Washington— The Supreme Court on Friday rejected Facebook’s appeal of a lower court order that saved a shareholder lawsuit against the social media giant because consulting firm Cambridge Analytica misused millions of Facebook user data in 2015.
In its first opinion of the term, the high court issued an unsigned one-line decision dismissing Facebook’s appeal. The court’s ruling suggests that it should not take the case, although the Supreme Court did not explain why.
In dismissing the appeal, the Supreme Court left a decision from the US Court of Appeals for the 9th Circuit in favor of Facebook shareholders. They have filed a securities fraud lawsuit against Facebook for allegedly misleading them in financial filings about the risks posed by the big data breach by Cambridge Analytica.
The case involves what information public companies must disclose in the “risk factor” section of their annual filing with the Securities and Exchange Commission, and specifically, whether they have an obligation to disclose risks that occurred in the past, even if the event did not exist. not harm the business now or in the future.
The dispute stems from a class-action lawsuit arising from the political consulting firm Cambridge Analytica that misused Facebook user data in 2015. Cambridge Analytica had bought data collected through personality quizzes on Facebook and used it to create psychological profiles of US voters to help them. GOP presidential campaign Sen. Ted Cruz 2016.
While Cambridge Analytica said after the scandal it had deleted data from Facebook, it was reported in 2018 that the company lied. However, the information was kept and used to help Donald Trump’s 2016 presidential campaign.
Facebook’s stock price was not affected after Cambridge Analytica’s misuse of user data was revealed in 2015. But it fell in early 2018 after the consulting firm’s continued misuse of Facebook data for the Trump campaign appeared.
A group of investors who bought Facebook shares between February 2017 and July 2018 quickly sued the tech giant in federal court, saying the company’s statements in the risk factors section of its 2016 10-K filing were misleading.
In the filing, Facebook warned that “security violations and improper access or disclosure of data or user data, or other hacking and phishing attacks on our systems, could damage our reputation and affect our business.” The investor said the statement was inaccurate because it made the risk of data misuse by third parties a hypothetical one – even though Cambridge Analytica had improperly used data from Facebook members.
A federal district court rejected the claim, finding that the challenged statement was not false because “the Cambridge Analytica scandal (did not) harm Facebook’s reputation, business or competitive position” when the company filed a 2016 risk disclosure.
But the US Court of Appeals for the 9th Circuit ruled against the shareholders and allowed the case to continue, finding that Facebook’s risk disclosure was to blame because the company “presented the risk of improper access or disclosure of Facebook users’ data as a pure hypothesis. when the risk has already occurred.”
Facebook then appealed to the Supreme Court, arguing in part that the decision of the 9th Circuit imposes “expansive risk disclosure requirements that will force public companies to inform investors of past incidents that pose unknown threats to business.”
The company also noted that there is a split among federal appeals courts over what companies must disclose in SEC filings. One, the U.S. Court of Appeals for the 6th Circuit, did not require companies to disclose past events in risk factors, while another appeals court required such disclosure only if the company knew the prior event would harm its business.
Facebook said the 9th Circuit’s ruling would open the door to lawsuits alleging “fraud-by-hindsight” and make risk disclosures more burdensome for companies and less useful for investors as they seek to avoid liability.
The Biden administration supported shareholders in the case, saying it was “clearly misleading to portray bad events that have already occurred as hypothetical future risks.”
The Supreme Court heard arguments on November 6.
