On November 19, 2024, the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a putative class action complaint alleging that a data management and analytics software company (the "Company") and certain of its officers and directors made misleading statements and omissions regarding the technical capabilities of the Company's products and its financial outlook in violation of Sections 11(a), 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act") and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. In re Cloudera Securities Litigation, No. 22-16807 (9th Cir. Nov. 19, 2024). The Court held that plaintiff failed to allege falsity and affirmed the dismissal with prejudice based on plaintiff's failure to cure the deficiencies of which he had been warned.
The Company conducted an initial public offering ("IPO") in 2017. Two years later, it announced negative quarterly earnings, and the stock price fell approximately 40% the next day. Plaintiff filed suit, alleging, among other things, that defendants' statements that the Company possessed an "original cloud-native architecture and cloud-native platform" exaggerated the Company's capabilities because the software was not a "cloud-native offering" and had been "panned" by customers for "lacking key attributes of cloud products." The district court dismissed the complaint for failure to allege falsity because it did not define what a "cloud-native product" or "cloud-native architecture" was at the times the statements were made and thus could not claim that the statements were false, and cautioned plaintiff that an amended complaint must define those terms and that failure to do so would result in a dismissal with prejudice. In a decision we previously covered here, the district court dismissed the amended complaint, this time with prejudice, because although the complaint offered definitions of the terms at issue, it pled "no evidentiary facts to support such additional assertion." The Ninth Circuit affirmed the dismissal with prejudice, holding that the complaint failed to plead fraud with particularity.
First, the Court explained that it would be "impossible to determine the truth or falsity" of the statements at issue without an understanding of a "contemporaneous definition of explanation" of the terms such as "cloud-native." The Court acknowledged that plaintiff attempted to define the term "cloud-native" as being "understood by reasonable investors to mean a software offering with specific core material attributes, such as the use of containers, seamless scalability, ease-of-use, and security and elasticity," and that such a definition may survive a claim not subject to the heightened pleading standard. But the definition did not establish falsity with particularity as was required under Ninth Circuit precedent, which requires that "where... a plaintiff claims that the words used in a statement have some special or nuanced meaning that differs from what the literal words suggest, the plaintiff must plead facts that will support this crucial premise." Wochos v. Tesla, Inc., 985 F.3d 1180, 1193-94 (9th Cir. 2021). Here, plaintiff could not cite to anything that substantiated his interpretation of "cloud-native" or "cloud-architecture" at the time the statements were made.
Next, the Court rejected plaintiff's argument that the words did not need to be specifically defined because their commonly accepted definitions were sufficient to establish falsity. The Court held that it was not obvious that the definitions used today would be the same as they were when the statements were made because—as plaintiff alleged in the complaint—the world of cloud computing is a "fast-evolving market." The Court also noted that "experts in cloud computing acknowledge that the meaning of the term 'cloud' is, well, cloudy," and that "cloud-native" did not have a plain meaning. Because the challenged statements lacked plain meanings, and plaintiff did not provide facts to support their definitions, plaintiff could not sufficiently allege falsity.
Finally, the Court affirmed the district court's denial of leave to amend. Reviewing the issue de novo, the Court agreed with the district court that further amendment of the complaint would be futile because plaintiff had failed to identify what facts they would use to overcome the complaint's shortcomings. The Court also rejected plaintiff's argument that the district court did not provide any explanation of its decision to deny leave to amend, which warrants reversal under Ninth Circuit precedent, because the district court referred to—and quoted—its earlier warning that "failure to cure the deficiencies . . . will result in dismissal . . . with prejudice," which made the basis for the denial apparent.
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