Nvidia (NVDA) and Facebook (META) are fighting two Supreme Court cases this year that they claim will flood the legal system with investor lawsuits if a decision is not made in their favor.
So far things are not going as they should.
Nvidia’s lawyers took their case to the Supreme Court on Wednesday, drawing skepticism from justices across the ideological spectrum. The same thing happened to Facebook’s lawyers last week.
“It seems to me that you are asking us to engage in a kind of analysis that we are not good at,” Justice Elena Kagan, an appointee of Democratic President Barack Obama, told Nvidia lawyer Neil Kumar Katyal.
The outcomes of these cases could undermine or embolden litigants in future securities fraud cases.
In Nvidia’s case, investors who have sued the company alleging that Nvidia CEO Jensen Huang made false statements should be required to provide more specific information in their lawsuit about what Huang knew at the time of his statements.
Investors claim that in 2017 and 2018, Huang intentionally deviated from internal Nvidia data by falsely attributing the company’s demand for chips to the video game market.
Investors assumed that demand at the time was actually driven by the more volatile market for cryptocurrency mining. This hypothesis was based on the opinion of a financial analyst who based his conclusion on publicly available documents, rather than Nvidia documents.
Supreme Court Justice Samuel Alito, appointed by Republican President George W. Bush, told Nvidia’s lawyers: “This is a very technical issue, and I don’t understand how the court is opposed to evaluating that at the pleading stage.”
The justices pressed Nvidia to explain why the Ninth Circuit Court of Appeals decision should be overturned, repeating a point they made on Facebook. issueStem argued last week.
In both cases, the appeals court allowed investors to bring lawsuits against companies through proposed securities fraud class actions.
Jonathan Massey, a professor at Yale Law School, said he was surprised by the justices’ questions in the Facebook case.
“The one thing that was amazing about the oral argument is that you got this kind of coalition across the aisle,” he said, with conservative Justice Clarence Thomas and liberal Justice Sonia Sotomayor expressing concerns that were “very pro-plaintiff.”
Facebook, for its part, said investors should not be able to claim that it misled its shareholders by overlooking that its partnership with British political consulting firm Cambridge Analytica exposed data on 87 million Facebook users.
At the heart of both disputes are questions about what facts a plaintiff must include in a legal complaint to keep the case in court.
Facebook argued that its disclosures were not false or misleading by failing to disclose that the Cambridge Analytica breach had actually occurred in the past, especially since the so-called risk did not pose any known risk of ongoing or future business harm.
According to Nvidia, investors should not be able to sustain a proposed class action against the company by relying on an expert’s opinion.
“Congress… wanted to stop lawsuits like this, lawsuits that allowed fraud too late,” Katyal said on Nvidia’s behalf during Wednesday’s arguments.
“When the stock price falls, all (plaintiffs) have to do is find an expert who has numbers that contradict the company’s public statements,” Katyal said.
Katyal went on to say that the decision in favor of shareholders created an “easy roadmap” for plaintiffs to evade a federal law that requires certain information to be included in a securities fraud complaint.
This law, known as the Private Securities Litigation Reform Act (PSLRA), which was created in part to prevent frivolous lawsuits, states that a plaintiff must prove that the defendant company intended to make a false or misleading statement, and that the statement was, in fact ,false.
Supreme Court Justice Neil Gorsuch, an appointee of Republican President Donald Trump, also expressed the idea that the PSLRA may need improvement.
“It’s beyond belief” to think that a CEO like Hwang was unaware of the source of such a large portion of the company’s income, Gorsuch said.
Jim RedwoodThe Albany Law professor of securities law doubted that the Supreme Court would ultimately rule in investors’ favor, saying he expected both cases to be resolved in a way that limits future securities class action lawsuits.
He said: “The Facebook case is somewhat closer,” explaining that the social media company’s case may be somewhat weaker than Nvidia’s case.
The Justice Department joined Nvidia’s case, siding with investors.
“We believe the Ninth Circuit correctly applied the standard here,” a Justice Department lawyer said during arguments Wednesday.
Alexis Keenan is a legal correspondent for Yahoo Finance. Follow Alexis on X @alexiskweed.
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