Free Speech vs Corporate Lies: The Role of the First Amendment in Securities Fraud

POMERANTZ MONITOR | MARCH APRIL 2022

The intersection of fraud and claimed free speech protection under the First Amendment is fraught with controversy. From defamation to fraud, obscenity, hate speech, and even fighting words – the fine line between protected and prohibited speech is left largely undefined by guidelines from the bench that sometimes fail to go beyond “you’ll know it when you see it.” Add commercial speech and the complexities of securities fraud class action litigation into the debate and you have what James C. Goodale – famed General Counsel who represented The New York Times in their Sullivan and Pentagon Papers cases – described as a “collision course” between the First Amendment and securities regulation. Goodale asserted that “there is no greater statutory regulation of speech than the ‘33 and ‘34 Securities Acts and the ‘40 Investment Adviser and Investment Company Acts.”

A recent case involving oil giant ExxonMobil Corp. (“Exxon”) shows how bad faith misuse of the First Amendment can threaten investor protections. In a recent appeal in Massachusetts state court, Exxon argued that Massachusetts Attorney General Maura Healey’s suit under the state’s consumer protection statute should fail because Exxon’s public statements (and alleged omissions) relating to climate change were protected under the First Amendment of the United States Constitution. Exxon claimed the statements, rather than being targeted at consumers and investors, were directed at policymakers and the public at large to influence energy policy, thus fitting into the statutory definition of “petitioning.” Exxon argued that, due to its position as a large energy company, it must take an active role in the public discussion on energy policy, and these statements are protected so that it can fulfill that role.

Suffolk Superior Court Justice Karen Green did not find Exxon’s arguments convincing and denied dismissal of the suit. Justice Green found that Attorney General Healey’s claims that Exxon lied to consumers by marketing its products as environmentally friendly could move forward, as could claims that Exxon misled investors by downplaying any climate-driven financial risks to its bottom-line financials. Significantly, Justice Green found that commercial speech is protected under the First Amendment if the speech concerns lawful activity and is not misleading, but not when it includes fraudulent statements. Given the allegation of fraud to consumers and investors, she held that First Amendment protection was not warranted at the motion to dismiss stage.

On appeal, Exxon has argued that “[b]y premising its claims on Exxon’s advocacy and alleged omissions regarding preferred policies on climate change, the Commonwealth seeks to curtail Exxon’s exercise of its right of petition by punishing Exxon, through litigation, for not propounding a particular message.” Exxon further claims that climate change is one of several controversial and sensitive topics of public concern, and due to that, forcing any disclaimers to accompany Exxon’s statements regarding the matter to prevent allegedly misleading omissions is compelled speech on issues of public concern, and an unconstitutional step by the Commonwealth of Massachusetts to take. It further argues that this is simply “a policy disagreement about the potential scale and efficacy” of certain alternative energy sources. Exxon also claims that the Commonwealth’s views on what constitutes good or poor energy policy should not form the basis of forcing the company to disseminate opposing viewpoints on the matter or otherwise subject itself to liability. This, according to Exxon, creates a chilling effect on petitioning activity vis à vis the First Amendment.

The Massachusetts Attorney General responded that the intended audience was very clearly investors and consumers; Exxon’s statements were commercially motivated and profit-oriented, rather than petitioning the government. Exxon’s claims of petitioning, according to the AG, are a phony pretext for its actual goal for the statements, and its First Amendment defense is a delay tactic used by defendants in similar cases. Additionally, the Commonwealth of Massachusetts had the clear goal of protecting investors and consumers, not punishing Exxon due to disagreements with its climate change policy viewpoints.

Some examples of representations clearly made to investors were that Exxon will “face virtually no meaningful transition risks from climate change.” In Exxon’s 2018 Energy Outlook, the company told investors that it “use[s] the Outlook to help inform ... long-term business strategies and investment plans.” According to the AG, these statements plainly target investors and should not be shielded from liability under the contrived premise of free speech. The Commonwealth further pointed to the fact that Exxon itself described their communications as “branding and marketing efforts,” “corporate messaging,” and “statements highlighting the positive features of its business.” Plainly, the Commonwealth argues, they aim to deceive investors about the significant and existential threat that climate change poses to the company’s value. The appeal is currently pending in the Massachusetts Supreme Court.

Exxon’s line of reasoning certainly raises concerns in the context of securities fraud actions, although, in a good sign to investors, courts have been similarly unconvinced in that context in several recent cases. One example is in a recent major victory for Pomerantz in the Altria and JUUL securities fraud litigation in the Eastern District of Virginia. The court there, in a 2021 opinion, found that the Noerr-Pennington doctrine, which is meant to safeguard the First Amendment right to petition the government for a redress of grievances by immunizing liability that may attend the exercise of that right, did not call for the dismissal of plaintiffs’ claims related to defendants’ statements made to Congress – in this case, Altria and Juul’s denials that they marketed their nicotine vaping products to children – because “the First Amendment offers no protection when petitioning activity ... is a mere sham to cover an attempt to violate federal law.” The court found that plaintiffs’ fraud allegations under the Exchange Act raised the sham exception, and, in any event, the doctrine was an affirmative defense that could not be decided at the motion to dismiss stage. Thus, even if speech was established as petitioning, First Amendment protection does not apply when the speech is used to fraudulently deceive investors.

A 2020 Northern District of California court opinion found similarly against Apple in a securities fraud action against the company concerning allegations that processing performance was intentionally throttled on iPhones. In this case, the court denied the Noerr-Pennington First Amendment defense because Apple could not show that it was seeking any redress from policymakers implicating their First Amendment rights, despite the speech in question being a letter to Congress.

In 2003, in Nike, Inc. v. Kasky, the argument for First Amendment protection for corporate speech reached the United States Supreme Court, as Nike fought allegations of false advertising by claiming that their denials of engaging in unfair labor practices and subjecting workers to unsafe working conditions were actually protected speech related to matters of public concern. Nike initially prevailed at trial and in the California Court of Appeals but lost on reversal in California Supreme Court – sending it to the High Court. While the U.S. Supreme Court accepted the case, they eventually sent it back down as “improvidently granted” – meaning they should not have accepted it in the first place – although Justice John Paul Stevens noted that the case presented “novel First Amendment questions because the speech at issue represents a blending of commercial speech and debate on issues of public importance.” Unfortunately, the case was settled before the issues at hand could be resolved with further clarification of just how free corporate speech can be on matters of public interest.

Despite some limited protection in narrow circumstances, there is strong judicial backing of the principle that companies cannot hide behind perceived First Amended rights to lie to or mislead investors. Some courts have found that outlining the factual basis for an opinion leads to First Amendment protection; however, Circuit Courts of Appeals have generally found that punishing securities fraud does not violate the First Amendment and laws punishing fraudulent speech survive constitutional scrutiny even when applied to pure, fully protected speech. In fact, in 2009, the Fourth Circuit explicitly found that “Punishing fraud, whether it be common law fraud or securities fraud, simply does not violate the First Amendment.” The Supreme Court has also stated, as cited by Suffolk Superior Court Justice Karen Green in Exxon: “the First Amendment does not shield fraud.”

It is well-settled law that the First Amendment does not protect fraud, and so courts are unlikely to prevent investors from enforcing their rights to be protected from false and misleading statements under the guise of free speech. Securities fraud defendants will certainly continue to use the tactic of improperly hiding behind the First Amendment to shield themselves from liability for false or misleading statements. However, they should be wary -- especially in the age when outspoken corporate officers can find themselves just one tweet away from destroying shareholder value with misguided, misleading, and potentially fraudulent comments.