On March 23, 2022, Judge Kenneth K. Lee of the United States
Court of Appeals for the Ninth Circuit affirmed the United States
District Court for the Northern District of California's
dismissal of claims brought under 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 executive
officers. Weston Family Partnership LLLP et al. v.
Twitter Inc. et al., No. 20-17465 (9th Cir. Mar. 23,
2022). Plaintiffs alleged that the Company failed to disclose
the scope of software issues that led to a loss in advertising
revenue, which ultimately caused the Company's share price to
drop. The Court affirmed the district court's order
granting defendants' motion to dismiss, holding that plaintiffs
failed to state a claim because the Company's statements were
not false or materially misleading. The Court stated that
"[s]ecurities laws . . . do not require real-time business
updates or complete disclosure of all material information whenever
a company speaks on a particular topic. To the contrary, a
company can speak selectively about its business so long as its
statements do not paint a misleading picture. [The
Company]'s statements about its advertising program were not
false or misleading because they were qualified and factually true.
The Company had no duty to disclose any more than it did
under federal securities law."
According to the Court: "[e]very day, millions of people use
[the Company] to share and read news, offer (often horrendous) hot
takes, and fire off mean [messages. The Company], in turn,
mines the personal data of its users to better target
advertisements." In August 2019, the Company revealed
that "software bugs" had caused it to inadvertently share
with advertisers the personal data of users who had opted out of
data-sharing. The Company stated that it had "fixed
these issues. In October 2019, the Company disclosed that
software bugs had hampered its advertisement customization and that
it had suffered a $25 million revenue shortfall. The
Company's share price dropped over 20%.
Plaintiffs are investors who filed a consolidated class action
complaint alleging that various statements by the Company were
false or materially misleading. Plaintiffs alleged that
statements in the July 31, 2019 Form 10-Q—that the Company
was "continuing [its] work to increase the stability,
performance, and flexibility of [its] ads platform," but that
it was "not there yet"—were misleading because
"defendants did not disclose the software bugs allegedly
plaguing" their software. Plaintiffs also alleged that
warnings in the 10-Q that "the [C]ompany's products and
services 'may contain undetected software errors, which could
harm [its] business and operating results'" were
misleading because the Company allegedly knew by then that software
bugs were certain to harm its bottom line. In addition to the
10-Q statements, Plaintiffs further alleged that the Company
misleadingly claimed it had resolved the software bugs in August
2019—because the Company had in fact allegedly stopped
data-sharing altogether rather than fixing the bugs—and that
one of the executives made other public statements that glossed
over the software bugs. The district court granted
defendants' motion to dismiss, and plaintiffs appealed.
On appeal, the Court first held that plaintiffs failed to state a
claim under Section 10(b) 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 the software bugs to the investing public, noting that
"companies do not have an obligation to offer an instantaneous
update of every internal development" under Section 10(b) and
Rule 10b-5. The Court held that "[a] company must
disclose a negative internal development only if its omission would
make other statements materially misleading." The Court
emphasized that to hold otherwise would "inject instability
into the securities market, as stocks may wildly gyrate based on
even fleeting developments." With respect to
plaintiffs' allegations that defendants misled investors into
believing that work to improve the data-sharing feature was
"on track," the Court found that defendants'
statements were "much more qualified and less
definitive," noting that the 10-Q also stated that the work
was "not there yet," that it was "ongoing," and
that the Company was "still in the middle of that
work." According to the Court, absent a "specific
deadline or revenue impact" for the program, the Company's
statements could not be seen as an implied affirmation of any
specific target.
The Court next held that plaintiffs did not plausibly allege that
the software bugs had materialized and affected revenue in July
2019. The Court stated 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. Moreover, the Court was not persuaded by
plaintiffs' argument that the Company knew about the bugs in
August 2019 based on statements in the Company's July 2019 10-Q
filing that the product could contain "undetected software
errors." The Court reiterated that "nothing in the
complaint suggest[ed] that the company knew of the bugs in July
2019," and that plaintiffs merely relied on the assumption
that "these types of bugs . . . take three to six months to
fix." Further, the Court rejected plaintiffs'
argument that defendants' social media post about fixing the
bugs in August 2019 "was referring to the fix of the software
bugs, and not just a halt to the data-sharing," noting that
the context of the post makes clear that the Company had
"'fixed' the inadvertent data-sharing; there is no
mention of software bugs."
Finally, the Court held that defendants' statements in their
shareholder letter and 10-Q were forward-looking and
"accompanied by very detailed meaningful cautionary
language," and therefore fell within the safe harbor provision
of the Exchange Act. Because plaintiffs did not adequately
plead a primary violation of Section 10(b) or Rule 10b-5, the Court
also affirmed the dismissal of the Section 20(a) claims against the
individual defendants.
Weston Family Partnership LLLP et al. v. Twitter Inc. et al.
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