On March 23, 2022, Judge Kenneth K. Lee of the United States Court of Appeals for the Ninth Circuit affirmed the dismissal by the United States District Court for the Northern District of California of the claims brought under the sections 10(b) and 20(a) of the Securities Exchange Act (the “Exchange Act”) and Rule 10b-5 thereunder against a social media company (the “Company”) and certain of its leaders. Weston Family Partnership LLLP et al. against Twitter Inc. et al., no. 20-17465 (9th Cir. 23 March 2022). The plaintiffs alleged that the company failed to disclose the extent of the software problems that led to lost advertising revenue, which ultimately caused the company’s stock price to plummet. The Court upheld the district court’s order granting defendants’ motion to dismiss, finding that plaintiffs did not bring a claim because the company’s statements were not false or materially misleading. The Court stated that “securities laws[n’exigentpasdemisesàjourcommercialesentempsréelnidedivulgationcomplètedetouteslesinformationsimportanteschaquefoisqu’uneentrepriseparled’unsujetparticulierAucontraireuneentreprisepeutparlersélectivementdesonactivitétantquesesdéclarationsnebrossentpasuntableautrompeur[The Company’s] the statements regarding its advertising program were not false or misleading because they were qualified and factually true. The company had no obligation to disclose more than it did under federal securities law.
According to the Court: “every day, millions of people use [the Company] to share and read news, deliver hot (often awful) takes, and trigger baddies [messages. The Company], in turn, leverages the personal data of its users to better target advertisements. In August 2019, the company revealed that “software bugs” caused it to inadvertently share the personal data of users who opted out of data sharing with advertisers. The company said it had “resolved these issues. In October 2019, the company revealed software bugs hampered its advertising personalization and suffered a $25 million revenue shortfall. The Company’s share price fell more than 20%.
The plaintiffs are investors who filed a consolidated class action lawsuit alleging that various statements made by the Company were false or materially misleading. Plaintiffs alleged that statements in Form 10-Q dated July 31, 2019, that the company was “pursuing [its] work to increase the stability, performance and flexibility of [its] advertising platform,” but was “not there yet”—were misleading because “defendants failed to disclose software bugs that allegedly plagued” their software. Complainants also alleged that warnings in 10-Q that “the Company’s products and services” may contain undetected software errors, which could harm [its] business and operating results” were misleading because the company would have known at the time that software bugs were certain to hurt its bottom line. In addition to the 10-Q statements, plaintiffs further alleged that the company had falsely claimed that it fixed the software bugs in August 2019 – because the company would have actually stopped sharing data altogether rather than fixing the bugs – and one of the executives made other claims that glossed over software bugs. The District Court granted defendants’ motion to dismiss and plaintiffs appealed.
On appeal, the Court first ruled that the plaintiffs had not made a s. 10(b) claim because the company’s statements were not false or materially misleading. The Court disagreed with plaintiffs’ argument that the company had a legal duty to disclose software bugs to the investing public, noting that “companies are under no obligation to offer a up-to-date of every internal development” under Section 10(b) and Rule 10b-5. The Court held that “[a] The company should disclose a negative internal development only if its omission would make other statements materially misleading. The Court pointed out that to hold otherwise “would introduce instability into the securities market, as stocks could undergo wild fluctuations depending on even fleeting developments”. With respect to plaintiffs’ claims that defendants misled investors into believing that work to improve data sharing functionality was “on track”, the Court found that defendants’ statements were “much more nuanced and less definitive,” noting that 10-Q also said the work was “not there yet,” was “in progress,” and the company was “still in the midst of these works”. According to the Court, in the absence of a “specific timeframe or revenue impact” for the program, the Company’s statements could not be considered an implied assertion of a specific purpose.
The Court then ruled that the plaintiffs did not plausibly allege that the software bugs materialized and affected revenue in July 2019. The Court said that “it is simply not enough to assume or implausibly infer” that defendants knew about the bugs in July 2019 based solely on the fact that they disclosed them in August 2019. Further, the Court was not persuaded by plaintiffs’ argument that the company was aware of the bugs as of August 2019 based on statements in the company’s July 2019 10-Q filing that the product may contain “undetected software errors. The Court reiterated that “nothing in the complaint does not suggest[ed] that the company was aware of the bugs in July 2019,” and that the complainants simply relied on the assumption that “these types of bugs. . . take three to six months to repair. Further, the Court rejected Plaintiffs’ argument that Defendants’ August 2019 bug-fixing social media post “referred to fixing software bugs, not just stopping data sharing.” ‘, noting that the context of the post makes it clear that the company had “fixed” the inadvertent data sharing; there is no mention of software bugs.
Finally, the Court held that the defendants’ statements in their shareholder letter and 10-Q were forward-looking and “accompanied by very detailed and significant cautionary language” and therefore fell within the safe harbor provision. of the Exchange Act. Because the plaintiffs did not adequately plead a primary breach of Rule 10(b) or Rule 10b-5, the Court also upheld the dismissal of the claims under Rule 20(a). ) against individual defendants.
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