Securities Litigation Advisory | Exploring the Dismissals of the Facebook and NVIDIA Appeals

The Supreme Court recently heard oral argument in two appeals regarding the scope of private liability under the federal securities laws – Facebook, Inc. v. Amalgamated Bank (No. 23-980) and NVIDIA Corp. v. E. Ohman J:Or Fonder AB (No. 23-970).¹ Both appeals were from the Ninth Circuit, which upheld the lower court’s ruling that the plaintiffs had adequately pled securities fraud claims. 

The question presented in Facebook was whether a risk factor in a company’s SEC filing can be false or misleading “when it does not disclose that the warned-of risk has materialized in the past, even if the past event presents no known risk of ongoing or future business harm.”²  In NVIDIA, the Supreme Court was asked to consider (1) whether a plaintiff can satisfy the heightened pleading requirements for securities fraud claims through allegations of internal company documents without pleading with particularity the contents of those documents; and (2) whether a plaintiff can rely on an outside expert’s opinion to plead falsity as to a company’s public statements. 

In a surprising turn of events, less than a month after holding oral argument, the Supreme Court dismissed both the Facebook and NVIDIA appeals. The Court issued a one-sentence order in both cases stating that “[t]he writ of certiorari is dismissed as improvidently granted.” This means of resolving an appeal without issuing a substantive opinion is known as a “DIG.” 

We explain below what we think may have prompted the Court to reject the Facebook appeal and what impact the refusal to issue an opinion might have on other defendants facing similar claims of false and misleading risk factor disclosures. We also assess why the Court may have declined to address the issues raised in NVIDIA and what that means for executives who face allegations that internal reports they reviewed supposedly contradicted what they said publicly.

The plaintiffs in Facebook claimed that the company’s Form 10-K was false and misleading because it included a risk factor disclosure that presented the risk of third-party misappropriation of user data as a “hypothetical” future risk and failed to disclose that Facebook had in fact experienced at least one such incident in the past. Facebook’s argument on appeal was that this past incident was already known to the public at the time the 10-K was filed, rendering impossible an omissions theory of liability. Facebook also argued that the Court should not impose a rule requiring issuers to identify all past events in the risk factor section of their SEC filings because that section is supposed to focus on areas of future concern, but in any event a company should not have to disclose a specific past event that it does not believe presents a risk of continuing or future harm. 

During oral argument, several Justices struggled with where to draw the line for requiring disclosure and stated their discomfort with a bright-line, categorical rule. In the hopes of finding some agreement on what facts might give rise to a misleading impression about the absence of past events, the Justices spent most of the argument offering and tweaking their own hypotheticals, with Justice Barrett stating that, despite these efforts, “it seems to me very hard to articulate what the line is.”³  Indeed, multiple Justices voiced a preference for the SEC to consider as an initial matter whether or how existing regulations should be modified to address this issue, instead of forcing the Court to “walk the plank” on the issue.⁴ 

It is also possible that the decision to dismiss the Facebook appeal was influenced by the fact that, at oral argument, both sides seemed in agreement on the question on which certiorari was granted. The plaintiffs’ counsel, for example, conceded at the argument that “as to the actual question presented, we agree that a risk disclosure is not misleading because it omits disclosure of an event that is immaterial because it risks no business harm.”⁵  Thus, the Justices may have felt that there was no longer a live dispute on the question presented, making it unwise to proceed any further. It is also perhaps the case that the Justices felt the unique facts of Facebook – in particular, the obvious problem that one cannot have a viable omissions claim when investors are already aware of the facts supposedly omitted – meant that the case was not the best vehicle to address disclosure obligations that could have far-reaching and possibly unintended consequences in cases with more conventional fact patterns.

The Court’s decision not to issue a ruling in Facebook leaves the securities litigation landscape unchanged. For cases outside the Ninth Circuit, defendants will point to the fact that the Supreme Court had the opportunity to state that disclosure of past events was always required or sometimes required and refused to do either. Defendants, thus, have all the same arguments available to them as before – namely, that risk factors are understood by investors to be forward-looking in nature and reasonable investors do not read into such statements an implied representation on past events. Defendants will also likely argue, as Facebook did on appeal, that the Ninth Circuit’s opinion is an outlier that turned on unique and distinguishable facts.

Plaintiffs in the Ninth Circuit will likely argue that, under the Ninth Circuit’s Facebook decision, a company may be required to disclose past events in the risk factors section of its SEC filings, but by the plaintiffs’ own admission in the Facebook case, companies can avoid such claims with minimal tweaks to their disclosures. At the Facebook oral argument, both the plaintiffs and the Solicitor General indicated that the risk factor at issue would have been acceptable if Facebook had simply added some general language to the effect that misappropriation of user data had happened in the past. They agreed that it was not necessary to disclose the specific details of any past events. 

Furthermore, even the plaintiffs in Facebook appeared to concede that some risks – for example, the possible negative impact of adverse media coverage – would not require any specific “call-out” of past instances in the risk factors section. This is so because a reasonable investor would assume that every company at some point in the past has been the subject of some unflattering media attention. Thus, even the plaintiffs in Facebook seemed to be saying that disclosure of past events would not be required for every type of risk factor issued by a company.

Insights from NVIDIA Oral Argument 

The plaintiffs in NVIDIA sought to satisfy the heightened requirement for pleading fraudulent intent or “scienter” by relying on allegations supplied by unnamed former employees of NVIDIA that the company’s CEO had access to internal reports on product demand that were somehow in conflict with his public statements. The plaintiffs sought to bolster their claims through allegations that the CEO was very detailed-oriented and a “hands on” leader – the Ninth Circuit noted that some employees even described him as a “micromanager” – and, thus, he must have reviewed all available data on product demand.⁶  As would be typical at the motion-to-dismiss stage, the plaintiffs in NVIDIA did not have access to any of the nonpublic company reports that they described generally in the complaint. Accordingly, they were not able to point to any specific report or the contents of a specific report to allege with particularity when the CEO supposedly saw conflicting information, nor could they explain how particular statements made by the CEO diverged from a specific report he saw. 

At oral argument, certain Justices seemed sympathetic to NVIDIA’s contention that the Ninth Circuit could have – or even should have – reached a different outcome based on the allegations before it. One Justice explicitly noted that the outcome “may be wrong as a matter of error correction[,]”⁷  but there was also concern raised about issuing a bright-line rule requiring plaintiffs, for example, to quote from specific internal company documents, which they likely would not have at the pre-discovery stage of litigation.

Counsel for NVIDIA responded that the company was not seeking such a requirement and noted that a plaintiff would not necessarily need to have the internal reports in-hand if they could identify witnesses with sufficient personal knowledge to speak to the contents of specific reports seen by the CEO. NVIDIA’s contention was that the plaintiffs had failed in this regard because they were relying on former employees who could not reliably speak on the reports the CEO saw. NVIDIA argued that this was so because these employees were either not employed at the time the allegedly false and misleading statements were made or were too junior to know what the CEO knew and when he knew it. 

Certain Justices indicated that – in the absence of a request to establish a bright-line rule – it was unclear how NVIDIA’s proposed standard was substantially different from the contextual, fact-driven analysis that was already required under existing precedent. Certain Justices also suggested that they would not have accepted this appeal to “error correct” the lower court. These Justices were drawing a distinction between ruling that the lower court should have reached a different result based on the facts of the case versus issuing an opinion that resolves a legal question about which the circuit courts disagree. This reluctance to engage in “error correction” may have factored into the decision to dismiss the appeal.⁸ 

What the Denial of the NVIDIA Appeal Could Mean for Other Securities Cases

Similar to the Court’s refusal to issue an opinion in Facebook, the post-argument dismissal of NVIDIA is unlikely to alter the securities litigation landscape. The dismissal means that the Supreme Court offered no opinion on whether the Ninth Circuit complied with the Court’s existing guidance on the requirements for pleading securities fraud. Thus, one cannot reasonably read into the dismissal any suggestion that the Court thought the Ninth Circuit “got it right.” Indeed, comments made at the oral argument suggest that at least some of the Justices were of the opposite view.

Also, internal report allegations are already present in virtually every securities case brought inside and outside the Ninth Circuit. There is, therefore, well-established law in many circuits, including the Ninth Circuit, that plaintiffs have to plead something more than general allegations that internal reports must have existed, and that those reports must have discussed the “true facts” concealed from investors. 

There is also well-established case law, including in the Ninth Circuit, that the plaintiffs must plead particularized facts to support the reliability of allegations coming from former employees and to support the probability that the former employees would have personal knowledge of and exposure to the facts they now claim to know. In other words, the issues that arose in NVIDIA concerning former employees not being employed during the relevant time period or being too junior within the organization to be a reliable source for information reviewed by the CEO are all still fair game. Each side will continue to argue (as they have done in the past) that the unique facts and circumstances of the case should control the court’s conclusion of whether unnamed sources should be credited at all and, if so, the level of discount to be applied to the allegations they have supplied.

You can subscribe to future advisories and other Alston & Bird publications by completing our publications subscription form.

If you have any questions, or would like additional information, please contact one of the attorneys on our Securities Litigation Team.

¹ Each of these appeals were the subject of a prior client advisory.
² Brief for the Petitioners at (I), Facebook, Inc. v. Amalgamated Bank (2024) (No. 23-980).
³ Transcript of Oral Argument at 42:8-9, Facebook, Inc. v. Amalgamated Bank (2024) (No. 23-980).
⁴ Id. at 99:18-19.
⁵ Id. at 51:2-6.
⁶ E. Ohman J v. NVIDIA Corp., 81 F.4th 918, 939 (9th Cir. 2023).
⁷ Transcript of Oral Argument at 26:19-20, NVIDIA Corp. v. E. Ohman J:Or Fonder AB (2024) (No. 23-970).
⁸ The second issue on appeal in NVIDIA (whether the plaintiffs could rely on an expert’s opinion to support their claims of allegedly false misstatements) received less attention from the Justices at oral argument. It is unusual for a plaintiff to submit an expert report at the motion-to-dismiss stage. At oral argument, NVIDIA’s counsel stated that NVIDIA was not seeking a ruling from the Court that no expert report could ever be submitted at this stage of the case. After receipt of confirmation that no such ruling was sought, the Justices seemed disinclined to engage in an independent review and analysis of the assumptions and conclusions offered by the expert that NVIDIA had raised as problematic.