Legal Docket: Facebook and corporate transparency

NICK EICHER, HOST: It’s The World and Everything in It for this 11th day of November, 2024. We’re so glad you’ve joined us today. Good morning! I’m Nick Eicher.

MARY REICHARD, HOST: And I’m Mary Reichard. Time now for Legal Docket.

In his single term of office, President Biden reversed many of his predecessor’s policies.

But what he could not reverse was President Trump’s ideological remaking of the Supreme Court.

Now that Trump is both Biden’s predecessor and his successor, will Trump be able to extend his legal legacy even further?

MEDIA MONTAGE: Everybody here in Washington once we kind of process, what happened is looking at the Court. President Elect Donald Trump's return to the White House puts him once again in a position to influence the makeup of the Supreme Court. If a Supreme Court justice retires in the next year or two, that justice would be replaced by a conservative jurist. There is a very real possibility Donald Trump could appoint five Supreme Court justices.

EICHER: In his first term, Trump appointed three justices. His first, replaced a conservative with a conservative.

GORSUCH: I, Neil M. Gorsuch …

Gorsuch replacing the late Antonin Scalia.

But that was significant in that Republicans blocked President Obama from filling the vacancy and Trump swept into office in 2016 on a promise to nominate from a dazzling list of conservative legal superstars.

REICHARD: Then, his second appointment …

KAVANAUGH: I, Brett M. Kavanaugh …

… Kavanaugh was sworn in by the justice he’d replace, Anthony Kennedy, and that was an ideological shift to the right.

EICHER: Trump’s third …

BARRETT: I, Amy Coney Barrett …

… was a seismic shift a conservative appeals-court judge, Amy Coney Barrett, a devout Roman Catholic mother of seven.

REICHARD: She replaced the ideologically liberal Ruth Bader Ginsburg. Justice Ginsburg had died in Trump’s last year of his first term.

We don’t have any indication that anyone on the current bench is planning to retire. Still, it’s a fact that time runs out for each of us. The two oldest justices are Clarence Thomas, 76, and Samuel Alito, 74.

Now, Justice Thomas did once say he’d stay on until age 86. No word on what Justice Alito might be thinking. But we’re getting a little ahead of ourselves.

EICHER: And if the online news site Politico is to be believed, we’re getting way ahead of ourselves.

Politico reports that an “urgent conversation is blowing up largely outside of public view: whether to push for 70-year-old Supreme Court Justice Sonia Sotomayor to step down … while Dems still have the power to approve her replacement.”

Politico says that’s an actual conversation among Democratic senators. So we’ll see.

REICHARD: Let’s jump into today’s case. It’s Facebook v. Amalgamated Bank, and it involves what companies are required to disclose to investors.

Facebook is known by its publicly traded corporate name Meta. And like all publicly traded companies, it’s required to file regular reports with the SEC, the Securities and Exchange Commission.

But this case challenges how Facebook described a data misuse incident to the SEC in 2016. Meta framed it hypothetically, saying if user data were improperly accessed, it could hurt the company.

EICHER: But as shareholders later argued, the hypothetical was misleading—because the misuse had already happened.

Facebook allowed a third-party app to access millions of users’ data. When the scandal broke, the value of Facebook stock dropped, and that cost the company billions.

SHANMUGAM: Under the correct approach, this case is an easy one.

Meta’s lawyer is Kannon Shanmugam. He argued that companies need only to warn about future risks, not make disclosures about incidents in the past.

Besides, Meta’s hypothetical statement wasn’t really misleading.

SHANMUGAM: Meta's warnings that business harm could result in the event of data misuse did not imply that Meta had never previously suffered such misuse. But, in any event, the initial misuse of the data had been publicly reported by the time Meta made the statements at issue…

But Justice Ketanji Brown Jackson questioned that approach. She suggested that past incidents still affect future risks, and it could be misleading to present only future possibilities.

JACKSON: So suppose a realtor is speaking to a potential buyer about a house and he says: If crime goes up in this area, homeowners insurance could become more expensive. The triggering event would be crime, and the harm would be more expensive homeowners insurance. Both of those things in the futuristic statement are happening in the future. Wouldn't it be misleading to make this statement if a string of burglaries had actually happened that month? The homeowner has no way of knowing that. The realtor knows that. And, at the time the statement is made, homeowners insurance has actually already shot up two times higher than before. What I'm suggesting is it's misleading because the homeowner is making a determination of the risk of buying this property and paying a certain amount of homeowners insurance. And, when you say your statement totally futuristically, as though that has --the burglaries never happened, they're miscalculating. They're being misled into making that calculation.

REICHARD: Shanmugam says that’s not misleading. He explained to Justice Jackson that when you carefully parse the meaning of the phrase “if crime goes up”, you can certainly interpret that to mean crime going up from this moment forward.

JACKSON: But, I mean, isn't the whole point -- the whole point of these risk disclosure statements…is that the person who is hearing them is trying to determine whether there's going to be a future harm to their business investment, right? I mean, isn't that what they're doing?

SHANMUGAM: I would slightly disagree with that. I think the point of these risk disclosures, as the SEC itself has made clear, is to warn prospectively about the types of risks that a company would face.

EICHER: Kevin Russell is lawyer for the shareholders. He argued that by failing to disclose data misuse in the past, Facebook was implying it never happened.

But Justice Neil Gorsuch raised the issue of relevance with lawyer Russell, saying data breaches are so common, maybe investors ought to assume them.

GORSUCH: I think China probably has all of our FBI files. Data breaches are part of our lives these days.

RUSSELL: But this wasn't a data breach. And this is really important. That was a principal argument that Facebook made below, that these statements only warned about data breaches, and the Ninth Circuit rejected that reading, and the reason for that is because, unlike a hacking event --and I don't know what China does --here, Facebook allowed a third-party developer --it just gave them the data. And that doesn't happen…all the time. Actually, at the -- before the disclosures in this case, reasonable investors would have thought that it never happened and particularly on this scale. And for --Facebook had faced allegations of this in December of 2015, and it didn't respond by saying: Yeah, that happened and we took care of it. It said: We have to conduct an investigation, and if we do, we will take swift action. And by the time they issued this report in 2016, they hadn't said boo about this. And so, in that context, I think it is very reasonable for investors to understand that by treating it as simply something that may happen in the future, they are confirming that their --what their silence had already conveyed, which is that the --that we didn't substantiate the allegations in the 2015 article.

Justice Alito had a hypothetical about a different sort of risk:

ALITO: Suppose a company…has an inspector come in. The inspector examines the factory and says your wiring has -- has got to be replaced, but it can't be done in less than six months and that there is an X percentage chance that there's going to be a fire in your factory in the next year. Do they have to disclose that internal report and say we know that there is an X percent chance that a fire is going to occur?
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RUSSELL: So I think possibly yes, but this is actually the real virtual certainty rule. So this is where something is misleading not because it's already happened in the past but because you are not disclosing something that's virtually certain to happen in the future.

ALITO: Well, it's not virtually certain. There's a certain percentage. Let's say it's a 15 percent chance.

RUSSELL: Well, I think, if the statement is understood to imply that there hasn't been a fire in the past, that's our case, that is our claim here, and that that would be misleading without regard --

ALITO: Well, the statement --

RUSSELL: --to the probability of occurrence.

ALITO: --the statement is, if there is a fire, there will be a substantial disruption of our operations.

RUSSELL: I think, if there has been a fire, that --

ALITO: It doesn't say if there has been. If there is a fire.

RUSSELL: No, I understand.

ALITO: Okay.

RUSSELL: I understand that, but a reasonable investor, I think, could read that as saying, you know, we wouldn't be talking about fires in hypothetical terms if there had recently been one that calls into question the safety of the entire facility.

REICHARD: The federal government supports the shareholders on the grounds of corporate transparency.

Justice Kavanaugh wondered why the SEC didn’t just fix the problem. He puts the question to Kevin Barber, assistant to the Solicitor General:

KAVANAUGH: Why can't the SEC just write a reg? It's very simple, I think, to add something like: “When the company discloses the risk of a future event that could cause harm, also disclose any past occurrences of that event.”

BARBER: The SEC could always be clearer…

However the court decides, this case will shape what companies must disclose in the future.

If Facebook wins, the standard for disclosure might stay as it is. If the shareholders win, the standard is going to be more detailed, and that could mean more transparency.

And that’s this week’s Legal Docket!

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