TheCorporateCounsel.net

SCOTUS is poised to review a Ninth Circuit decision of great interest to us all — addressing whether Facebook could be held liable under antifraud rules for failing to disclose risks that had materialized but presented no known risk of ongoing or future harm. The Court granted cert in Facebook, Inc. v. Amalgamated Bank in June and is poised to hear oral arguments on November 6.

The case involves the same disclosures at issue in a 2019 SEC enforcement action but involves a securities class action lawsuit filed by Amalgamated Bank. Here’s the background from this Kramer Levin article:

Amalgamated Bank filed a securities class action alleging that defendant Facebook Inc. made materially false and misleading statements and omissions regarding the risk of improper access to or disclosure of Facebook user data. Facebook’s 2016 Form 10-K disclosures included risk factors such as “[a]ny failure to prevent or mitigate … improper access to or disclosure of our data or user data … could result in loss or misuse of such data, which could harm [Facebook’s] business and reputation and diminish our competitive position.” Plaintiffs alleged that at the time these risk factor statements were made, Facebook knew that on two prior occasions, Cambridge Analytica, a political consulting firm, had improperly collected and harvested Facebook users’ personal data. Accordingly, plaintiffs alleged that the risk factors identified in the Form 10-K were false and misleading because they framed the risk of data misuse as merely hypothetical, belying the fact that such data misuse had already occurred.

[The Ninth Circuit] found that the plaintiffs had adequately pleaded falsity as to the risk factors disclosed in Facebook’s Form 10-K regarding whether misuse of Facebook users’ data could harm Facebook’s business, reputation and competitive position. In so finding, the majority pointed to its reasoning in In re Alphabet, decided after the district court dismissed plaintiffs’ complaint. In In re Alphabet, the Ninth Circuit held that falsity allegations could survive a motion to dismiss when the complaint plausibly alleged that a company’s Securities and Exchange Commission (SEC) filings warned that risks “could” occur, when in fact those risks had already materialized. Relying on this holding, the majority found that the plaintiffs had sufficiently alleged the falsity of Facebook’s risk factor statements. […]

Facebook’s petition for certiorari presented two questions for the Court’s consideration, of which it granted review of one: whether risk disclosures are false or misleading when they do not disclose a risk that has materialized in the past, even if that past event presents no known risk of ongoing or future business harm. […] The petitioners contend that the Ninth Circuit’s holding creates a three-way split among eight circuits regarding what companies must include in “risk factors” disclosures.

The article notes that law professors, former SEC officials, legal policy institutes and industry groups had submitted amicus briefs in support of the petition for cert. Briefs on the merit have been submitted in August (and may continue to be submitted until September 24). The Society for Corporate Governance and the Chamber both argue that risk factor disclosures cannot support liability based on failure to disclose past events and urge SCOTUS to reaffirm “that Item 105 calls for prospective disclosures. Hypothetical phrasing about the future does not generally imply the absence of past incidents.” The Society’s brief suggests liability for hypothetical phrasing is only appropriate in very limited circumstances:

Insofar as forward-looking Risk Factors could be misleading as to past events or existing conditions, this Court should allow such a reading only where the risk disclosure implies a specific fact that is incorrect. For example, “a caution that ‘the price of our primary input may rise above $5 next quarter’ could certainly cause a reasonable investor to conclude that the price was, at present, $4.99 or less.” In re Mylan N.V. Sec. Litig., No. 16-cv-7926 (JPO), 2018 WL 1595985, at *9– 10 (S.D.N.Y. Mar. 28, 2018). But such specificity is not the norm, and the Court should not extend liability outside this narrow exception. Otherwise, litigants will continue to deliberately misread companies’ statements concerning hypothetical future risks to mean that such risks have never materialized in the past, subverting the plain, forward-looking focus of Item 105.

More to come on this one, which we’ll be following closely! For now, have a wonderful Labor Day Weekend! Our blogs will resume Tuesday. 

– Meredith Ervine