On November 26, 2024, Judge Jon S. Tigar of the United States District Court for the Northern District of California granted a motion to dismiss a putative securities fraud class action against a subscription streaming services company (the “Company”), and its CEOs, CFO, and COO (the “Individual Defendants”). Pirani v. Netflix, Inc., et al., No. 22-cv-02672-JST (N.D. Cal. Nov. 26, 2024). Plaintiff alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, based on alleged false and misleading statements and omissions regarding the impact of account sharing and market saturation on the Company's subscriber growth. The Court granted defendants' motion to dismiss with prejudice, holding that plaintiff failed to plausibly allege that defendants' statements were false or misleading.
Plaintiff, representing a putative class of investors that purchased or otherwise acquired the Company's common stock between January 19, 2021 and April 19, 2022 (the putative “Class Period”), alleged that defendants made false and misleading statements about the Company's ability to overcome the challenges posed by the COVID-19 pandemic, which allegedly caused a “pull-forward” in demand for subscriptions in 2020 that ultimately slowed down during the Class Period. Plaintiff specifically alleged that defendants failed to disclose the fact that account sharing—which occurs when a paying user of the Company's services shares their username and password with a non-paying user who does not reside in the subscriber's household—constrained the Company's growth and revenue potential, especially in the United States and Canada (the “UCAN” market). Plaintiff alleged that before the Class Period, defendants knew that account sharing was a “major problem eating into subscriptions” and that the COVID-19 subscription spike was temporary, but defendants nonetheless misled investors by asserting that the Company had a “big long runway of growth” ahead with “a lot of headroom” for expansion. Plaintiff further alleged that the Company's quarterly financial results throughout the Class Period fell below consensus estimates and that on the last day of the Class Period, the Company announced a net loss of 200,000 subscribers, which it allegedly attributed to oversaturation caused by account sharing that had been “obscured by [the Company's] COVID growth.” The Company's alleged stock price fell more than 35% by the next day. Plaintiff filed this action in May 2022 and subsequently filed an amended complaint. The Court granted defendants' motion to dismiss the amended complaint and plaintiff filed a second amended complaint. Defendants moved to dismiss.
The Court first held that some of defendants' alleged statements were nonactionable under the PSLRA safe harbor, as the statements were forward-looking and accompanied by meaningful cautionary language. However, the Court found that defendants' alleged statements concerning present or historical metrics or business conditions, such as statements that the Company had “an ample runway for growth,” were statements of current fact not protected under the safe harbor and therefore considered whether those statements were otherwise false.
In addressing falsity, the Court grouped the alleged false statements into three categories: (1) statements regarding the Company's market penetration and headroom for growth; (2) statements attributing the Company's growth slowdown to COVID-19; and (3) statements about the Company's growth metrics and long-term trajectory.
As to the first category, the Court held that none of defendants' representations about market penetration were false or misleading because the alleged statements clearly referred to paid subscribers, rather than non-paying users. In so holding, the Court found that the Company's alleged statement that it had penetrated 60% of the UCAN market was not false or misleading because reasonable investors reading the statement “fairly and in context” would not expect the penetrated market figure to account for anything other than paid subscribers. The Court similarly found that defendants' statements relating to the Company's headroom for growth did not imply that the remaining portion of the UCAN market was readily available for capture.
As to the second category—statements allegedly attributing the Company's growth slowdown to the COVID-19 pandemic's “pull-forward” without acknowledging the impact of account sharing and market saturation—the Court held that plaintiff did not adequately allege that defendants did not hold their stated beliefs, nor did plaintiff allege that a statement of fact contained in these statements was untrue. The Court further held that plaintiff did not adequately allege that facts about account sharing formed the basis of defendants' opinions about the pandemic's effects and that plaintiff accordingly failed to plead an actionable misrepresentation or omission to those statements.
As to the third category—alleged statements about the Company's growth metrics and long-term trajectory—the Court held that plaintiff's theory of falsity relied on previously rejected theories relating to account sharing and market saturation. For example, the Court rejected plaintiff's argument that the Company inflated its viewing metrics by counting views from account sharers as views by subscribers, thereby overestimating its revenue potential, finding that the complaint did not plead any false or misleading statements about viewership specifically, nor did it allege with particularity why any such statements were false. Because the Court found that plaintiff failed to plausibly allege that the statements at issue were false or misleading, the Court did not address defendants' other arguments.
Finally, having found no primary liability under Section 10(b), the Court dismissed plaintiff's derivative Section 20(a) claim. The Court did not grant leave to further amend, noting that plaintiff had already been given an opportunity to amend and any further amendment would be futile.
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