On April 18, 2023, Judge William H. Orrick of the United
States District Court for the Northern District of California
denied a motion to dismiss a putative securities class action
alleging a software company (the "Company") and several
of its officers (the "individual defendants") violated
Sections 10(b) and 20(a) of the Securities Exchange Act (the
"Exchange Act"). Weston v. DocuSign, Inc. et
al., No. 22-cv-00824 (Apr. 18, 2023). Plaintiff claimed that
defendants made false and misleading statements to investors about
the sustainability of the Company's COVID-19 pandemic-driven
growth. The Court denied defendants' motion to dismiss, holding
that at least some of the alleged material misstatements or
omissions were not protected by the safe-harbor provision of the
Private Securities Litigation Reform Act ("PSLRA"), and
that plaintiff had sufficiently pled falsity, scienter, and loss
causation as it related to those statements.
According to the First Amended Complaint ("FAC"), the Company's flagship product is an "electronic signature" or "eSignature" application that allows users to sign and send documents digitally, without needing paper copies or "wet" signatures. Plaintiff alleged that after the onset of the COVID-19 pandemic, demand for the eSignature product "skyrocket[ed] to unprecedented levels" between March and June 2020, with revenue up 27% and billings-allegedly the "primary metric that the Company used to track performance and growth"-up 59% from a year earlier. The Company allegedly used a "land and expand" business model to grow its business, whereby the Company would first "land" with a customer-typically by selling its eSignature product for a specific use-and then "expand" by selling additional eSignature products or other products to that customer. Plaintiff filed suit in February 2022, after the Company's stock price had fallen precipitously since March 2020.
Plaintiff alleged that throughout the pandemic, defendants "assured investors that the Company would continue on the same growth trajectory even after the pandemic subsided," but defendants allegedly "knew and concealed from investors numerous adverse material facts indicating that this COVID-19-fueled demand was unsustainable." Specifically, the FAC alleged that the Company knew that "much of this new business influx was for one-time" COVID-related uses. The FAC alleged that the Company made numerous false and misleading statements or omissions in press releases, on earnings calls, at conferences, at the Company's Analyst Day, and in tweets between June 4, 2020, and September 8, 2021.
The FAC further alleged that the Company knew of internal warning signs that the pandemic-related boom would not last. First, the FAC alleged that between March and June 2020, customers advised the Company that they did not intend to renew their eSignature contracts once the pandemic waned and they could return to their offices. Second, the FAC alleged that near the end of 2020, as COVID-19 vaccines began to roll out, customer and sales data tracked through a database called "Salesforce" confirmed those initial warning signs, which the FAC alleged with statements from confidential witnesses. Third, the FAC alleged that the Company knew of-but failed to disclose-increased competition from other companies, further reducing demand for the Company's eSignature product. Finally, the FAC alleged that statements made during the Company's earning calls between December 2, 2021, and June 9, 2022, revealed that the Company was "experiencing dramatically slowed billings growth as a result of waning demand for its products as customers began returning to their offices and resumed in-person signature processes." The "full truth" was allegedly revealed in the June 9, 2022, earnings call, when one of the individual defendants stated that much of the demand that the Company experienced during the pandemic was the result of single use cases that no longer existed.
In considering defendants' arguments that the FAC failed to allege any actionable misrepresentation because the challenged statements were shielded by the PSLRA's safe-harbor provision, were not shown to be false, and/or amounted to opinions, puffery, or corporate optimism, the Court first considered whether the statements were forward-looking. The Court held that some of these statements were more clearly about "current or past facts," and were not forward-looking. This included, for example, an individual defendant's alleged statement that one-time COVID use cases were "the extreme minority," because he was speaking about the current impact of such cases on the Company's billings growth. But the Court determined that certain alleged statements were forward-looking, such as alleged statements that were more akin to predictions about customer behavior and served as assumptions underlying or relating to the Company's future revenue and earnings.
The Court next considered whether the otherwise forward-looking statements were "accompanied by meaningful cautionary statements," thereby making such statements inactionable under the PSLRA safe harbor. The Court held that the FAC sufficiently alleged that the Company had actual knowledge during the pandemic that its pandemic-related risk disclosures were inadequate because the purported risks had already come to fruition. The Court noted that although the safe harbor protects statements that were made without actual knowledge, the FAC sufficiently set forth allegations that supported both an inference of falsity and scienter.
The Court also rejected defendants' argument that certain alleged statements were inactionable opinions, finding that even if statements about customer demand could arguably constitute opinions, plaintiff plausibly alleged facts going to the basis of statements about customer demand, that, when omitted, made any opinions misleading. The Court further found that, to the extent any of the alleged statements expressed corporate optimism or puffery, "even general statements of optimism, when taken in context, may form a basis for a securities fraud claim when those statements address specific aspects of a company's operation that the speaker knows to be performing poorly."
Turning to the issue of scienter, the Court held that the FAC provided sufficient information to establish the reliability and personal knowledge of the confidential witnesses, pointing to allegations describing the witnesses' roles within the Company, how long they were employed by the Company, the nature of their responsibilities, and, in some circumstances, their exact titles and line of reporting. The Court also found that the confidential witness allegations supported a showing of scienter by the individual defendants, as it related to their alleged statements about customer demand, noting that plaintiff plausibly alleged that the individual defendants had access to and monitored data indicating the Company's decline in customer demand. The Court also observed that alleged stock sales by some of the individual defendants were further indicia of scienter when coupled with the confidential witness statements. In particular, the Court found that "[t]he amount and percentage of shares sold, along with the timing and novelty of those sales, plausibly support that the sales were 'dramatically out of line' with [the individual defendants'] prior trading practices." The Court also disagreed with defendants' argument that it was more reasonable to conclude that the Company acted in good faith during unprecedented circumstances, instead holding that "viewed holistically, the statements from multiple confidential witnesses about the internal information available to the defendants, which allegedly showed that demand for [the Company] was lagging, and [the individual defendants'] stock sales, support an inference of scienter that is 'more than merely reasonable or permissible.'"
Finally, the Court rejected defendants' argument that plaintiff's allegations that the Company missed its billings guidance were insufficient to establish loss causation. Citing Ninth Circuit precedent, the Court held that plaintiff could "show loss causation by showing that [the Company's] stock price fell upon the revelation of an earnings miss," which is what the Court determined the FAC alleged. The Court further held that it was plausible at the motion to dismiss stage that the final purported corrective disclosure revealed that the Company's statements about customer demand were fraudulent and misleading and caused the Company's stock price to drop. The Court, therefore, held that the allegations in the FAC "plausibly show[] loss causation."
Having found that plaintiff sufficiently alleged an underlying Section 10(b) claim, the Court held that plaintiff's Section 20(a) claim could also proceed.
According to the First Amended Complaint ("FAC"), the Company's flagship product is an "electronic signature" or "eSignature" application that allows users to sign and send documents digitally, without needing paper copies or "wet" signatures. Plaintiff alleged that after the onset of the COVID-19 pandemic, demand for the eSignature product "skyrocket[ed] to unprecedented levels" between March and June 2020, with revenue up 27% and billings-allegedly the "primary metric that the Company used to track performance and growth"-up 59% from a year earlier. The Company allegedly used a "land and expand" business model to grow its business, whereby the Company would first "land" with a customer-typically by selling its eSignature product for a specific use-and then "expand" by selling additional eSignature products or other products to that customer. Plaintiff filed suit in February 2022, after the Company's stock price had fallen precipitously since March 2020.
Plaintiff alleged that throughout the pandemic, defendants "assured investors that the Company would continue on the same growth trajectory even after the pandemic subsided," but defendants allegedly "knew and concealed from investors numerous adverse material facts indicating that this COVID-19-fueled demand was unsustainable." Specifically, the FAC alleged that the Company knew that "much of this new business influx was for one-time" COVID-related uses. The FAC alleged that the Company made numerous false and misleading statements or omissions in press releases, on earnings calls, at conferences, at the Company's Analyst Day, and in tweets between June 4, 2020, and September 8, 2021.
The FAC further alleged that the Company knew of internal warning signs that the pandemic-related boom would not last. First, the FAC alleged that between March and June 2020, customers advised the Company that they did not intend to renew their eSignature contracts once the pandemic waned and they could return to their offices. Second, the FAC alleged that near the end of 2020, as COVID-19 vaccines began to roll out, customer and sales data tracked through a database called "Salesforce" confirmed those initial warning signs, which the FAC alleged with statements from confidential witnesses. Third, the FAC alleged that the Company knew of-but failed to disclose-increased competition from other companies, further reducing demand for the Company's eSignature product. Finally, the FAC alleged that statements made during the Company's earning calls between December 2, 2021, and June 9, 2022, revealed that the Company was "experiencing dramatically slowed billings growth as a result of waning demand for its products as customers began returning to their offices and resumed in-person signature processes." The "full truth" was allegedly revealed in the June 9, 2022, earnings call, when one of the individual defendants stated that much of the demand that the Company experienced during the pandemic was the result of single use cases that no longer existed.
In considering defendants' arguments that the FAC failed to allege any actionable misrepresentation because the challenged statements were shielded by the PSLRA's safe-harbor provision, were not shown to be false, and/or amounted to opinions, puffery, or corporate optimism, the Court first considered whether the statements were forward-looking. The Court held that some of these statements were more clearly about "current or past facts," and were not forward-looking. This included, for example, an individual defendant's alleged statement that one-time COVID use cases were "the extreme minority," because he was speaking about the current impact of such cases on the Company's billings growth. But the Court determined that certain alleged statements were forward-looking, such as alleged statements that were more akin to predictions about customer behavior and served as assumptions underlying or relating to the Company's future revenue and earnings.
The Court next considered whether the otherwise forward-looking statements were "accompanied by meaningful cautionary statements," thereby making such statements inactionable under the PSLRA safe harbor. The Court held that the FAC sufficiently alleged that the Company had actual knowledge during the pandemic that its pandemic-related risk disclosures were inadequate because the purported risks had already come to fruition. The Court noted that although the safe harbor protects statements that were made without actual knowledge, the FAC sufficiently set forth allegations that supported both an inference of falsity and scienter.
The Court also rejected defendants' argument that certain alleged statements were inactionable opinions, finding that even if statements about customer demand could arguably constitute opinions, plaintiff plausibly alleged facts going to the basis of statements about customer demand, that, when omitted, made any opinions misleading. The Court further found that, to the extent any of the alleged statements expressed corporate optimism or puffery, "even general statements of optimism, when taken in context, may form a basis for a securities fraud claim when those statements address specific aspects of a company's operation that the speaker knows to be performing poorly."
Turning to the issue of scienter, the Court held that the FAC provided sufficient information to establish the reliability and personal knowledge of the confidential witnesses, pointing to allegations describing the witnesses' roles within the Company, how long they were employed by the Company, the nature of their responsibilities, and, in some circumstances, their exact titles and line of reporting. The Court also found that the confidential witness allegations supported a showing of scienter by the individual defendants, as it related to their alleged statements about customer demand, noting that plaintiff plausibly alleged that the individual defendants had access to and monitored data indicating the Company's decline in customer demand. The Court also observed that alleged stock sales by some of the individual defendants were further indicia of scienter when coupled with the confidential witness statements. In particular, the Court found that "[t]he amount and percentage of shares sold, along with the timing and novelty of those sales, plausibly support that the sales were 'dramatically out of line' with [the individual defendants'] prior trading practices." The Court also disagreed with defendants' argument that it was more reasonable to conclude that the Company acted in good faith during unprecedented circumstances, instead holding that "viewed holistically, the statements from multiple confidential witnesses about the internal information available to the defendants, which allegedly showed that demand for [the Company] was lagging, and [the individual defendants'] stock sales, support an inference of scienter that is 'more than merely reasonable or permissible.'"
Finally, the Court rejected defendants' argument that plaintiff's allegations that the Company missed its billings guidance were insufficient to establish loss causation. Citing Ninth Circuit precedent, the Court held that plaintiff could "show loss causation by showing that [the Company's] stock price fell upon the revelation of an earnings miss," which is what the Court determined the FAC alleged. The Court further held that it was plausible at the motion to dismiss stage that the final purported corrective disclosure revealed that the Company's statements about customer demand were fraudulent and misleading and caused the Company's stock price to drop. The Court, therefore, held that the allegations in the FAC "plausibly show[] loss causation."
Having found that plaintiff sufficiently alleged an underlying Section 10(b) claim, the Court held that plaintiff's Section 20(a) claim could also proceed.
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