th Cir. 2023).
[viii] Sec. Litig. v. Facebook, Inc. (In re Facebook, Inc.), 87 F.4th 934, 948-49 (9th Cir. 2023).
[ix] Facebook, Inc. v. Amalgamated Bank, Petition for Writ of Certiorari, No. 23-980 (U.S. filed Mar. 4, 2024), available at https://www.supremecourt.gov/DocketPDF/23/23-980/302143/20240304124120337_Meta%20Petition%20for%20Certiorari.pdf
[x] Id. at 2.
[xi] Id.
[xii] Id. at i.
[xiii] Supreme Court of the United States, Facebook, Inc. et al. v. Amalgamated Bank, et al., Docket No. 23-880 (last accessed Jan. 22, 2025 6:04 PM), https://www.supremecourt.gov/docket/docketfiles/html/public/23-980.html; see also Supreme Court Oral Argument Transcripts, Oral Argument on risk disclosures: Facebook v. Amalgamated Bank (Nov. 16, 2024), https://www.youtube.com/watch?v=xZHGJLeDxc4 (unofficial transcript based on audio recording of oral arguments from Oyez); Oyez, Facebook v. Amalgamated Bank (Nov. 6, 2024), https://apps.oyez.org/player/#/roberts13/oral_argument_audio/25664 (containing audio recording of oral arguments).
[xiv] Ronald Mann, Justices skeptical about Facebook’s data breach disclosure to investors, SCOTUSblog (Nov. 7, 2024 12:12 PM), https://www.scotusblog.com/2024/11/justices-skeptical-about-facebooks-data-breach-disclosure-to-investors/
[xv] The Supreme Court occasionally decides to “dismiss as improvidently granted,” or “DIG” cases that have been granted a petition of the writ of certiorari. See Michael E. Solimine and Rafael Gely, The Supreme Court and the Sophisticated Use of DIGs, 18 Sup. Ct. Econ. Rev. 155, 155–157 (2010), available at https://www.journals.uchicago.edu/doi/full/10.1086/659985
[xvi] Kevin Russell, Practice Pointer: Digging into DIGs, SCOTUSblog (Apr. 25, 2019, 1:21 PM), https://www.scotusblog.com/2019/04/practice-pointer-digging-into-digs/
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