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Monday, June 10, 2024 | Back issues
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Facebook shareholders’ lawsuit over user data security heads to high court

The Supreme Court agreed to decide whether Facebook must face claims from shareholders whose stock lost $100 billion in value after the Cambridge Analytica scandal.

WASHINGTON (CN) — The Supreme Court agreed on Monday to review whether shareholders can revive a lawsuit accusing Facebook of misleading them about the risk associated with user data security issues at the social media giant.

In 2018, Facebook’s stock tanked after news reports revealed the company sold data to a political consulting firm without users’ knowledge. British data analytics contractor Cambridge Analytica wielded Facebook user data to support Donald Trump’s presidential campaign, The New York Times reported.

The scandal led to an almost 19% drop in the company’s stock price, which at the time was the largest single-day stock price drop in U.S. history. The drop amounted to $100 billion in shareholder value.

Shareholders sued Facebook for fraud, claiming the company violated the Securities and Exchange Act regulations by lying on risk factor statements. Facebook told investors that user data could be compromised if developers did not adopt adequate data security practices. The company, however, knew as early as 2015 that third parties had already accessed users’ data without their knowledge. 

After a federal judge dismissed the suit, the Ninth Circuit revived it. The appeals court said Facebook’s risk statements were misleading because they presented user data breach issues as purely hypothetical even though Cambridge Analytica’s data harvesting had transpired already. 

Facebook, now called Meta, appealed to the Supreme Court, urging the justices to decide which risk factors companies must disclose. Under the platform's reading of the lower court ruling, Facebook would be forced to disclose past instances when a risk materialized even if it did not threaten the business. 

“That rule makes little sense, will make disclosures less useful to investors by drowning them in irrelevant information, and will encourage plaintiffs to plead fraud-by-hindsight by attaching significance after a stock drop to events a company had no reason to know were significant at the time of disclosure,” wrote Joshua Lipshutz, an attorney with Gibson Dunn representing Facebook. 

The court agreed to hear Facebook’s appeal, but the shareholders claim the platform’s characterization of the Ninth Circuit's ruling is incorrect. In their view, the decision held that that implying a data breach had not occurred when it had was misleading. 

“Facebook does not dispute the general proposition that treating a materialized risk as merely hypothetical misleadingly implies that the risk has not yet transpired,” wrote Kevin Russell, an attorney with Goldstein Russell representing the shareholders. “Instead, Facebook argued below that it did not have to disclose the event because it had no reason to believe the breach would lead to business harm given that the public allegedly already knew about it and did not care.” 

In 2019, Facebook agreed to pay $5.1 billion in penalties to the Federal Trade Commission and the Securities and Exchange Commission over accusations that it misled users and investors over the privacy and security of user data on its platform. 

The Supreme Court also agreed on Monday to hear a follow-up to its 2022 ruling on Medicare reimbursement rates. 

In Becerra v. Empire Health Foundation, the justices said anyone entitled to Medicare Part A benefits included all those who qualify for the program whether or not the agency paid for a hospital stay. Now, the court will decide if the phrase “entitled to benefits” means the same thing for supplementary security income benefits. 

Per the court’s custom, the court did not explain its decision to hear either case.

Follow @KelseyReichmann
Categories / Appeals, Business, Securities, Technology

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