Judge Finds Flaws in Facebook Investor Lawsuit

A federal judge found little support for claims that Facebook misled investors about its commitment to fighting discrimination and diversifying its workforce and leadership team.

In this March 25, 2015 file photo CEO Mark Zuckerberg gives the keynote address during the Facebook F8 Developer Conference in San Francisco. (AP Photo/Eric Risberg)

SAN FRANCISCO (CN) — A federal judge on Thursday refused to advance a shareholder class action accusing Facebook’s corporate leaders of ignoring dire warnings about hate speech proliferation and discriminatory hiring and advertising practices.

“The allegations about ignoring red flags seem like they’re contradicted by the actual record,” U.S. Magistrate Judge Laurel Beeler said during a virtual court hearing. “It’s contradicted by the actual composition of the board and the board’s actual selection practices.”

Lead plaintiff Natalie Ocegueda sued Facebook CEO Mark Zuckerberg and 11 former and current Facebook board members in July 2020. She claims the company touted a commitment to diversity in securities filings and annual reports while misleading investors about its discriminatory hiring practices, illegally biased advertising and failure to curb hate speech on its platform.

Facebook argued the suit should be dismissed on three grounds: because Ocegueda did not make a written demand detailing the board’s alleged wrongdoing before filing suit; because a forum selection clause requires shareholder suits be litigated in Delaware; and because the lawsuit fails to specify facts showing Facebook directors made false or misleading statements.

In arguing against Facebook’s motion to dismiss, plaintiffs’ attorney Francis Bottini Jr. urged the judge not to consider evidence the company submitted showing it had at least five non-white executives and two female executives between 2014 and 2020.

“That’s not something the court can consider on a motion to dismiss,” Bottini argued.

Beeler disagreed. She said the law permits her to consider facts in the public record.

“The facts are what they are, and that’s that,” Beeler said.

Facebook also argued the lawsuit failed to specify how it misled investors about its commitment to diversity in its board selection process. The company had only one Black board member when the lawsuit was filed in July 2020. Today, the company has two Black directors, four female directors and one openly gay director serving on its board.

Facebook attorney William Trach of Latham and Watkins called it one of the most diverse corporate boards in the technology industry.

“That’s something for Facebook to be proud of,” Trach said.

The lawsuit also claims Facebook’s directors failed to act on a series of “red flag” warnings about the company’s discriminatory advertising and hiring practices. It says the directors were put on notice by tough questions from lawmakers about Facebook’s advertising policies during Zuckerberg’s testimony before Congress on April 10, 2018.

It further cites two USA Today articles published in July and November of 2018 detailing a lack of diversity in Facebook’s hiring and alleged mistreatment of Black employees.

The shareholder complaint says Facebook directors were also put on notice by lawsuits filed against the company in 2018 over tools that allowed advertisers to exclude women, people in certain geographic areas and other groups from seeing advertisements.

Facebook agreed to change its advertising platform to settle those lawsuits in 2019. The U.S. Department of Housing and Urban Development sued Facebook in 2019 over those same advertising practices.

In court Thursday, Trach argued those “red flags” had nothing to do with the incident that supposedly harmed Facebook shareholders last year when its share price dropped 8.3% on June 26, 2020. The stock price tumble came after more than 300 advertisers decided to boycott Facebook over its failure to curb hate speech.

Trach said the boycotts were prompted by Facebook’s refusal to censor former President Donald Trump’s incendiary tweets about Black Lives Matter protests.

“You certainly can’t demonstrate the causal link between the red flags and the harm,” Trach said.

Bottini countered that Facebook’s problems with employee diversity and advertising bias also contributed to the boycott. The failure to censor Trump was one of several problems that pushed advertisers over the edge, he argued.

“These were all things that the advertisers said, ‘This is the tip of the iceberg — the straw that broke the camel’s back,” Bottini said.

Turning to Facebook’s other arguments, Beeler said she would likely dismiss the case for failure to make a demand on the board prior to filing suit. Bottini argued his client is exempt from that requirement because the demand would be futile.

Courts have found such demands futile when board members face a substantial likelihood of liability and would be unlikely to act on a demand to sue themselves on behalf of their corporation. Beeler said she did not think the board members faced a strong likelihood of liability because many allegations in the shareholder suit “are contradicted” by facts in the record.

Additionally, Beeler said she was inclined to borrow the same logic cited by her colleague U.S. District Judge Haywood Gilliam in Oakland when he dismissed a previous shareholder suit against Facebook in 2019. In that ruling, Gilliam found a forum selection clause in Facebook’s certificate of incorporation requires shareholder suits be litigated in the Delaware Court of Chancery, where Facebook is incorporated.

Because the lawsuit accuses Facebook directors of violating state and federal laws, Bottini argued a transfer to Delaware would prevent shareholders from seeking restitution for federal securities law violations.

Gilliam considered the same issue in his 2019 ruling and concluded that a Delaware court “has discretion to sever the federal claims and dismiss the remaining claims to be brought in the prescribed forum.”

Sensing that Beeler was leaning toward dismissing the lawsuit, Bottini requested permission to file an amended complaint.

“That would be my inclination,” Beeler responded.

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