Out of Thin Scienter: Protecting Confidential Information in Light of ‘NVIDIA v. Ohman’

In this article for New York Law Journal, Stefan Atkinson and Jenny Lee discuss the Supreme Court’s upcoming decision in NVIDIA Corp. v. E. Ohman J:or Fonder AB, its potential to clarify the Private Securities Litigation Reform Act (PSLRA) and steps companies may want to consider to protect their confidential information.

For nearly 30 years, the Private Securities Litigation Reform Act (PSLRA) has required private plaintiffs in securities litigation to plead both falsity and scienter with particularity. The Supreme Court will likely clarify the contours of this heightened pleading standard when it decides NVIDIA Corp. v. E. Ohman J:or Fonder AB this term.

One of the questions presented in NVIDIA is whether plaintiffs seeking to allege scienter under the PSLRA based on allegations about internal company documents must plead with particularity the content of those documents.

For companies and their counsel, some practical questions underlie the one before the Supreme Court: how did the NVIDIA plaintiffs get information about (and in one instance, direct access to) purported internal company documents—before discovery, no less? And what can be done about it? The use of internal documents in securities litigation (and beyond) poses myriad issues for companies and their counsel to weigh when considering how to protect proactively their confidential information.

The NVIDIA Case

In NVIDIA, the plaintiffs (respondents in the Supreme Court) brought a class action under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, alleging that NVIDIA intentionally misrepresented the extent to which its chip sales to cryptocurrency miners, as opposed to gamers, were driving the company’s gaming-segment revenues. This was allegedly done because executives wanted to create the false impression that NVIDIA was insulated from crypto volatility.

To support these claims, the plaintiffs alleged that company leadership was aware of internal documents that showed that the volume of sales to crypto miners outstripped what had been acknowledged publicly. It appears that several former NVIDIA employees described such documents to the plaintiffs’ counsel and, in one instance, provided a document itself. The purported internal company documents included:

• A database that tracked global sales;
• Technical data from software installed on devices sold;
• A privately commissioned internal study on crypto-mining’s effect on sales in China and an accompanying PowerPoint deck (several slides of which were then included in the complaint as screenshots);
• Quarterly meeting materials;
• Weekly reports; and
• Emails.

The District Court dismissed the plaintiffs’ complaint, finding that the plaintiffs’ reference to internal records without particularized pleading as to their contents failed to plead scienter. A divided panel of the Ninth Circuit reversed, holding that the plaintiffs’ allegations sufficiently pleaded scienter.

The defendants (petitioners in the Supreme Court) argued that alleging only the general character of company documents prevents courts from reliably assessing the pleadings under the governing PSLRA standard. The defendants also argued that because every major company has internal reporting structures, any shareholder under the plaintiffs’ proposed approach could create generalized allegations sufficient to survive the pleading stage, allowing for the very vexatious litigation the PSLRA was meant to prevent.

The plaintiffs countered that precedent requires courts to consider all alleged facts holistically, rather than apply the heightened PSLRA standards to each fact (or document) individually.  According to the plaintiffs, the defendants’ proposed rule would hamstring securities plaintiffs by requiring them to allege the specific contents of documents that they may not be able to access or control, particularly in light of the PSLRA’s automatic stay of discovery through the resolution of motions to dismiss.

Key Takeaways for Companies

Regardless of how the Court decides NVIDIA, the case serves as an important reminder of the risk of disclosure of confidential company information and how that information may be used even at the outset of litigation. Companies and their counsel may want to consider the following steps to protect their confidential information. It is important to note that the suggestions here are not intended to interfere with a company’s policies or obligations regarding whistleblower claims or other protections.

Draw Clear Parameters. It may be wise to educate employees about their company’s confidentiality policies and any applicable agreements governing the use of confidential information. Current or former employees may disclose confidential information without even realizing what they are doing. Educating employees early and often about the relevant scope of confidentiality and their individual roles in safeguarding that confidential information can help protect against such inadvertent disclosures.

One good way to educate employees is to define confidentiality in clear, concrete terms. Ensure employees understand that the underlying information is protected, regardless of whether the document in which that information resides is disclosed. In NVIDIA, the plaintiffs relied not just on information that most employees would recognize as confidential, such as a purported internal sales database and a privately commissioned study, but also less obviously protectable information, such as data embedded in quarterly and weekly updates and emails that may have gone out to many company recipients. It may be helpful to use specific examples of what constitutes confidential information when speaking with employees on these issues.

Confidentiality should also be defined in terms of duration. For example, confidential information could be disclosed by former employees who are unaware that confidentiality obligations to former employers can survive the employment relationship. The allegations in NVIDIA were founded on statements made by purported former employees, including from outside of the U.S. It appears that one former NVIDIA employee even supplied the plaintiffs’ counsel with a copy of an internal PowerPoint on crypto-mining’s effect on chip sales in China; it is unclear whether the former employee shared the document before leaving the company or after, but it would not be surprising if both are violations of NVIDIA’s confidentiality policy. It is therefore essential to make plain the longevity of any confidentiality restrictions.

In sum, companies and their counsel should determine what confidential information means to their respective businesses and communicate those specific parameters to their employees, as well as the employees’ role in safeguarding that information, even beyond their employments. While this will not eliminate the risk of disclosure, it could go a long way toward avoiding at least inadvertent disclosures of confidential information.

Counsel Careful Conversations. Companies and their counsel should also educate employees on what constitutes a disclosure. In the securities litigation context, confidential information is sometimes verbally disclosed by current or former employees to lawyers (or private investigators employed by lawyers) reaching out on behalf of a putative class. For example, the plaintiffs in NVIDIA relied upon statements of five former employees who appear to have spoken directly with plaintiffs’ counsel or investigators. Employees may not be clear on who is a company “outsider” for purposes of confidentiality, including counsel or investigators for someone other than the company. Teach employees to ask questions of anyone seeking information about the company.

In particular, consider training employees to ask whom the individual contacting them represents and how the information will be used. Employees may sometimes be willing to speak under the mistaken belief that they will not be implicated in the litigation or that they might benefit from the lawsuit. As always, encourage employees to talk to the company’s counsel if they are asked for confidential information by someone outside the company.

Don’t Be All Bark. In some instances, a current or former employee may seek to share confidential information with outsiders, despite knowing the company’s policies. Consider whether to attach consequences (and if so, what consequences to attach) to a breach of the company’s confidentiality, including after an employee has left the company. For a departed employee, for example, a confidentiality breach could lead to the return of an employee’s severance, equitable relief, or even attorneys’ fees. You may wish to tie the consequences for breach to factors like relevant industry regulations and employee level.

If an employee has an employment agreement that contains confidentiality provisions, it is helpful if employees are aware of and understand those provisions at the time of signing their agreement, as well as during and after their employment. Including consequences for breach will help reinforce the notion that the company takes the protection of its confidential information very seriously.

Of course, companies need to be mindful of their obligations under Section 21F of the Securities Exchange Act of 1934 to not impede an individual’s ability to act as a whistleblower to the SEC. 

There is no one-size-fits-all solution to corporate confidentiality concerns. Confidentiality agreements will naturally vary across industries, companies, and even employee levels. But whether or not the Supreme Court rules that securities plaintiffs must plead the contents of internal documents with particularity, the NVIDIA case highlights the crucial role confidential information can play in a securities class action—even long before discovery has begun. Companies can help to protect themselves by being proactive and diligent about instituting confidentiality protections, ensuring employee comprehension, and enforcing compliance.