United States Supreme Court Grants Certiorari To Consider When Already-Materialized Risks Must Be Disclosed

Shearman & Sterling LLP


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On June 10, 2024, the United States Supreme Court granted certiorari to review a decision of the United States Court of Appeals for the Ninth Circuit that partially reinstated a putative class action...
United States Corporate/Commercial Law
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On June 10, 2024, the United States Supreme Court granted certiorari to review a decision of the United States Court of Appeals for the Ninth Circuit that partially reinstated a putative class action asserting claims under the Securities Exchange Act against a social media company. Facebook v. Amalgamated Bank, —S. Ct.—, 2024 WL 2883752 (2024). Plaintiffs alleged that the company made misrepresentations relating to the misuse of user data by a third party. The Supreme Court granted certiorari to address the following question: "Are risk disclosures false or misleading when they do not disclose that a risk has materialized in the past, even if that past event presents no known risk of ongoing or future business harm?"

As noted in our prior post, the district court dismissed plaintiffs' third amended complaint with prejudice for failure to adequately allege scienter and loss causation, but the Ninth Circuit revived allegations regarding the company's statement warning that, if third parties improperly access user data, the company could suffer harm. The Ninth Circuit held that this statement was actionable because it was phrased as a hypothetical even though the company allegedly knew of prior misuse of user data. In re Facebook, Inc. Sec. Litig., 87 F.4th 934, 948–52 (9th Cir. 2023). (The Ninth Circuit also reversed the lower court with respect to loss causation, but the Supreme Court declined to grant certiorari on that issue.)

In urging the Court to grant certiorari, the company argued that the Ninth Circuit's ruling has created three circuit court standards addressing what a company must include in its risk disclosures. The company argued that (1) the Sixth Circuit has held that past events do not need to be disclosed, on the theory that risk disclosures are purely prospective in nature, and (2) the First, Second, Third, Fifth, Tenth, and D.C. Circuits have held that an already-materialized risk must be disclosed only if it is known that that event will harm the business. According to the company, plaintiffs did not state a claim under either of those tests. However, the company contends that the Ninth Circuit's ruling established an "outlier" position requiring disclosure of a previously materialized risk even if that event is not known to present a current or future threat of business harm.

The Court's decision on the merits may result in more clarity regarding the circumstances under which a risk disclosure can be potentially actionable (or not) based on allegations that a previously materialized risk was not disclosed.

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