Justices tangle with meteors and Molotov cocktails to sort Meta risk disclosure obligations

WASHINGTON (CN) — The Supreme Court tied itself in knots with hypotheticals ranging from warehouse fires to Molotov cocktails Wednesday trying to determine if Meta violated disclosure laws by not telling investors about the Cambridge Analytica scandal.

“I wonder whether we’re in the world of a meteorite or Justice Alito’s falling debris or whether we’re in the chief justice’s world of slip and fall on the front porch,” Justice Neil Gorsuch, a Donald Trump appointee, said.

Gorsuch’s question aimed at categorizing the social media giant’s decision not to disclose a user data breach that shareholders say led to a massive drop in the company’s stock. Investors sued Meta, formerly Facebook, in 2018 for securities fraud after the company told shareholders that data security risks could impact their investments, but the social media site didn’t disclose that user data had already been compromised in 2016.

Data analytics firm Cambridge Analytica harvested user data and sold it to Republicans for campaign use. Facebook uncovered the data breach and told Cambridge Analytica to delete users’ data, but the firm continued to sell user information.

Meta claims it didn’t have to disclose the 2016 breach because risk disclosures address future harm. A federal court sided with the social giant but the Ninth Circuit reversed, holding that treating third-party data misuse as a hypothetical prospect was misleading even if the first breach hadn’t yet resulted in follow-on business harm.

Meta asked the Supreme Court to reverse, arguing that the ruling encouraged fraud by hindsight. The social giant said a reasonable person wouldn’t think disclosing that negative media coverage could affect the business implied that Meta had never faced bad coverage. Meta said context should be determinative of whether or not to disclose past harm.

The high court didn’t seem wholly convinced. Several justices thought Meta was proposing a categorical test for disclosures.

“This inquiry is more contextual than your position allows for,” Justice Elena Kagan, a Barack Obama appointee, said. “It’s not a black-and-white thing.”

Kagan used a hypothetical warehouse fire to parse Meta’s position, asking what level of damage a plant would need to sustain for Meta to think a disclosure was warranted. Meta said that a fire crippling 100% of the plant’s production would require disclosure, but if only 50% of production was harmed by the blaze there was no need for investors to know.

Justice Ketanji Brown Jackson, a Joe Biden appointee, said Meta’s position was too futuristic, assuming a past event won’t be repeated. She compared the dilemma to a relator telling a home buyer that crime may lead to higher insurance rates without disclosing a string of burglaries in the area.

“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,” Jackson said. “When you say your statement totally futuristically, as though the burglaries never happened, they’re being misled into making that calculation.”

Justice Samuel Alito, a George W. Bush appointee, said past events very often shed light on the risk of a recurrence. Picking up Kagan’s fire hypothetical, Alito said whether a fire was caused by faulty wiring that still hadn’t been fixed or by a piece of space junk that fell out of the sky would tell an investor about the probability of a future fire.

“I don’t want to dwell on things that fall out of the sky, but what about the situation where the fire is caused by something that’s utterly freakish?” Alito asked. “A meteorite fell out of the sky or some crazy person who was hearing voices decided that that person was going to go throw a Molotov cocktail in the window of this plant.”

The shareholders urged the court to reject any bright-line test, arguing each case needs to be decided by the context of the events.

Chief Justice John Roberts, a George W. Bush appointee, said that argument would expand the disclosure obligation. He said that the disclosure itself suggested that an event might have occurred in the past. Roberts said that if he told someone leaving his house that they might slip on the steps, they’d assume someone might have slipped before.

“How are we supposed to parse whether it’s slipping on my steps or what you say is actionable in this case?” Roberts asked the shareholders.

Gorsuch said Meta never implied that data breaches hadn’t happened in the past, noting that reasonable investors know that can happen to a large company.

“I think China probably has all of our FBI files,” Gorsuch said. “Data breaches are part of our lives these days.”

Justice Amy Coney Barrett, a Trump appointee, tried to find a middle ground between Meta and the shareholder’s arguments. She said data breaches for social media companies or E. coli outbreaks for food producers could both be associated with their respective businesses.

Barrett said the general statements about the risks a particular category of businesses faces could be separated from the more unusual risks that could make or break the business.

“I think some of the hypotheticals that you’re getting show that not everybody shares that intuition, that materiality is the only thing at stake, that it can also be misleading,” Barrett said. “Depending on how specific the risk is people probably have different intuitions that fall along a spectrum.”

The shareholders told Barrett that the Cambridge Analytica breach fell into the second basket of more unusual risks.

“You’re saying it falls more in the category of a factory half burning to the ground, something that we wouldn’t necessarily expect because you would have trusted Meta not to hand it over,” Barrett said.

Justice Brett Kavanaugh, a Trump appointee, said the shareholders’ rule wasn’t in the regulation, suggesting that the Securities and Exchange Commission could write the regulation if the government thought it was necessary.

“Why does the judiciary have to walk the plank on this and answer that question when the SEC could do it with all the uncertainty and all the hypotheticals that have arisen, which, in turn, at least as I see it, just speaking for myself, raises a lot of questions for companies about what they have to disclose and what they don’t?”

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