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Northern District Of California Dismisses Purported Securities Fraud Class Action Against Entertainment Streaming Company For Failure To Plead Falsity
01/23/2024On January 5, 2024, Judge Jon S. Tigar of the United States District Court for the Northern District of California granted a motion to dismiss a proposed securities class action against an entertainment company that primarily operates a subscription-based streaming service, alleging that defendants made misrepresentations in public statements about the Company’s growth, customer retention, and challenges related to shared accounts in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In re Netflix Sec. Litig., No. 22-CV-02672-JST, 2024 WL 69069 (N.D. Cal. Jan. 5, 2024). The Court dismissed the complaint, holding that plaintiff failed to sufficiently allege any false or misleading statements.
Plaintiff, representing a putative class of stockholders who allegedly purchased Company stock between January 19, 2021 and April 19, 2022 (the “Class Period”), alleged that the following material information was omitted from the Company’s public statements: (i) during the Class Period, between approximately 91.7 million and 100 million households globally were using the Company’s platform through account sharing, which occurs when a customer shares their account credentials with a non-paying user who is not a member of the customer’s household so that the non-paying user can access and use the Company’s platform; (ii) the market penetration rate in the U.S. and Canada was between 83% and 84% rather than the Company’s reported 60%; (iii) the Company was thus substantially more penetrated in the applicable markets than investors believed because of account sharing; (iv) this severely hindered the Company’s ability to acquire new paying members; and (v) the degree of market saturation due to account sharing was the main reason for a slowdown in the Company’s membership.
Plaintiff identified four overlapping categories of statements that were allegedly misleading due to omitted facts regarding the extent of the account sharing issue: (1) statements about the Company’s market penetration, (2) statements about the Company’s metrics and long-term growth, (3) statements that attributed the Company’s slow growth to COVID and its aftereffects, and (4) statements that specifically addressed account sharing. Defendants moved to dismiss, arguing that the complaint failed to plausibly allege that the Company knew about the extent of the account sharing problem at the time the alleged misstatements were made, and that the challenged statements were otherwise nonactionable statements of opinion, corporate optimism, and/or forward-looking statements.
The Court agreed with defendants, holding that plaintiff failed to allege with particularity what level of monitoring the Company was doing for account sharing, or what was known regarding the extent of account sharing at the time the alleged misleading statements were made. In particular, the Court found that except for an internal memorandum from early 2020 showing that the Company would pause efforts to “crack down” on account sharing, plaintiff did not specify what confidential witnesses or anyone at the Company discussed about account sharing or when it was discussed. In so holding, the Court rejected plaintiff’s argument that the Company’s awareness of the account sharing issue was enough to survive the pleading stage, holding that “without more, the allegations do not establish at what level the [Company] monitored account sharing during the Class Period, or that [the Company was] aware of the extent of the account sharing problem.”
Having found no primary liability under Section 10(b), the Court dismissed plaintiff’s derivative claim under Section 20(a) against the individual defendants. The Court did, however, grant plaintiff leave to amend, finding that it appears that the pleading could be cured by the allegation of other facts. In anticipation of such further amendment, the Court did not address in its opinion the various other defenses raised by defendants, including safe harbor protection and the failure to allege scienter and loss causation.
