ARGUMENT ANALYSIS

Justices debate particularity of complaint in NVIDIA securities fraud suit

The justices closed the November session on Wednesday with  NVIDIA Corp v. E. Ohman J:or Fonder AB, a case arising out of the use of NVIDIA chips by crypto miners. The legal problem presented for the justices is whether the complaint – which alleges that NVIDIA misled investors by downplaying the sale of its chips for crypto mining rather than gaming – was sufficiently particular to get over the relatively high pleading standard required for such cases.

Investors say the company did not disclose the extent to which sales to crypto-miners put their shares at risk. NVIDIA argues that the shareholders don’t have the hard evidence required for such a case – specifically, internal documents showing executives knew and withheld information.

Appearing on behalf of NVIDIA, Neal Katyal argued that the court of appeals was too lax in letting the case go forward, but he had to spend most of his time fencing off questions about why such a fact-specific dispute warranted the court’s attention. Justice Sonia Sotomayor in particular burned through a large portion of Katyal’s time pressing the idea that he is just asking for “error correction,” a task the justices typically regard as beneath them. It was not a great sign for him that the references to error correction kept surfacing from almost all the questioners during his argument: he got the same line from justices spanning “both sides of the aisle,” if you will: Elena Kagan, Amy Coney Barrett, and Neil Gorsuch.

About the only substantive discussion Katyal had on the merits was with Justice Ketanji Brown Jackson, who pretty clearly thought that he was asking for far too much. In her words, Katyal was insisting that “plaintiffs … actually have the evidence in order to plead their case,” while she opined that the standards in fact don’t “require that they have the documents,” and indeed couldn’t “understand how they could have the documents when discovery hasn’t occurred yet.”

To be sure, it was not all bad for Katyal. Chief Justice John Roberts repeatedly observed that Congress clearly intended in the 1995 Private Securities Litigation Reform Act to limit this type of lawsuit. Because in Roberts’ view Congress thought the law did “a good bit more than simply keep out frivolous lawsuits,” Roberts seemed to believe that the justices should put some content in the pleading standards that NVIDIA is challenging.

Justice Brett Kavanaugh echoed Roberts’ concern, as he worried openly about the ease with which the lower court’s decision would permit shareholders, “any time a stock price falls,” to “get past a motion to dismiss” by simply providing a vague expert report.

The shareholders in this case relied on an expert report that looked at the number of of crypto-mining processors built during the relevant time to estimate the likely share of chip sales sold by NVIDIA. But Deepak Gupta, representing the investors, told the justices that the group had presented a variety of other types of evidence.  

Late in Katyal’s argument, Roberts interrupted him to ask about his repeated statements that the complaint approved in this case “eats itself.” Roberts commented that he found “the analogy … very vivid,” but he confessed that he’d “never heard” the phrase before and wondered “what does that mean?” After Katyal labored at some length to explain that he intended only to suggest that the complaint was internally inconsistent, Roberts responded that he remained “not sure how that’s ‘eating itself,’ but I’ll take your word [for it].”

It’s a little puzzling for so many justices to spend argument time asking an advocate why they’re hearing his case – four of the people sitting on the bench doubtless voted to hear it, and if they don’t regret that decision then it’s pretty likely the justices will proceed to decide the case. But it does suggest that NVIDIA has a long way to go in persuading a majority of the justices that the court of appeals erred in any important way.