A class action lawsuit involving Cambridge Analytica’s collection and use of Facebook user data during the 2016 presidential election is coming before the Supreme Court this week.
Although the dispute involves private securities fraud issues and what level of risk disclosures are required for companies, court watchers say a ruling from the justices could have broader First Amendment implications.
“As we all increasingly give away personal data on assorted social media platforms and other apps, questions regarding companies’ duties in handling that data, and potential remedies for misuse and abuse, will continue to arise,” said Ilya Shapiro, director of constitutional studies at the Manhattan Institute. “Although this case comes up in the context of securities disclosures, the Court’s ruling here will shape our broader interactions online.”
The litigation arose when a group of investors purchased Facebook stock between 2017 and 2018.
Facebook stock had dropped in 2018 in the wake of revelations surrounding the collection of data used to benefit the presidential campaigns of Sen. Ted Cruz, Texas Republican, and then eventually former President Donald Trump.
A professor at Cambridge University developed a personality quiz for Facebook users in 2014 that collected data from more than 270,000 people and created “personality scores” that were used to study voter behaviors. He then sold the data to Cambridge Analytica, a political consulting firm.
The data aided Mr. Cruz’s campaign and then Mr. Trump’s campaign, according to court documents.
When news outlets discovered the data leak in 2015, Facebook removed the quiz app and had the professor and Cambridge Analytica confirm in writing that the data had been purged from its systems. Stock prices did not drop initially after the news broke.
However, it was discovered in 2018 that the data was still being retained to have benefited the Trump team. Stock prices then later fell in 2018 by 18%.
The investors and Amalgamated Bank, the respondent in the litigation with Facebook, say that Facebook’s disclosure form warned that security breaches and the disclosure of data might harm the company’s business and reputation, but that the issue was posed as “merely hypothetical,” when a breach had already taken place.
The justices could set a standard for what type of risk disclosures public companies must make, as circuit courts have issued different standards.
The 6th U.S. Circuit Court of Appeals has said companies don’t need to disclose past risk events, while six other appellate courts have required companies to disclose past risk events if the company knows it will harm the business.
The 9th Circuit, however, ruled against Facebook in the investors’ action, requiring public companies to disclose a past event even if there’s no current threat to business.
Facebook says that the 9th Circuit’s ruling will “light a beacon for class-action lawsuits.”
“The stakes are high: these cases are often worth millions or even billions of dollars and settle for large sums if they survive a motion to dismiss,” Facebook argued in its filing.
Cory L. Andrews, general counsel for the Washington Legal Foundation, which supports Facebook in the case, said the 9th Circuit decision “creates an unworkable disclosure regime—one that forces companies to fill their risk disclosures with extraneous details of past incidents rather than focusing on the most important future risks.”
“Affirming that rule in such a litigious climate would force companies to ’overdisclose’ risks, which would impose unnecessary costs and burdens on the company. It would also confuse shareholders and investors, who must navigate a company’s exhaustive SEC filings to find key information relevant to their investment decisions,” Mr. Andrews said.
The Biden administration, meanwhile, is siding with Amalgamated Bank and the shareholders.
The federal government says the U.S. Securities and Exchange Commission has an interest in the case and had brought an enforcement action against Facebook in 2019 over similar concerns regarding describing particular risk factors as hypothetical.
“The antifraud provisions of the securities laws prohibit half-truths, not just flat-out lies, and there is no exception to that principle for risk-factor statements,” the feds’ filing stated.
Facebook had settled the case with the SEC for $100 million.
Oral arguments are scheduled for Wednesday, with a ruling expected by the end of June. The case is Facebook v Amalgamated Bank.
• Alex Swoyer can be reached at aswoyer@washingtontimes.com.
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