Nvidia (NVDA) and Meta (META) are fighting two Supreme Court cases this year that they claim will flood the legal system with investor lawsuits if not decided in their favor.
So far, things aren’t exactly going their way.
Nvidia’s lawyers made their case before the high court on Wednesday and drew skepticism from justices across the ideological spectrum. The same happened to Meta’s lawyers last week.
“It just seems to me that you’re asking us to engage in a kind of analysis that we are not very good at,” Justice Elena Kagan, an appointee by Democratic President Barack Obama, told Nvidia’s lawyer Neal Kumar Katyal.
The outcome of the cases could undermine or embolden future securities fraud litigants.
Nvidia argues that investors who sued the company alleging that Nvidia CEO Jensen Huang made false statements should be required to present more particular information in their lawsuit about what Huang knew at the time of his statements.
The investors claim that in 2017 and 2018, Huang knowingly departed from Nvidia’s internal company data by misattributing the company’s demand for chips to the video gaming market.
Demand at the time, the investors hypothesized, was actually driven by the more volatile market of cryptocurrency mining. That hypothesis relied on the opinion of a financial analyst who based his conclusion on publicly available documents, rather than Nvidia’s company documents.
“This is a highly technical subject, and I just don’t understand how a court is opposed to be evaluating that at the pleading stage,” Supreme Court Justice Samuel Alito, an appointee of Republican President George W. Bush, told Nvidia’s lawyer.
The justices pressed Nvidia to explain why they should reverse a decision by the 9th Circuit Court of Appeals, repeating a point they made in the case against Meta’s Facebook argued last week.
In both cases, the appellate court allowed investors to proceed against the companies with proposed class-action securities fraud suits.
Yale Law School professor Jonathan Macey said he was surprised by the justices’ questions in the Facebook case.
“One thing that was amazing in the oral argument,” he said, “is you’ve got this kind of across-the-aisle alliance” with conservative Justice Clarence Thomas to liberal Justice Sonia Sotomayor expressing concerns that were “very pro-plaintiff.”
Facebook, for its part, said investors should not be able to allege that it misled its stockholders by omitting that its partnership with British political consulting firm Cambridge Analytica exposed the data of 87 million Facebook users.
At the core of both disputes are questions about what facts a plaintiff must include in a legal complaint to keep a case in court.
Facebook argued that its disclosures were not false or misleading by failing to disclose that the Cambridge Analytica breach actually materialized in the past, especially because the so-called risk posed no known risk of ongoing or future business harm.
According to Nvidia, investors should not be able to maintain a proposed class-action lawsuit against the company by relying on an expert’s opinion.
“Congress … wanted to stop lawsuits like this, lawsuits that allowed for fraud by hindsight,” Katyal said on behalf of Nvidia during Wednesday’s arguments.
“When a stock drops, all [plaintiffs] have to do is find an expert with numbers that contradict a company’s public statements,” Katyal said.
Katyal went on to say that a decision in favor of the shareholders created “an easy road map” for plaintiffs to evade a federal law that requires particular information to be included in a securities fraud complaint.
The Private Securities Litigation Reform Act (PSLRA), which was in part created to prevent frivolous lawsuits, states that a plaintiff must show that a 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 entertained the idea that the PSLRA may need refining.
Gorsuch said “it beggars belief” to think that a CEO, such as Huang, would have been unaware of the source of such a large portion of the company’s income.
Jim Redwood, a securities law professor with Albany Law, doubted that Supreme Court would ultimately rule in favor of the investors, saying he expects both cases to be resolved in a manner that curbs future securities class action lawsuits.
“The Facebook case is somewhat closer,” he said, explaining that the social media company’s case may be somewhat weaker than Nvidia’s.
The Justice Department joined in the Nvidia case, siding with investors.
“We think that the 9th Circuit correctly applied the standard here,” the DOJ’s lawyer said during arguments on Wednesday.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.
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