Last fall the U.S. Supreme Court dismissed, as improvidently granted, the writ of certiorari in two pending securities lawsuits, including in the Meta Platforms/Facebook case (as discussed here). The Court’s dismissal of the writ of certiorari in the Facebook case had obvious implications for the immediate litigants in the case, as it left the prior circuit court ruling standing. But the dismissal also has important implications for litigants in other cases involving the same issues as were raised in the Facebook case.
In the following guest post, Sarah Abrams, Head of Claims Baleen Specialty, a division of Bowhead Specialty, considers the implication for those other litigants in those other cases in light of the Supreme Court’s dismissal of the writ of certiorari in the Facebook case. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors in topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
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As the D&O Diary reported in November and December 2024, the U.S. Supreme Court dismissed two significant securities fraud cases with DIG (“dismissed as improvidently granted”) orders. While we previously discussed the Supreme Court’s DIG Order in the securities class action case brought against Meta Platforms Inc. (formerly Facebook) in the wake of the Cambridge Analytica scandal, the following digs deeper into how the Federal Circuit Court split left from the DIG impacts D&O public company underwriting.
Key takeaway: Due to the U.S. Supreme Court’s decision not to review (i.e., dismissal of certiorari in) the Facebook case, a circuit split regarding the application of the PSLRA and corporate disclosure standards remains unresolved. As a result, the location of an Insured’s headquarters could affect the likelihood of a securities claim surviving a motion to dismiss and the associated costs and potential loss exposure.
The Facebook case
The Supreme Court decided In re Facebook, Inc. Securities Litigationto DIG and thus did not provide clarity on whether an omission in an SEC risk-disclosure statement is misleading. By way of background Facebook had listed in the “Risk Factors” section of its 2016 Form 10-K that “[a]ny failure to prevent or mitigate . . . improper access to or disclosure of our data or user data . . . could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position.” Shortly thereafter, the Cambridge Analytica data harvesting scandal broke, causing Facebook stock to plummet.
Facebook shareholders subsequently filed a securities class action, which the Northern District of California dismissed for failure to meet the heightened pleading standards required by the Private Securities Litigation Reform Act (PSLRA). The Ninth Circuit reversed, finding that the lawsuit should proceed because the omission of Cambridge Analytica’s data harvesting could be materially misleading. In its request for the Supreme Court to hear the case, Meta played up the split in Circuit Courts’ PSLRA and regulatory disclosure standards. Supreme Court watchers opined that this variety in venue deference led to the initial grant of writ.
What is the PSLRA?
Understanding the PSLRA is relevant to public company D&O underwriters because it sets the pleading standard a securities case must meet to withstand an initial motion to dismiss.
By issuing a DIG, the Supreme Court did not say one way or the other if it agreed with the Ninth Circuit’s interpretation of the PSLRA to reverse dismissal of the In Re Facebook, Inc. complaint. The PSLRA was enacted in 1995 to curb abusive and frivolous lawsuits while still allowing legitimate securities fraud cases to proceed. It requires plaintiffs to plead scienter (intent to deceive or reckless disregard for the truth) with particularity. General or vague complaint allegations of purported bad acts or omissions are insufficient to state a claim.
Circuits Split
The difference in how Circuit Courts have applied the PSRLA and determined materiality of regulatory disclosure omissions of fact may impact the likelihood and survival of securities class actions brought against companies with local headquarters.
The First, Second, Third, Fifth, Tenth, and D.C. circuits generally require a company to disclose a past event in a regulatory filing if the company knows or believes that the event will likely cause future harm to the business. The Sixth Circuit has held that risk disclosures are inherently forward-looking and do not require disclosure of past events, even if those events have materialized. Thus, in the circuit courts discussed above, and under the PSLRA, securities class actions stemming from omissions in risk disclosures may face increased difficulty in surviving a motion to dismiss.
The Ninth Circuit, on the other hand, as was evident in the In Re Facebook litigation, may not have such a high hurdle for pleadings to clear. The Ninth Circuit includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington. The Circuit ranks second in the number of securities class action filings according to Stanford Law School’s Securities Class Action Clearing House database. This is likely because of the type and number of businesses headquartered in California.
The Ninth Circuit has also developed a reputation for being relatively favorable to plaintiffs, particularly in its interpretation of the PSLRA. Therefore, the Supreme Court decision not to opine on the PSLRA pleading requirements may appear more favorable for securities fraud claims to survive the motion to dismiss stage. Especially if the case is filed in a Ninth Circuit district court.
For D&O underwriters, the heightened risk for protracted litigation stemming from regulatory disclosures may mean more time in court. Additional pleadings, motion practice, and discovery in securities cases are time-consuming, expensive, and often used as leverage for high-dollar settlement demands.
What about Nevada and Delaware?
The potential for increased insurance exposure for a company headquartered in the Ninth Circuit is also important to consider in light of the recent publicity that Nevada has received for being an attractive alternative domicile to Delaware. Nevada imposes no corporate income tax, personal income tax, franchise tax, or taxes on corporate shares. The state also offers protections for corporate officers and directors against personal liability for lawful business activities and does not require the disclosure of shareholders, directors, or officers in public records, ensuring a high level of privacy for business owners.
Companies have recently moved their incorporation from Delaware to Nevada, citing the state’s more favorable “legal environment” and lower litigation risks. But Nevada is in the Ninth Circuit. The Facebook DIG by the Supreme Court may be a bucket of cold water. Instead, being headquartered in Nevada may attract plaintiff shareholder lawsuits alleging omissions in federal regulatory disclosures, with a perceived lower threshold application for the PSLRA.
This might be a win for Delaware. As discussed on the D&O Diary, Delaware recently passed SB21 to purportedly stop companies from incorporating elsewhere. Being in the Third Circuit may now also help Delaware with its Circuit applying the “virtual certainty” test to determine whether a company must disclose a risk that has already materialized. With the heightened pleading standard of the PSLRA, securities actions filed in Delaware face an uphill battle.
The views expressed on this article are exclusively those of the author, and all of the content in this article has been created solely in the author’s individual capacity. Neither this site nor this article are affiliated with her company, colleagues, or clients. The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.