On September 3, 2024, Judge Rita F. Lin 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 technology and digital advertising company (the “Company”) and certain of its officers. Ami-Government Employees Provident Fund Mgmt. Company LTD., et al., v. Alphabet Inc., et al., No. 23-cv-01186-RFL (N.D. Cal. Sept. 3, 2024). Plaintiffs alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act, and Rule 10b-5 promulgated thereunder, by making false and misleading statements about the Company’s digital advertising technology products and the competitiveness of the advertising technology market in general. The Court granted defendants’ motion to dismiss, holding that plaintiffs failed to adequately plead falsity and scienter.
The Company owns and operates the leading publisher digital advertising server, as well as the leading digital advertising exchange that allows potential advertisers to instantaneously bid through an electronic auction for advertising space on its server. Plaintiffs alleged that defendants committed securities fraud by making alleged misrepresentations about the Company’s digital advertising technology practices, including by manipulating bidding in auctions on its ad tech platform and misrepresenting these practices to investors, which allegedly caused financial losses when these practices were revealed. Plaintiffs further alleged that defendants made false statements about the Company’s support for user privacy. The Court categorized the alleged misstatements as follows: (i) alleged statements describing the Company’s ad tech products as helping customers; (ii) alleged statements categorizing the ad tech market as highly competitive; (iii) alleged statements claiming that the Company supports privacy protections and protects its users’ privacy; and (iv) alleged statements representing how the Company’s ad tech products operate.
The Court first held that alleged statements touting how the Company’s ad tech products help its customers—such as “our advertising solutions help millions of companies grow their business”— and alleged statements regarding the Company’s support for privacy protections—such as “we continued to put privacy and security at the forefront of our products”—were nonactionable statements of puffery. The Court found that these and similar statements were “vague, highly subjective claims as opposed to specific, detailed factual assertions capable of objective verification.”
The Court further held that alleged statements describing the ad tech industry as “highly competitive and dynamic” and that the Company faced “robust competition” were similarly “at best” inactionable opinion statements. Plaintiffs argued that the statements about the competitiveness of the market were false because, since 2020, several state attorneys general, the Department of Justice, and the European Commission have been investigating the Company for its alleged anticompetitive tech sales practices, which have resulted in enforcement actions against the Company. The Court held, however, that plaintiffs did not adequately plead that the opinion statements were misleading because Section 10(b) and Rule 10b-5 do not create an affirmative duty to disclose any and all material information, and only prohibit misleading and untrue statements, not statements that are incomplete.
The Court then addressed the allegations related to statements made in response to Congressional inquiries about the operation of the Company’s ad tech products. At the outset, the Court observed that the PSLRA requires particularized facts giving rise to a strong inference that defendants acted with the intent to deceive or with deliberate recklessness as to the possibility of misleading investors, which it determined was a “high bar” that plaintiffs failed to meet. In particular, the Court held that plaintiffs failed to plead falsity with respect to all but one of these alleged statements. As to that one alleged statement—that “the channel through which a bid is received does not otherwise affect the determination of the winning bidder”—the Court held that plaintiffs adequately pled falsity because they alleged that bids submitted through rival exchanges were less likely to win publishing space than bids submitted through the Company’s exchange. Nevertheless, as to that statement, the Court held that plaintiffs failed to adequately plead that any defendant had knowledge about the specific mechanics of the exchange, such that they were aware of the falsity of the statement, and therefore plaintiffs failed to sufficiently plead scienter.
Having found that plaintiffs failed to adequately plead claims under Section 10(b) and Rule 10b-5, the Court dismissed the derivative control person claims under Section 20(a). The Court did, however, grant plaintiffs leave to further amend.
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