On September 30, 2024, Judge Araceli Martínez-Olguín of the United States District Court for the Northern District of California granted in part and denied in part a motion to dismiss a putative class action asserting claims under the Securities and Exchange Act of 1934 against a social media company and certain of its executives. Ohio Public Emps. Ret. Sys. v. Meta Platforms, Inc., et al., 2024 WL 4353049 (N.D. Cal. 2024). Plaintiffs alleged that the company made misrepresentations regarding various business operations. Although it dismissed claims relating to certain statements, the Court held that plaintiffs adequately alleged that others were false or misleading and that plaintiffs had adequately alleged scienter and loss causation.
Plaintiffs alleged that the company made misrepresentations regarding (1) its commitment to holding all users to the same standards, despite allegedly making exceptions for certain high profile accounts, (2) the company’s algorithm and content moderation, despite allegedly promoting divisive content on its platform, (3) uncertainty around harm incurred by young users of one of the company’s platforms, despite alleged evidence of the same, and (4) the company’s growth rate, which was allegedly overstated because the number of duplicate accounts was not adequately disclosed. Id. at *2.
The Court held that certain challenged statements were statements of opinion, and that plaintiffs had not adequately alleged that they were either objectively or subjectively false. For example, the Court explained that one executive’s statement, “I think more than anyone else in the industry, we invest on the safety and security side to sort of keep bad content off the site,” was inactionable, because plaintiffs did not allege that others in the industry did more or that the executive did not believe the statement to be true. Id. at *4. The Court determined that other statements, however, such as that it was “simply false” that the company “amplifies ideas you disagree with,” were not non-actionable opinion statements because they were “capable of objective verification.” Id. at *5.
Similarly, the Court held that certain challenged statements were non-actionable corporate puffery, while others were not. For example, the Court explained that statements that the company was taking “significant steps” to fight misinformation and was focused on “trust and safety” were “too generalized and [did] not describe a ‘specific and testable characteristic.’” Id. at *6. However, the Court held that statements that the company “has never had a general rule that is more permissive for content posted by political leaders” could be verified and were not corporate puffery. Id.
The Court next addressed the alleged falsity for each of the four categories of challenged statements. With respect to allegations regarding enforcement of community standards, the Court held that certain statements alleged to be false based on internal reports failed to satisfy the heightened pleading requirements for fraud under the PSLRA and Rule 9(b), because plaintiffs did not allege who drafted the reports, “who received or reviewed them, or what the reports entailed.” Id. at *8. However, the Court held that allegations relating to statements that the company applied a different standard only in limited newsworthy situations, were sufficiently alleged to be false in light of plaintiffs’ allegation that a company transparency report published by the company’s oversight board acknowledged that those statements were misleading. Id. at *8.
As for statements regarding harm to young users from one of the company’s platforms, the Court determined that certain challenged statements were either statements of opinion and/or not actually contradicted by factual allegations in the complaint, such as statements that research on wellbeing was inconclusive and that “social media isn’t inherently good or bad for people.” Id. at *12. However, the Court held that plaintiffs adequately alleged other misrepresentations. For example, the Court explained that the statement that research findings were “bi-directional, so small effects positive and small effects negative but it’s quite small” was misleading given the company’s allegedly extensive internal research as to the extent of the harms the company’s platform caused to teenagers. Id. And the Court held that statements such as, “we never compromise on [young people’s] privacy and safety” were sufficiently alleged to be misleading because they omitted that, based on internal documents, the company was aware of harm to young girls but avoided taking certain protective steps. Id. at *13.
The Court rejected plaintiffs’ claims as to all challenged statements in the two remaining categories. As for challenged statements relating to the company’s algorithm and content moderation practices, the Court explained that plaintiffs’ allegations regarding the prevalence of hate speech on the platform as compared to the small percentage identified by the company through its content moderation did not contradict challenged statements that the company was taking significant steps to fight misinformation, that it removed misinformation from its platforms, or that the company was investing in artificial intelligence to boost its spam detection. Id.at *9–11. As for challenged statements regarding the company’s growth that allegedly did not adequately account for the impact of duplicate accounts, the Court explained that plaintiffs’ citation to the company’s internal statistics about the prevalence of duplicate accounts did not necessarily render the challenged growth-related statements false or misleading, and that plaintiffs did not allege that it was false for the company to state that duplicate accounts were “very difficult to measure at our scale” and that the actual numbers “may vary significantly from our estimates.” Id. at *13–14.
With respect to the element of scienter, the Court limited its analysis to the statements for which the Court already determined that plaintiffs had adequately alleged falsity. The Court first examined scienter as to allegations regarding the different standards applied to high-profile accounts, holding that plaintiffs adequately alleged scienter as to certain defendants who were allegedly personally involved in that process and crafting those policies, but not as to other defendants who were not alleged to be personally involved. Id. at *15–16. And the Court held that plaintiffs had adequately alleged scienter as to certain defendants relating to statements about harm to young users, based on the prominence of the issue and public statements by those defendants, although not as to other defendants who were not alleged to have made such statements. Id. at *17–18. However, the Court rejected other theories of scienter, including the “core operations” theory—for which the Court noted that plaintiffs relied on internal documents but failed to allege any detail about who drafted the documents, who received them, and the exact factual content of the documents. Id. at *16. The Court also rejected plaintiffs’ attempt to plead scienter based on allegations of improper motive, noting that general allegations about a broad financial motive cannot support an inference of scienter. Id. at *16–17.
In addition, the Court held that plaintiffs adequately alleged loss causation with respect to the challenged statements that survived, based on alleged corrective disclosures that allegedly caused the company’s stock price to decline. While defendants argued that one set of disclosures did not reveal “new” information that had not been disclosed previously on the same topic, the Court observed that plaintiffs alleged that the previous disclosures on the same topics were false or misleading, and that whether “news of the truth credibly entered the market and dissipated the effects of prior misstatements” was an issue for summary judgment or trial. Id. at *19. The Court further noted that other alleged corrective disclosures were followed by stock price drops that were sufficient to plausibly allege that the information disclosed was “at least a substantial cause of the loss.” Id.
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