Justices Ask If They Should Have Even Taken Nvidia’s Appeal of Investor Suit
“This is pure error correction that you’re asking us to do,” Justice Sonia Sotomayor told NVIDIA’s lawyer, Neal Katyal.
November 13, 2024 at 05:09 PM
5 minute read
The U.S. Supreme Court on Wednesday seemed to regret its decision to hear an appeal from tech giant Nvidia seeking to throw out an investor class action over a temporary fall in its stock price that followed a crash in the crypto market.
During oral arguments, several justices suggested that the company—which sells technology products, including “graphics processing units”—has not presented a clear legal question for the court to resolve. Instead, Nvidia seems to be asking them to wade into a messy factual dispute about whether the fraud allegations in the lawsuit were sufficient enough under the federal Private Securities Litigation Reform Act, the justices said.
“This is pure error correction that you’re asking us to do,” said Justice Sonia Sotomayor.
Nvidia is facing claims that its CEO, Jensen Huang, misled investors about the extent to which its sales of 'GPUs' relied on the cryptocurrency market, such that when the crypto market fell sharply in 2018, the company's stock price soon followed. In their lawsuit, the plaintiffs have relied on testimony from former employees and an outside expert to allege that Huang must have reviewed internal sales data that contradicted his public statements.
Nvidia’s lawyer, veteran high court attorney Neal Katyal, argued to the justices that the U.S. Court of Appeals for the Ninth Circuit created a “dangerous” rule in finding the plaintiffs’ allegations sufficient to sustain an investor class action under the PSLRA given that they had not included the “contents” of the data that Huang is said to have reviewed.
Justice Elena Kagan shared Sotomayor’s skepticism.
“As what you’re saying from the podium in terms of the rule you think we should adopt gets more and more like the sort of thing that we usually ask for, it becomes less and less clear why we took this case, No. 1, as Justice Sotomayor suggested, and No. 2, why you should win it,” Kagan told Katyal.
“What we’re basically seeking is a definition of particularity,” argued Katyal, of Hogan Lovells. “In this case, that would have required the plaintiffs to show the particular data that deviated from the CEO’s public statements. And there’s nothing even close.”
That didn’t seem to convince Justice Amy Coney Barrett.
“Mr. Katyal, why isn’t that error correction?” asked Barrett, suggesting that Katyal was “simply asking us to go through the complaint and explain why it’s not good enough.”
As the top court in the country, the Supreme Court’s primary purpose is to clarify legal questions that have divided lower courts. Its own rules state that “[a] petition for a writ of certiorari is rarely granted when the asserted error consists of erroneous factual findings or the misapplication of a properly stated rule of law.”
Around once or twice a term, the Supreme Court will dismiss a petition as “improvidently granted” after oral arguments reveal the case to be a poor vehicle to resolve the question presented. It’s unclear whether that will be the outcome in Nvidia’s appeal.
“This case certainly seems like a candidate for that, given [the justices’] remarks,” said Jennifer Windom of Kramer Levin Naftalis & Frankel. “There were several justices who today seemed to suggest during argument that the position that petitioners presented in their cert petition may not be the full picture of the Ninth Circuit’s decision and the record below, and are a bit skeptical of whether this case really presents anything [other than error-correction.]”
Kramer Levin’s Dan Lerman agreed, calling it the “most striking thing about” the argument.
The plaintiffs’ attorney, Deepak Gupta of Gupta Wessler, seized on their skepticism.
“I think the questions from Justice Kagan, Justice Sotomayor, Justice Gorsuch and Justice Barrett show that they have retreated to nothing more than a fact-bound application of agreed-upon legal principles,” Gupta said. “There is no need for this court to sit as a district court and reweigh hundreds of paragraphs anew.”
Nvidia's stock fell significantly in late 2018 after the company reported low sales and an excess supply of its GPUs, a device used in smartphones and computers that increases the speed of rendering graphics. Nvidia's "GeForce" GPU had been designed for gamers but became very popular with cryptocurrency miners.
According to the plaintiffs, Nvidia’s market value “plummet[ed]” when crypto prices fell in the summer of 2018, causing an oversupply of the company’s GeForce product.
In a lawsuit filed under Section 10(b) of the Securities Exchange Act, plaintiffs claimed Nvidia CEO Jensen Huang repeatedly and falsely denied to investors that GeForce's original success had been due to sales to crypto miners. Relying on testimony from former Nvidia employees, they further claimed Huang had access to data about the crypto sales and thus had the requisite "scienter," or wrongful intent, required under the PSLRA.
But Katyal, Nvidia’s lawyer, attacked the sufficiency of those pleadings under the 1995 law, which Congress passed to crack down on frivolous securities litigation.
In accepting the plaintiffs’ allegations, the Ninth Circuit adopted a “loosey-goosey” rule and “allowed basically a recipe for fraud by hindsight,” Katyal said.
He seemed to have an ally in Chief Justice John Roberts Jr., who on numerous occasions alluded to the “specific objectives” of the PLSRA to demand a higher degree of specificity from plaintiffs’ allegations.
“Congress went out and saw a real problem there and wanted to do something about it,” Roberts said. “So the idea that, oh, you’re going to have varying levels of particularity with respect to the evidence is kind of a hard standard to apply.”
Kramer Levin’s Windom noted that, if the justices decide the case on the merits, “it has the potential to be important.”
“They take very few securities cases,” she noted. “If the Supreme Court intends to write something regarding pleading standards that differs at all from the prior law they made on this and that exists on these issues, it will be picked up on either side in every motion to dismiss going forward.”
A decision in the case is expected by July.
The case is Nvidia v. E. Ohman J:Or Fonder AB, No. 23-970.
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