This week, the Ninth Circuit considers whether Twitter’s statements about a software bug causing privacy problems were actionable for securities fraud, and whether a zoning ordinance in Salinas, California, violated the Religious Land Use and Institutionalized Persons Act.
WESTON FAMILY PARTNERSHIP LLP V. TWITTER, INC.
The Court holds that Twitter’s statements and omissions about an ongoing software problem causing privacy problems were not actionable under securities law.
Panel: Judges Collins, Lee, Otake (D. Hawaii), with Judge Lee writing the opinion.
Key Highlight: “Securities laws . . . do not require real-time business updates or complete disclosure of all material information whenever a company speaks on a particular topic. To the contrary, a company can speak selectively about its business so long as its statements do not paint a misleading picture.”
Background: Twitter earns money by selling advertisements, commanding a premium for ads targeted based on users’ data. Mobile App Promotion, one of Twitter’s highly touted features, allows advertisers to prompt users to download apps based on what is already on the users’ device. Despite an earlier pledge to allow users to opt out of sharing their data, in May and August 2019, Twitter announced that software bugs had inadvertently shared user data with advertisers. The second time it disclosed the problem, Twitter announced that it had “fixed these issues.” But it did not immediately reveal that it had not fixed the bugs, but rather stopped sharing user data altogether through Mobile App Promotion, sacrificing significant revenue. Eleven weeks later, in its quarterly earnings call, Twitter reported a $25 million revenue shortfall caused in part by the software problems.
Plaintiffs filed a putative securities class action alleging that Twitter had made various false and misleading statements about the software issues and related revenue loss. The district court dismissed, holding that plaintiffs had failed to allege actionable misleading statements or a strong inference of scienter, but gave plaintiffs leave to amend. Plaintiffs declined to amend, instead opting to file a notice of appeal. The district court then sua sponte considered the claims dismissed and closed the case.
Result: The Ninth Circuit affirmed. The Court first addressed a threshold question about its appellate jurisdiction. Defendants argued that plaintiffs had appealed from a non-final order because the district court had granted them leave to amend. But the Ninth Circuit explained that it did not matter that the district court’s decision was non-final when plaintiffs filed their notice of appeal, because the decision later became final when the district court closed the case. That final order was sufficient to support appellate jurisdiction.
Reaching the merits, the Ninth Circuit held that Twitter’s statements were not false or misleading. For a statement to be actionable, the Court explained, it must “‘directly contradict what the defendant knew at that time’ or ‘omit[] material information.’” Fraud must be pleaded with particularity, an allegedly misleading statement must be “capable of objective verification,” and there is no general duty to disclose unless necessary to correct a misleading statement.
The Court reasoned that Twitter was not required to provide immediate updates on its software problems because disclosure would not have corrected any misleading statement. It never provided a specific deadline to fix the software issue or an estimated revenue impact, and merely said it was continuing to work on the problem. Plaintiffs also did not plausibly allege that Twitter knew the full extent of the problem in July 2019. Twitter’s statement that it had “fixed” data-sharing privacy issues did not mean that it had fixed the underlying software problems. And some of the statements Twitter had made in financial filings qualified for safe harbor because they were forward-looking and were accompanied by cautionary language. Finally, the Ninth Circuit also held that the district court correctly dismissed “control person” claims against Twitter executives because they were merely derivative of plaintiffs’ other claims.
NEW HARVEST V. CITY OF SALINAS
The Court holds that the City’s zoning ordinance circumscribing religious activities did not impose a substantial burden on a church, but facially violates the equal terms provision of the Religious Land Use and Institutionalized Persons Act (“RLUIPA”).
Panel: Judges Nguyen, Collins, and Rakoff (S.D.N.Y.), with Judge Rakoff writing the opinion and Judge Collins concurring in part.
Key Highlight: “Because the City prohibits New Harvest from hosting worship services on the ground floor of the Main Street Restricted Area but permits theatres to operate on the ground floor in that area, the City does not treat New Harvest as well as nonreligious assemblies similarly situated with respect to an acceptable zoning criterion. We therefore conclude that the Assembly Uses Provision facially violates the equal terms provision of RLUIPA.”
Background: Plaintiff New Harvest Christian Fellowship (“New Harvest”) is an evangelical church in Salinas, California. In 2018, New Harvest purchased a two-story building on Main Street in downtown Salinas. The zoning code for that downtown area specifically prohibits “places of religious assembly” from operating on the ground floor of buildings facing Main Street. New Harvest asked the City to amend the zoning ordinance and grant a conditional use permit, but the City denied both requests. New Harvest filed suit, alleging violations of the Religious Land Use and Institutionalized Persons Act (“RLUIPA”). The district court granted summary judgment in favor of the City.
Result: The Ninth Circuit affirmed in part and reversed in part. The panel affirmed the district court’s finding that the City did not violate RLUIPA’s substantial burden provision. Under that test, New Harvest must prove that the City’s actions imposed a substantial burden on the church’s religious exercise. Examining the totality of the circumstances, the panel held that there was no substantial burden. The panel focused on three facts in particular: (1) New Harvest could have reconfigured its first floor or held worship services on the building’s second floor to comply with the zoning ordinances; (2) New Harvest could have used other sites within the City—including one particular property that became available for sale during the pendency of this litigation; and (3) New Harvest knew about the applicable zoning restrictions at the time of its building purchase in 2018.
Yet the panel reversed the district court’s finding that the City did not violate RLUIPA’s equal terms provision. That provision provides that government shall not “impose or implement a land use regulation in a manner that treats a religious assembly or institution on less than equal terms[.]” 42 U.S.C. § 2000cc(b)(1). The panel held that New Harvest established a prima facie case of facially unequal treatment because the City’s zoning ordinance explicitly distinguishes between “places of religious assembly” and other nonreligious assemblies. The panel further concluded that nonreligious assemblies (such as theaters) that are permitted to operate on ground floors facing Main Street are similarly situated to religious assemblies, and that the City did not treat these two groups on equal terms.
Judge Collins concurred in part and concurred in the judgment. While he agreed with the panel’s conclusion that New Harvest did not prove a substantial burden, Judge Collins would have relied on narrower grounds than the majority. Judge Collins was not persuaded that New Harvest could have redesigned its space or that the church had notice of the zoning ordinances. However, he agreed that New Harvest failed to present evidence for why purchasing the alternative property that became available for sale would have been burdensome. On that basis, Judge Collins would still affirm summary judgment with respect to RLUIPA’s substantial burden provision.
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