Northern District Of California Dismisses Complaint Against A Ticketing Platform Provider For Failure To Plead Falsity
On April 28, 2020, Judge Edward J. Davila of the United States District Court for the Northern District of California granted a motion to dismiss a putative securities fraud class action based on purportedly misleading statements in the prospectus and registration statement (the “Offering Materials”) filed by a ticketing platform provider (the “Company”) in connection with its initial public offering (“IPO”). The complaint asserted claims under Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company and certain of its officers, and violations of Section of 11 of the Securities Act against the underwriters for the IPO. In re Eventbrite Inc. Sec. Litig., No. 5:18-CV-02019-EJD (N.D. Cal. Apr. 28, 2020). In granting the motion to dismiss, the Court held that it could rely on documents incorporated into the complaint by reference to negate conclusory allegations in the complaint and for context, and further held that plaintiffs failed to adequately plead falsity and that the Company, in any event, sufficiently disclosed risks associated with the acquisition. The Court also held that the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure applied to the Section 11 claims and that its risk disclosures were sufficient under Item 303.
The alleged misstatements related to the Company’s pre-IPO acquisition of a competitor. Based on information from former employees, plaintiffs alleged that the Company was aware that it would be unable to quickly integrate the acquired competitor’s customers into the Company’s platform because of differences in the two companies’ respective platforms. Plaintiffs further alleged that, although defendants were aware of these challenges, defendants falsely claimed that the integration was smooth and successful. For example, plaintiffs alleged defendants represented that the Company (a) had been “successful leveraging [its] platform,” (b) had “been able to utilize the extensibility of [its] platform and the modularity really to bring together an offering,” (c) “accelerated [its] momentum through the acquisition,” and (d) “[t]he modularity and extensibility of [its] platform enable[d the Company] to quickly integrate and migrate creators.” Plaintiffs further alleged that these and similar statements omitted material facts about the integration and failed to disclose substantial problems with the pre-IPO acquisition.
Before addressing defendants’ substantive arguments, the Court first rejected plaintiffs’ argument that the Ninth Circuit’s decision in Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988 (9th Cir. 2018) precluded defendants from relying on publicly-available documents incorporated by reference in the complaint to create factual disputes with plaintiffs’ allegations. Specifically, the Court held that Khoja did not preclude defendants from relying on such documents to refute conclusory allegations and to provide context.
The Court then held that none of the allegedly misleading statements was actionably false. First, the Court held the complaint included only “vague allegations” that the integration of the two platforms was delayed, costly and missing key features, which were insufficient to show that defendants “affirmatively” created an impression of a state of affairs that differs in a material way from reality. The Court also noted that the Company in fact disclosed the potential for integration risks and did roll out new features within the timeframe the Company projected. Second, to the extent plaintiffs’ claims were based on general statements regarding Company initiatives and capabilities, which allegedly were misleading because the Company offerings were inferior to those of the acquired company, the Court held the statements were not misleading because they did not make comparisons with the acquired competitor. Statements that the Company “typically” experiences customer losses when it deprecates a new platform and explanations for why customers might choose not to migrate to the Company, which allegedly omitted to disclose that the Company was experiencing losses, were held not to be misleading because plaintiffs failed to quantify the losses the Company was experiencing. Third, statements regarding “delivering the full power” of the combined platforms were held to be “nothing more than an optimistic statement” and thus inactionable puffery.
With respect to the claims under Section 11, the Court first held that the claims were subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) because the Complaint was “so substantively similar to the conduct pled in connection with Plaintiffs’ Section 10(b) claim.” Finally, the Court dismissed plaintiffs claim that the acquisition problems were known trends that were required to be disclosed under Item 303 because the Company in fact disclosed those risks, specifically noting the acquisition by name and the potential impacts that the acquisition could have on its business.