This is Bloomberg Law with June Grosso from Bloomberg Radio.
So today we're announcing a federal lawsuit against Meta. Met of course, is the parent company of Instagram and Facebook, for knowingly harming the mental health of young social media users.
Meta Platforms is being sued by forty one states who claimed that social media platforms Instagram and Facebook exploit young people for profit by building an addictive features that are harming their mental health. At a press conference of the Attorney General of Washington State, Bob Ferguson, two teenagers described their struggles coping with social media sites like Instagram.
The worst part was these pictures and videos were never ending. The addictive algorithm and the constant flood of new content kept me glued to my phone, and before I knew it, I began to hate myself and.
The way I looked.
This all happened before I.
Turned thirteen, as I would go on my phone intending to do other things and then instinctively start opening up Instagram, opening up different social media platforms without even meaning to, and then getting stuck in the cycle of scrolling seeing other people's lives and interactions.
Ferguson said, Meta knowingly misled users and hooked youngsters with psychologically manipulative product features.
They tap into their so called fear of missing out, discouraging them from leaving the apps once they are logged on. Meta is aware of the addictive nature of these features for young people and the risks that they pose. The original developer of the infinite scroll concept Liken the feature too, and I'm quoting now behavioral cocaine.
Thirty three states are filing a joint lawsuit in federal court in California, while attorneys general for d and eight other states are filing separate complaints in federal, state or local courts. Joining me is Bloomberg Intelligence analyst Matthew Shettenhelm. Matt tell us about the federal lawsuit.
So yesterday over thirty states filed in federal court in California, basically using their consumer protection laws under each states and accompanying that with one claim under federal law under the Children Online Privacy Protection Act, which is known as KAPPA. And basically the allegation here is that Meta acted in an unfair and deceptive manner because it knew that its social media service was harmful to teens, but it withheld that knowledge and misled users and proceeded to deliver its
product to teens anyway. So it's seeking damages, civil penalties as well as injunctive relief, basically forcing the company to change how it serves teams. That's the goal of the lawsuit.
And so what they're alleging is that Meta designed algorithms. It says Meta did not disclose that its algorithms were designed to capitalize on young users, dopamine responses, and create an addictive cycle of engagement. So the allegation is that Meta specifically designed an algorithm for this.
That's exactly right. So the lawsuit takes aim at a number of features that are sort of fundamental to how Meta designed its social media platforms, using data about the teams to send them content that keeps them scrolling and keeps them reading, sending them notifications that keep them coming back to the service as soon as they look away from it, using the law like system that entices them and draws them in and pushes them to put more
content out there. And the allegation here is that Meta knew that all of these features were harmful to teams. There's a separate lawsuit actually in this same federal court that goes to the design of the product itself and whether that violates product liability law or whether Facebook was negligent in designing it. Actually, this Friday, that's going to be go for emotion to dismiss hearing. This suit's a little bit different. It's not about the design itself. It's
about did Meta lie? Did it mislead users about that? And so it takes same It uses these existing consumer protection laws about what is unfair and what is deceptive to ask did Facebook mislead the public about what it knew?
And a lot of this is based on the whistleblower who released internal Dyes documents in twenty twenty one.
Yeah, I think that's the real start of this, when Francis Hoggin came out with her release of the internal documents suggesting that that Facebook knew more about the risk to children than it was letting on. And so this is really you been playing out ever since that moment. Now, Facebook disputes her allegations and says that they're overblown and that the evidence isn't clearly as one sided as it
might seem or as she might suggest. So that's the sort of allegation that would be tested in this case if it gets past a motion to dismiss.
Metta said, we share the Attorney General's commitment to providing teens with safe, positive experiences online and have already introduced over thirty tools to support teens and their families. Do you know what kind of tools they're talking about.
I think these are features like there are settings that teens can put on the product to turn off after so many minutes on the product. I think there are a handful of features like that that they have added. You can turn off if you go into the settings, you can turn off the data that is used about you for ads. I think as a practical matter, these
features may not be used all that frequently. I know my teenager doesn't jump to find those features, and I suspect that's true of many many other teams as well. So I think the negotiation here before this lawsuit was filed, was trying to push the states, likely trying to push
Meta to find more features and more effective features. And I think eventually, if you saw this lawsuit settle, you might see a push for even more in that direction, more effective features to discourage the use of the network so frequently by young users.
Would they have to actually change the algorithm? Would Meta have to change its algorithm?
That's the question. It starts to become maybe a difficult solution because, as we've talked about, this is really focused on young users. And is there even a way for the company to tailor a fix that changes the algorithm just for teens. I don't know. That's probably part of the conversation, and it has a technical component that probably makes it tricky as well.
Yeah, because I was listening at the press conference by the Washington a G he had two teenagers talk about this, and they were so self aware of what was happening, and yet they still couldn't get away from it. Listen to the things that one of the teenagers tried.
I've done a lot of different methods to try to prevent engagement with Instagram. I've created time limits, I've created like an app that you have to open first to breathe and then to engage with Instagram. But all of these methods eventually fail because I understand that it's up to my own discretion and the promise of gaining connection with my peers owas seems to be more important.
Yeah, I mean, I think that's the allegation that it's so inviting and so difficult for young users to look away, that the companies need to make changes here. Now, it's sort of a tricky First Amendment problem here. I mean, in the media, there's always been allegations about, you know, the next form of media and the harm that it's
causing to you. So you can go back to the nineteen seventies and the Federal Trade Commission was going to go after advertising to kids that made them eat onhealthy things, and there was a big to do over that, and ultimately that sort of fizzled as well. And so you wonder, especially in light of the serious First Amendment arguments that Meta is going to make to say, look, we have the right to organize speech on our platform and to make it enticing, to make it, you know, so useful
and engaging for our users. That's sort of a fundamental First Amendment right. What they can't do is mislead about it. So that's what if we get right back down to the key legal element here is did they mislead? Did they know something and then tell the world the opposite.
Coming up next on the Bloomberg Law Show, I'll continue this conversation with Bloomberg Intelligence analyst Matthew Shettenhelm, and we'll talk about emotion for summary judgment that's coming up this week. In some other lawsuits against social media platforms, I'm June
Grosso and this is Bloomberg. The Attorney General for Washington State, Bob Ferguson, is one of the forty one state ags suing Meta platforms, claiming Instagram and Facebook exploit young people for profit by building an addictive features that are harming their mental health.
Not only did Meta know the risks these features posed to children and teens, the company's own research demonstrate the potential for psychological and physical.
I've been talking to Bloomberg Intelligence analyst Matthew Shettenhelm, and our children or teenagers particularly attractive demographic for businesses and advertisers.
Yeah, I think it's it's important for the company to facilitate engagement in young users because young users look at they are important a source for advertisers to go after, and young users grow up to be older users, and so that the more you can engage them at a young age, that only makes them, you know, use the product more in later years. So I do think it's
an important demographic now. Metas pushed back on that a little bit and said, it really maybe isn't a large goal to keep youthful users on the service for you know, extended amounts of times. I think that's going to be an issue in this case is how much has Meta said that that is or is not a goal to keep young users spending time the platform.
The suit also accuses Meta of violating the Children's Online Privacy Protection.
Act right so that you know, I almost read it like a throw in. They kind of throw that in at the back of the suit maybe to get this into federal courts, because all these other things are state law claims that you would think maybe would be brought state by state in their own courts. By having a federal claim in there, then you say, all these other state claims are sort of supplemental to it, and so one federal court should take the whole thing at one time.
But the federal claim focuses on the idea that for the youngest users, those under thirteen, this federal law says you have to have the parents make the decision about whether the kids' data can be used for ad targeting and have to get their consent and the allegation here is that Facebook knew that some of these users were under thirteen years old, and it nevertheless let them use the system without getting proper parental approval.
My daughter is well paid the teenage years. So let me ask you this. When there are these rules that you have to get parental permission, how is that implemented when you're online.
I mean, it's a problem with this law too in one other sense as well, that it only applies. Facebook only is vulnerable to the law if it knows it knowingly allows users under thirteen to go on the site. And so that's the first problem that a lot of times kids are going on and filling this in. And as long as Facebook doesn't know that the kids are going on below age thirteen without getting parental approval, then
it's at least theoretically protected from liability. But otherwise I think there's sort of a notification process where once you fill in that hey, I'm younger than thirteen years old, then there's going to be pop up screens that require a second level of approvals and sign off from a parent. But if the kid misleads in that first answer to the question, that's where it gets kind of tricky.
When I first heard about this lawsuit, I thought, well, there have been other lawsuits like this, right, I keep hearing about lawsuits against platforms. What happens to them?
Yeah, So this is just one piece of a much larger sort of legal puzzle I think here on exactly this issue. So you know, as I said, there's this other lawsuits that is going ahead Friday of this week in the Northern District of California that says, look, social media itself is a defective product and the companies are negligent just by putting it out there exactly for these features we talked about, you know, in facilitating engagement of youth and the harm it and inflicts on you know,
mental health for youth across the country. Is that itself defective And so that suit's going to play out. As we've talked about before, there's this liability shield Section two thirty liability shield. Usually Facebook didn't face lawsuit for bad stuff on its system because of the liability shield. Increasingly courts are reading that real narrowly and so these cases can move ahead in a way that they hadn't before. The Federal Trade Commission is going after Meta on its
targeting of youth. So it's really it's a storm here on multiple levels. And the real elephant in the room is what's Congress going to do about it. Congress hasn't been able to pass a law restricting the use of data from kids or advertising to kids, and so the real question is is Congress going to be able to step in with something here? In the meantime, this is an effort to use existing old law to try to
go after these companies, and that's often not easy. So I think the companies can win these cases, fight this stuff off, although I mean it's not easy. It can be difficult. In a lot of cases.
It seems like meta it's part of the cost of doing business. It's been fighting with the Federal Trade Commission for.
How long exactly right. It did a five million dollars settlement on its data issues is part of the Cambridge Analytica matter, and that hasn't been the end of the story. Now under Lena Khan, the Federal Trade Commission is trying to reopen that settlement and ban exactly what we're talking about here, the use of data to advertise to kids.
There was a court hearing I went to in Washington, I think just last week on exactly that question, can the FTC ban that just by reopening the twenty twenty settlement. So this is part of life for a company like Meta these days. And these are lawsuits that are difficult, but there are lawsuits that you know, you're applying old law to new technology, and their lawsuits that often I think the companies can win, but it's not always going to be easy.
You know, I'm surprised that Congress hasn't been well. I'm not surprised surprised that Congress hasn't been able to do something about, you know, the young users, because you know, with this lawsuit, you have bipartisan attorneys general from blue states and red states and purple states joining together to sue Meta. So it's surprising that Congress can't get together.
That's a great point. And there is a law piece of legislation that has advanced in Congress known as the Kids Online Safety Act, and it has over forty co sponsors in the Senate. Right now, it's just so difficult for Congress to agree on anything. I mean, right now they're struggling just to agree on who their leaders will be. And you know, all of these proposed laws have just
struggled to advance very far. But you're exactly right. This has bipartisan support, and as I said that Kids Online Safety Act, you know, it probably has a better chance than most pieces of legislation. So you could see some movement there if Congress can get attacked together.
Also, I mean TikTok I always thought was the most addictive of these platforms for.
Kids, right right, I think that's that's right, and it's very popular with the kids. Some of the lawsuits have targeted TikTok as well, as I said that the one that's pending in the Northern District of California that will be heard on Friday, that targets TikTok as well as Meta, as well as a couple of the other social media networks. This new one doesn't target TikTok, but we could see follow on actions from the states I think going after TikTok as well.
Well, we'll have to check back with you to find out what happens on Friday at that hearing. Thanks so much, Matt. That's Matthew Shechttenhelm, Bloomberg intelligence analyst. Coming up next on The Bloomberg Law Show. Instagram promoters test the limits of a ninety year old securities law. This is Bloomberg.
Welcome back to real estate investing made simple. Grant Cardone here in the car Doon Zone. Every Monday, I said, Steve, what I hey you?
Last month?
Steve was paid thirty one twenty dollars last month because the invested at Cardoncapital dot Com, Cardoncapital dot Com, Cardoncapital dot Com.
This month, the Supreme Court declined to hear a case involving a lawsuit against real estate management company cardone Capital and its CEO, Grant Cardone, for misleading statements in YouTube and Instagram videos. The lawsuit was dismissed on other grounds days after the justices refused the case, But the core issue remains, what does it mean to sell securities in the age of YouTube and Instagram? As venture capital firms and others hyping investment projects online are facing lawsuits from
disgruntled buyers. Joining me is Anne Lipton, a business law professor at Tulane University. Start with the real basics, which is tell us about the provision in the thirty three Securities Act that allows sellers to sue over unregistered securities.
Okay, so Section twelve is from the nineteen thirty three Securities Act, and it basically has two separate provisions. The first is that a purchaser of a security that was sold unregistered when it should have been registered has a right to sue the seller. Basically, it's a right of recision. They can give the security back and ask for their money back minus any income they've earned on it, so they can sue whoever sold it to them if it
was sold in violation of the registration provisions. And then secondly, they can sue anyone who sold it to them or who solicited the purchase if the prospectus or sales documents
contained false statements. Now, sometimes there's a bit of a debate about what counts as a prospectus, but what it comes down to is that this is sometimes a more attractive option than say, more traditional ways of suing for false statements, like Section ten B, which is the anti fraud statute, because if you sue for false statements in connection with essentially these unregistered ccurity sales under section twelve, you don't have to a show that you relied on
the false statement, and you don't have to show that there was any intent to make a false statement, and so.
How did the Supreme Court define a seller in nineteen eighty.
Eight, So in the case of Pitter versus Doll, there was a question of who counts as a statutory seller. In other words, Section twelve speaks of people who sell securities. So the question was, do you have to be actually the person who transfer the title me to you or could it be other people who are somewhat involved with the sale. And the court first said it has to be either a direct transfer of title or it has
to be someone who solicited the purchase. But they drew a distinction between someone who is somehow involved and had something to do with the buyer actively going out and purchasing the security, and instead they said they have to have actually solicited and had some kind of relationship with the buyer. They rejected a test that would be somehow like people who are just substantially participate in the sale.
So that was interpreted by courts to mean that you could only be liable under section twelve if you literally transferred title it was your security and you sold it to someone else, or if you had some kind of direct contact with a relationship with the buyer so that you induced the purchase that way.
So in our world of social media, where venture capital firms and others are hyping investment projects online, are courts having a difficult time determining whether they're sellers or not.
Yeah. So the issue here is that after Pinter versus Doll, there were a bunch of cases involving what were basically registered offerings. They were registered offerings, they were IPOs where
people sued for false statements in the IPO documents. Now there's a cause of action specifically for that false statements in a registration statement under section eleven, and they would also sue under section twelve because Section twelve has liability both for unregistered offerings, which these weren't, or for false statements and a perspective, and courts rejected the Section twelve liability looking at Pinter in a lot of cases where
there was no direct contact with the buyer. So for example, issuing companies, it was their security, but they sold in a firm commitment underwriting, meaning the underwriters bought the securities from the issuer. The underwriters then sold to the public. The producer would try to sue the issuer under section twelve because the issuer's name is all over the perspectives.
It's like their company, it's their securities being sold, and the courts would say the issuer did not have enough direct involvement with this particular sale to this buyer to justify imposing Section twelve viability. Now, you could still have other forms of liability because these were registered offerings, but you couldn't have liability under section twelve. So the court reading pincher vicious now very narrowly to mean you have to have had some kind of contact with a relationship
with the buyer. So now we fast forward to crypto, and the problem is there is an alternative scheme because crypto, assuming it's a security, which is a whole everything, but let's assume is a security. If crypto is a security, it's not registered. So the liability regime that was available in those IPO cases for registered offerings is not available to these shareholders. So for these shareholders, Section twelve is sort of the main potential avenue of liability other than
the anti fraud laws, which are hard. There's much harder. So they're suing under section twelve because that's it. And what we've seen now is too Appellate Court said, direct contact, we never said that. We are you talking about known as it's talent is a solicitation. As long as you make these public statements in advertising urging people to buy,
that's a solicitation, even if there's no personal relationship. Meanwhile, there are at least a couple of other decisions that say, no, we're sticking to the old interpretations of pinter that there have to be this kind of direct relationship. And then you have courts that are sort of like saying, like in a case against Coinbase, that Coinbase with air drops and materials about particular securities, that wasn't a solicitation. But it's not exactly clear why, you know, the court just
says that's not enough. So we don't know exactly what's enough or what exactly the regime is going to be.
The Supreme Court decided not to take a case involving cardone Capital. Tell us a little about the issues there, Well, that was the.
Case that was Actually it wasn't a registered offering. I believe it was under Regulation A. So Regulation A is an exemption from a full on registered offerings, but it does require some degree of filing and disclosure. With the SEC, so it wasn't an unregistered offering. But because it's not registered offerings, the standard protections available in registered offerings are
not available to purchasers. Instead, the only liability available would be, you know, just straight up fraud, which is again very hard to prove, or Section twelve liability. That's what's available. And so this real estate company, they use social media to advertise the offering that was filed with the SEC. They had documents with the SEC and so forth, and shareholders claimed that these advertisements were solicitations. In the Ninth
Circuit agreed and repudiated. I mean, you know, some of the case law that had held there must be direct contact hadn't come out of the Ninth Circuit, so at very least it was disagreeing with you know, the other courts that had imposed something like a direct contact requirement. But the Supreme Court denied sort you know, I mean, there are any number of reasons why they could have denied CIRT. But one possibility is that the social media
cases are new. They're you know, looking to this old precedent that was generated under IPO situations, and you know, it may take some time to work through the court you know, if you ask.
An average person, it doesn't seem like the difficult question. They're online, they're soliciting. Yeah, they're selling. What makes you difficult?
Well, because the interesting thing is that the word solicit it doesn't actually appear in the statute. Nothing in the statutes as imposing liability for solicitation. What the statute says is imposing liability for selling. The Supreme Court's interpretation of selling in Printer versus Doll, this case from nineteen eighty eight is the one that imposed this concept of solicitation
with this very specific kind of definition. And to be honest, Printer doesn't seem to really understand how security sales work. There are parts of it that display a kind of lack of understanding. For instance, there's a line in it that says you can't have liability for a seller seller that if you sell to somebody and that person sells to someone else, the original seller isn't going to be liable. But that's a firm commitment underwriting, and courts are struggling
with that. The sec has been struggling with that ever since Pinter versus Doll held it. So, you know, this concept of solicitation and exactly how we're defining it is not in the statute. It comes from the Supreme Court case launch. So now we're all trying to figure out what the Supreme Court meant and how you translate a case in nineteen eighty eight to today.
So the Ninth and the Eleventh Circuits are they in sync ruling?
Yeah, it's they seem to be following the same path that you know, at least, at the very least, these sort of widespread social media campaigns are sufficient. But what's really unclear is like what would be like, I mean, like, once you take away the requirement of direct contact, which is how courts seem to be reading it before, then there's the question of well, how much urging is enough? And that was exactly what happened with coinbase, where you know,
Coinbase technically it did have direct contact. It was talking to its customers and it you know, it does whatever it does to say, you know, here's an airdrop of a new security or whatever, and a court said, well,
that's just not enough. So now we have all kinds of questions like if social media is permissible, if you don't have the restriction of direct contact, then how much urging is enough to qualify solicitation, given that in Pinter, the Supreme Court's concern was, we don't want just substantial participation to be enough. And the reason we don't was because we want people to have certainty as to when they are potentially liable or not. It's important that we
have certainty. Direct contact at least, that's that's a rule be the best rule. It may not be the most functional rule, but we know what it means. We know when we see in. Now we're in this space where it's not clear what's going to be enough and.
Which circuits have a different take on this than the ninth and the eleventh.
There are several circuits that implied anyway, especially in these IPO cases, that you needed something like direct contact. The
third circuit, the first circuit, the fifth circuit. I know, there's definitely a district Core case involving crypto that followed in the second circuit that followed these cases to say no, you need something like direct contact, although sometimes the phrasing they use is sort of unclear because they say direct contact or active solicitation, and it's not exactly clear what they mean by active.
Why don't these quote sellers want to register just to be safe.
So first of all, the crypto people all say that these aren't securities anyway. But the whole point is that like registration, if you register them that there's a terrific amount of disclosure you have to make and there's very strict liability if those disclosures are false. That's why courts could get away for so long saying well, we won't have Section twelve liability for these IPO situations because there were alternatives. There's some very strict liability for false statements.
If you register, you have to do a terrific amount of disclosure. It's very expensive and you're risking this liability. And a lot of crypto people say that the registration requirements, like the disclosure requirements that attach, are simply not suitable for crypto, like they ask for things that don't make sense in the crypto context, like principles of an organization when it's a decentralized autonomous organization, or addresses when there
is no address. So the crypto people will say that not only is disclosure expensive and opens us up to all this liability, but the SEC hasn't updated the registration requirements to really make sense in a crypto world.
So then will it be up to the Supreme Court to clarify this so that there is clearer guidance?
Very possibly. I mean, you know, there's a lot that could happen in between. And then, I mean, first of all, if all the circuits come to settle on something, I mean, the Supreme Court doesn't have the kind of passion for securities cases that say I do. So if the circuits coalesce around a principle that's coherent, then the Supreme Court may not step in at all. And you know, we can all argue about it. But you know, I'm not convinced that crypto is, you know, the wave of the future.
So at some point, if crypto has becomes less popular, then we may just see less of these cases. I mean, Regulation A was how this came up in the Ninth Circuit, and that will still exist because that's sort of a formal disclosure space for securities that you don't want to do full registration for. But reggae isn't really that popular to begin with. So I mean, if crypto becomes less of a thing, it may simply be that this kind of settles down by itself.
Well, it's been great to talk to you, Anne. I love your enthusiasm about securities law. That's Anne Lipton, a business professor at Tulane University. And that's it for this edition of The Bloomberg Law Show. Remember you can always get the latest legal news on our Bloomberg Law podcasts. You can find them on Apple Podcasts, Spotify, and at www dot Bloomberg dot com slash podcast Slash Law, And remember to tune into The Bloomberg Law Show every weeknight
at ten pm Wall Street Time. I'm June Grosso and you're listening to Bloomberg