Supreme Court to Determine Pleading Standard in Shareholder Class Actions

On June 17, 2024, the U.S. Supreme Court granted certiorari on Nvidia’s appeal of the Ninth Circuit’s decision to revive a shareholder class action lawsuit against the company. The Supreme Court will consider the appropriate pleading standard for a claim of fraudulent statements or omissions under Section 10(b) of the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act (“PSLRA”).

Nvidia is an artificial intelligence chipmaker and Nvidia chips have become popular for cryptomining (the complicated process used to secure cryptocurrencies). The class action lawsuit alleged that Nvidia misled investors about what amount of their sales revenue was from crypto-related activities.  The suit was originally filed in 2018, but U.S. District Judge Haywood Gilliam Jr. dismissed it in 2021. The Ninth Circuit revived the case, finding that the plaintiffs adequately alleged that Nvidia’s CEO made “false or misleading statements and did so knowingly or recklessly.”

The PSLRA created a high standard for securities class actions, requiring plaintiffs to show fraudulent intent and falsity to survive motions to dismiss. In reversing the dismissal for failure to state a claim, the Ninth Circuit ruled that the plaintiffs could establish fraudulent intent by pointing to internal documents they have not seen and could use experts to prove that the company’s representations were false. Nvidia argued that such evidence was outside the pleadings and did not comport with the established pleading standard.

The Supreme Court will likely clarify the standards and rules of the PSLRA, settling differences among Circuit Courts. The decision could have significant implications on pleading requirements in securities class actions. If the standards are lowered, cases will be more likely to survive early motions to dismiss. Nvidia is concerned that if the Ninth Circuit decision were to remain, then the decision would permit “abusive and speculative litigation.”

The Supreme court will hear arguments on the case in its next term, which begins in October.

[1] Mac McCullough is a law clerk at Carr Maloney P.C. and law student at the George Washington University.