Katharine Sung | Facebook, Inc. v. Amalgamated Bank
INTRODUCTION
Facebook v. Amalgamated Bank deepened a circuit split regarding the standard for pleading for loss causation. This issue primarily stems from Facebook’s handling of user data, specifically during the Cambridge Analytica scandal. The controversy originated when Aleksandr Kogan, a professor at Cambridge University, created an app called “This is Your Digital Life” on Facebook that harvested user data. British political consulting firm Cambridge Analytica acquired the data and used it improperly, which potentially impacted the 2016 U.S. presidential campaigns.
The data misuse was publicly reported in 2015 and again in 2018 when the press revealed Cambridge Analytica was continuously using the data despite prior certifications of deletion. Following this series of events, Facebook’s stock value dropped substantially, amounting to a loss of over $100 billion. This led to investor lawsuits claiming securities fraud, as Facebook did not sufficiently disclose the risks related to data misuse, as required in its 10-K filings. In a 10-K risk filing, companies must disclose “risk factors” that could affect their businesses, financial condition, or results of operations.
In this case, there is a disagreement among the circuits over the proper pleading standard. The Fifth and Sixth Circuits held that loss causation allegations need only satisfy Rule 8(a)(2)’s “short and plain statement” requirement. The Fourth Circuit disagrees, requiring plaintiffs to plead loss causation with the “sufficient specificity” standard of Rule 9(b).
Courts have been divided on whether to utilize FRCP Rule 8, “short and plain” standard, or Rule 9(b) heightened standard, or the Private Securities Litigation Reform Act of 1995 (“PSLRA”) for loss causation. PSLRA was manifested by Congress’ intent to prevent abusive litigation from private plaintiffs. A heightened pleading standard formed under this statute, which states “any private securities complaint alleging that the defendant made a false or misleading statement must ‘specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.’” 15 U.S.C. § 78u-4(b)(1)–2).
The Ninth Circuit panel held that the plaintiffs met the standards for pleading loss causation regarding Facebook’s statements assuring user data control.
ISSUE PRESENTED
Whether the court of appeals erred as a matter of law in applying rational-basis review to a law burdening adults' access to protected speech instead of strict scrutiny as this Court and other circuits have consistently done.
THE ARGUMENTS
The circuits have split on what public companies must disclose in the “risk factors” section of their 10-K filings and disagree on the proper pleading standard for the loss causation element of a private securities fraud claim.
The Ninth Circuit first held that a FRCP Rule 8 standard was sufficient but later amended the holding, switching citations from Rule 8 to Rule 9(b) after Facebook filed a petition for panel rehearing and rehearing en banc, claiming that the Ninth Circuit was breaking precedent in applying Rule 8 instead of Rule 9(b). Before this case, the Ninth Circuit held that plaintiffs must satisfy Rule 9(b)’s heightened pleading standard for “all elements of a securities fraud action, including loss causation.” Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 605 (9th Cir. 2014). However, only the citations were switched out, while the analysis remained the same.
Facebook, the petitioner, argues that its disclosures in the 10-K filings were consistent with securities laws. The company contends that it had no obligation to disclose the data breach involving Cambridge Analytica at the time because it did not foresee any harm to its business at the time of the filing. Facebook also asserts that the Ninth Circuit’s ruling imposes an unrealistic and overly burdensome standard for risk disclosures, requiring companies to disclose immaterial or irrelevant past events that do not pose a potential risk to the business. Additionally, Facebook argues that the Ninth Circuit’s application of FRCP Rule 9(b) is improper, as it follows the same standards as its original application of Rule 8 and sets no distinction between the two rules.
Amalgamated Bank, representing the respondents, argues that Facebook’s risk disclosures on its Form 10-K were materially misleading because it downplayed the data privacy risks by framing them as hypothetical despite knowing that such a breach had already occurred. Information that user data had already been improperly used would have been critical information for investors. Moreover, the respondents argue that the Ninth Circuit properly applied the loss causation standard in that the respondents’ claims were sufficient to establish a connection between the press releases and Facebook’s decline in stock.
LOOKING FORWARD
In this case, the Supreme Court’s ruling could clarify the pleading standards for loss causation and identify what companies include as “risk factors.”
If the Court sides with Facebook, it may create a higher bar for securities fraud claims as the standard for stating a claim would come with more difficulty. If the Court sides with Amalgamated Bank and respondents, the standard for pleading would become broader, compelling companies to disclose more extensive information about past events, even events that may not have potential risks. Here, companies and their investors may risk an overflow of disclosures that could drown out real risk.
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