Group v. Findwhat.Com

• Citation: 23 Fla. L. Weekly Fed. C 453,658 F.3d 1282
• Decision Date: 30 September 2011
• Docket Number: No. 10–10107.,10–10107.
• Parties: FINDWHAT INVESTOR GROUP, on behalf of itself and all others similarly situated, et al., Plaintiffs–Appellants,v.FINDWHAT.COM, Craig Pisaris–Henderson, Phillip R. Thune, Defendants–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

658 F.3d 1282

23 Fla. L. Weekly Fed. C 453

FINDWHAT INVESTOR GROUP, on behalf of itself and all others similarly situated, et al., Plaintiffs–Appellants,

v.FINDWHAT.COM, Craig Pisaris–Henderson, Phillip R. Thune, Defendants–Appellees.

No. 10–10107.

United States Court of Appeals, Eleventh Circuit.

Sept. 30, 2011.

Maya Saxena, Lester R. Hooker, Christopher Steven Jones, Joseph Edward White, III, Saxena White, PA, Stephen Richard Astley, Paul J. Geller, David J. George, Jack Reise, Robert Jeffrey Robbins, Robbins Geller Rudman & Dowd, LLP, Julie Prag Vianale, Kenneth J. Vianale, Vianale & Vianale, LLP, Boca Raton, FL, Chris A. Barker, Barker Rodems & Cook, PA, Tampa, FL, Marc J. Greenspon, Michael J. Pucillo, Berman DeValerio, Palm Beach Gardens, FL, for Plaintiff–Appellant.Todd R. David, Susan Elaine Hurd, Robert R. Long, Alston & Bird, LLP, Atlanta, GA, Joseph Gerard Foster, Porter Wright Morris & Arthur, LLP, Gregory N. Woods, Grant Fridkin Pearson Athan & Crown, Naples, FL, for Defendants–Appellees.Appeal from the United States District Court for the Middle District of Florida.Before HULL and MARCUS, Circuit Judges, and COOKE,^* District Judge.MARCUS, Circuit Judge:

In this securities fraud class action, the investor Plaintiffs sued the Defendant company MIVA, Inc. (“MIVA”)¹ and three of its principal officers,² alleging that they had made a series of eleven false or misleading statements to the public, in violation of § 10(b) of the Securities Exchange Act of 1934 (“the Exchange Act”) and Rule 10b–5 promulgated thereunder. The Plaintiffs claimed that the false statements had the effect of artificially inflating the price of MIVA's stock until the truth belatedly came out, at which time the stock price dropped and the Plaintiffs suffered substantial financial losses.

The district court rejected all of the Plaintiffs' claims. It dismissed nine of the eleven allegedly misleading statements on the pleadings for failure to state a claim. The district court then granted summary judgment to the Defendants with respect to the remaining two statements, on the grounds that the Plaintiffs had failed to demonstrate genuine issues of material fact regarding loss causation and damages. The Plaintiffs have appealed both of these orders, placing before us today claims deriving from four of the original eleven statements made by the Defendants—two that were dismissed as insufficiently pled, and two that were rejected at summary judgment.

After thorough review, we hold that the district court properly dismissed the Plaintiffs' claims arising from the alleged misstatements made on March 5, 2004 and July 26, 2004, because the Plaintiffs have inadequately pled scienter and falsity, respectively. However, as for the Plaintiffs' claims arising out of the Defendants' February 23, 2005 and March 16, 2005 statements, we vacate the district court's entry of summary judgment. We hold that the securities laws prohibit corporate representatives from knowingly peddling material misrepresentations to the public—regardless of whether the statements introduce a new falsehood to the market or merely confirm misinformation already in the marketplace. In other words, a defendant may be liable for fraudulent statements intentionally made that have the purpose and effect of propping up an already inflated stock price in an efficient market. Accordingly, we affirm in part, vacate in part, and remand for further proceedings consistent with this opinion.

I. Facts and Procedural History

Since we assume the Plaintiffs' factual allegations to be true when reviewing a motion to dismiss, Garfield v. NDC Health Corp., 466 F.3d 1255, 1261 (11th Cir.2006), and the Defendants do not dispute the relevant facts for purposes of summary judgment, we take the relevant facts from the Plaintiffs' First Amended Consolidated Class Action Complaint (“Complaint”) and other documents submitted or incorporated by reference by the Plaintiffs.

A. Background on MIVA

MIVA is an Internet commerce company that provides “pay-per-click” advertising services. (Compl. ¶ 2). MIVA places advertisements for online sellers on the websites of numerous entities with whom MIVA contracts (called MIVA's “distribution partners” or “affiliates”). The advertisers pay MIVA each time an Internet user “clicks” on their ad. MIVA then shares a portion of that revenue with its network of distribution partners—the websites that first generated the click.

MIVA contracts with the advertisers on a keyword-targeted, bid-for-position, pay-per-click basis. ( Id. ¶ 23). Keyword-targeted advertising allows advertisers to reach a targeted audience: the advertisement appears on the user's computer screen only if a user types a particular keyword or keyword phrase into a search box on a website of one of MIVA's distribution partners. ( Id. ¶ 23 n. 6 (and materials cited therein)). Bid-for-position means that the advertisers bid against each other for ad placement. ( Id. ¶ 23 n. 4). The highest bidder for a particular keyword receives the first-place advertisement position with respect to that keyword, and the other advertisers for that keyword are listed in descending bid order. ( Id.) Pay-per-click means that an advertiser only pays when an Internet user clicks on its ad and gets transferred to its website. ( Id. ¶ 23 n. 5). These clicks are supposed to be highly qualified leads likely to convert into a sale, since the user intentionally clicked on the ad and, therefore, presumably has some interest in the advertised product. ( Id.)

Not surprisingly, it's very important to MIVA to generate high-quality Internet traffic for its advertisers. MIVA's revenue is determined by the price that advertisers bid for a click on their ads and the number of clicks MIVA can generate on those ads. ( Id. ¶ 28). The price an advertiser is willing to bid depends on the advertisement's conversion rate, i.e., the rate at which the seller's advertising expenditure translates into additional sales income. ( Id.) The greater the sales conversion rate, the more the advertiser is willing to bid on a particular keyword. ( Id. ¶¶ 25–26, 28). Conversely, the more advertiser-paid clicks that fail to translate into income for the advertiser—in other words, the lower the conversion rate—the lower the price that advertisers are willing to bid. ( Id. ¶¶ 4, 28). Therefore, it is essential to MIVA's success that the clicks it directs to its advertisers have a high conversion rate, that is, that they frequently translate into actual sales. ( Id. ¶¶ 25–26).

B. The Plaintiffs' Allegations of Click Fraud Within MIVA's Network

“Click fraud” generally refers to the practice of clicking on an Internet advertisement for the sole purpose of forcing the advertiser to pay for the click. ( Id. ¶ 43). Because advertisers only pay when someone clicks through to their website, artificial clicks can be very costly to advertisers. ( Id.) Click fraud includes the use of illicit practices such as spyware, browser hijacking software, and other “bots” or “non-human traffic.” ³ ( Id. ¶¶ 43–44). Such practices result in lower sales conversion rates for advertisers because the leads are false—they do not come from actual buyers interested in purchasing the advertised products. ( Id. ¶ 26). Because lower conversion rates lead to lower advertiser bids and thus to decreased revenue, ensuring the quality of its distribution partners and eliminating improper Internet traffic are extremely important for a pay-per-click company such as MIVA.

According to the Plaintiffs' allegations, in or around 2003, two of MIVA's top revenue-generating distribution partners (“Saveli” and “Dmitri”)—who together generated almost one-third of MIVA's revenue during 2003, 2004, and 2005, and represented about 36 percent of MIVA's click revenue ( id. ¶¶ 40–41)—began using click fraud to generate revenue. Saveli and Dmitri's click fraud included the use of spyware, browser hijacking software, and other non-human traffic. ( Id. ¶ 43). According to a former Business Development Manager at MIVA, Saveli and Dmitri were “turn and burn guys” who focused primarily on driving in a lot of traffic, regardless of its quality. ( Id. ¶ 39). This low-quality traffic caused advertisers to lower their advertising bids, decreasing Company revenue. A former MIVA Account Manager described the result as “serious, serious bid deflation.” ( Id. ¶ 29).

Due to MIVA's low-quality distribution partners,⁴ the Company's revenue-per-click rate dropped from $0.20–$0.21 in early 2003 to $0.12 by June 2005. ( Id. ¶ 33). This decrease in revenue had a domino effect, driving away high-quality distribution partners who shared in MIVA's decreasing revenue and thus sought more competitive returns from alternative pay-per-click companies. ( Id. ¶ 34). As a result, the Plaintiffs allege that the Company increasingly relied on greedy and unscrupulous distribution partners who were focused on only short-term gain. ( Id.)

By the summer of 2005, an analysis of MIVA's affiliates revealed that its supposedly extensive and diversified partner network had shrunk, with 95 percent of the Company's click revenue coming from its top fifty distribution partners—the top two being Saveli and Dmitri. ( Id. ¶ 37). In short, according to the Plaintiffs' allegations, the Defendants had created a distribution network that was primarily fueled by illicit traffic-generating techniques, and, according to a former MIVA Marketing Manager, was best described as a “house of cards ... held together by a thread.” ( Id.)

Although click fraud is deleterious in the long term because it drives away advertisers, it produces short-term revenue gains through increased clicks. The Plaintiffs allege that the click fraud within MIVA's network enabled the Company to report an uninterrupted string of quarter-by- quarter financial gains. Between 2003 and 2005, the Defendants issued public statements reporting seemingly unstoppable growth stemming...