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Western District Of Washington Largely Declines To Dismiss Putative Class Action Against Online Real Estate Listing Company
12/13/2022On December 7, 2022, the United States District Court for the Western District of Washington largely denied a motion to dismiss a putative class action asserting claims under the Securities Exchange Act of 1934 against an online real estate listing company and certain of its executives. Jaeger v. Zillow Group, Inc., 2022 WL 17486297 (W.D. Wash. Dec. 7, 2022). Plaintiff alleged that the company made misrepresentations in connection with a real estate purchasing program. While the Court dismissed one allegation as a non-actionable forward-looking statement, the Court held that the remainder of plaintiff’s allegations stated a claim.
The crux of plaintiff’s allegations related to the company’s real estate purchasing program, in which the company used software algorithms as part of a largely automated program to buy homes directly from homeowners, make certain repairs, and then relist them. Id. at *1. Plaintiff alleged that the company made statements touting its algorithms and operations, as well as attributing its inventory growth to increased demand, which were allegedly rendered misleading because the company had not disclosed that it employed “pricing overlays” that increased its bids, allegedly in order to boost the company’s market share. Id.
The Court first determined that one challenged statement that some economic improvements were “durable” was a protected forward-looking statement because it “deals with economic indicators that [the company] expects to maintain in the future.” Id. at *4. The Court rejected, however, the suggestion that other statements containing the terms “we expect,” “going to be,” “durable,” or “back on track” were sufficient to make broader statements forward-looking. Id. at *5. Rather, the Court explained that, to be protected, the statement must be “forward-looking in substance, not merely in form, with no separable present- or backward-looking aspects.” Id.
Thus, the Court held that statements regarding the company’s algorithms were potentially misleading because the company was allegedly not basing its pricing and inventory decisions on the automated algorithm but was applying overlays based on human-driven determinations. Id. The Court also determined that challenged statements regarding “durable operational improvements” were potentially misleading because the company’s emphasis on cost-cutting (allegedly necessitated by paying more than market price for properties) was not sustainable and had threatened relationships with contractors. In addition, the Court held that plaintiff adequately alleged that statements regarding increased consumer demand were misleading because plaintiff alleged that the higher volume was driven by the company’s price overlays. Id. at *7.
Moreover, the Court rejected the company’s arguments that its existing disclosures were sufficient to make plaintiff’s claims implausible. For example, the Court held that disclosures that the company was “testing price elasticity in this hot housing market” as it “improved [] offer strength” were not sufficient to disclose decreased reliance on automated processes. Id. Similarly, the Court held that disclosures of reduced payments to contractors and of the risks associated with its reliance on “contractors, vendors, and service providers” were not sufficient to rebut allegations that some contractors were “refusing, stopping, or delaying jobs as a result of the reductions” and that the lower costs “were likely not durable.” Id.
The Court also rejected the company’s argument that certain statements, such as being “back on track,” were mere puffery because they were objectively verifiable and were more than just optimism about the future. Id. at *8.
With respect to scienter, the Court explained that plaintiff adequately alleged that multiple former employees had indicated that the company’s senior executives possessed information that contradicted their public statements, including based on allegations that the company’s pricing overlay strategy was allegedly widely known internally and was discussed in meetings the executives attended and that certain executives expressly discussed it. Id. The Court also noted that, with respect to allegations regarding increased inventory, one former employee allegedly recalled a specific meeting in which one executive was asked about the inventory backlog and responded that the company would work to “clear the backlog” by “slowing down or stopping purchases.” Id. The Court also held that the scienter allegations were supported by the “core operations” theory, because the home buying operation represented 60% of the company’s revenue, and the company’s CEO had returned to the company specifically to oversee this business and claimed it was the “centerpiece of [the company’s] new strategy.” Id. at *9.
Finally, the Court determined that plaintiff had adequately alleged loss causation because the complaint contained “enough facts to raise a reasonable expectation that discovery will reveal evidence of loss causation.” Id. at *10. In particular, the Court noted that plaintiff sufficiently alleged that the “truth became known” as a result of a series of partial disclosures, and that a stock price drop followed each of those disclosures. Id.
