Curry v. Yelp Inc.

• Decision Date: 21 November 2017
• Docket Number: No. 16-15104,16-15104
• Citation: 875 F.3d 1219
• Parties: Joseph CURRY, Individually and on Behalf of All Others Similarly Situated; City of Miami Fire Fighters' and Police Officers' Retirement Trust, Plaintiffs–Appellants, and Mary Adams, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. YELP INC.; Jeremy Stoppelman; Robert J. Krolik; Geoffrey Donaker, Defendants–Appellees, v. Dru L. Pio, Movant.
• Court: U.S. Court of Appeals — Ninth Circuit

875 F.3d 1219

Joseph CURRY, Individually and on Behalf of All Others Similarly Situated; City of Miami Fire Fighters' and Police Officers' Retirement Trust, Plaintiffs–Appellants,

and

Mary Adams, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

v.YELP INC.; Jeremy Stoppelman; Robert J. Krolik; Geoffrey Donaker, Defendants–Appellees,

v.Dru L. Pio, Movant.

No. 16-15104

United States Court of Appeals, Ninth Circuit.

Argued and Submitted September 11, 2017 San Francisco, California

Filed November 21, 2017

Andrew S. Love (argued), Kenneth J. Black, Shawn A. Williams, and Susan K. Alexander, Robbins Geller Rudman & Dowd LLP, San Francisco, California; Stephen H. Cypen, Cypen & Cypen, Miami Beach, Florida; for Plaintiffs–Appellants.

Gilbert R. Serota (argued) and Daniel M. Pastor, Arnold & Porter LLP, San Francisco, California, for Defendants–Appellees.

Before: Ronald M. Gould and Paul J. Watford, Circuit Judges, and W. Louis Sands,^* District Judge.

GOULD, Circuit Judge:

Plaintiffs Joseph Curry, individually and on behalf of all others similarly situated, and Miami Fire Fighters' and Police Officers' Retirement Trust appeal the district court's dismissal with prejudice of Plaintiffs' securities fraud complaint for failure to state a claim. Plaintiffs argue that the district court erred by holding that they did not adequately plead falsity, materiality, loss causation, and scienter. Plaintiffs further argue that the district court erred by dismissing their control person claim and by denying them leave to amend. We hold that the disclosure of consumer complaints, without more, in the circumstances of this case did not form a sufficient basis for a viable loss causation theory. We further hold that allegations of suspicious insider sales of stock without allegations of historical trading data did not, in the circumstances here, create a strong inference of scienter. We affirm the district court's dismissal of the complaint based on the elements of loss causation and scienter that were not sufficiently pled. We need not reach and do not reach Plaintiffs' arguments regarding materiality and falsity. We also affirm the district court's dismissal of the complaint with prejudice because amendment of the complaint as to loss causation would be futile under current precedent.

I

Yelp Inc. ("Yelp") is a publicly traded company that generates revenue by selling advertising to businesses on its website. During the period from October 29, 2013 to April 3, 2014 (the "Class Period") Defendants¹ consistently stated that the reviews generated on Yelp's website were "firsthand" and "authentic" information from contributors about local businesses. On April 2, 2014, pursuant to a Wall Street Journal ("WSJ") Freedom of Information Act request, the Federal Trade Commission ("FTC") disclosed more than 2,000 complaints from businesses claiming that Yelp had manipulated reviews of their services. Some complaints alleged that Yelp salespersons would remove good reviews or promote bad reviews when businesses did not agree to advertise with them. Other complaints reported that bad reviews were suppressed for companies that advertised with Yelp. That afternoon, after the market had closed, the WSJ released an article citing the FTC's disclosure and noting that Yelp's stock had declined 6% after the FTC made its disclosure of these complaints.

A

Plaintiffs sued Defendants alleging that Yelp's statements regarding the independence and authenticity of posted reviews were materially false; that Defendants knew the statements were false; and that the revelation of their falsity through FTC disclosures and news articles caused a drop in Plaintiffs' stock value. The district court consolidated two cases and appointed City of Miami Fire Fighters' and Police Officers' Retirement Trust as Lead Plaintiff.

Defendants filed a motion to dismiss Plaintiffs' initial class-action complaint, which the district court granted, concluding that Plaintiffs did not sufficiently allege falsity, materiality, causation, or scienter. The district court concluded that Plaintiffs did not sufficiently plead materiality because the information revealed in the WSJ article and the FTC disclosures had previously been disclosed by Yelp in its Registration Statement and other SEC filings. The district court concluded that Plaintiffs did not allege falsity because most of the consumer complaints, eighteen out of twenty-five, did not allege that Yelp sought payment in exchange for good reviews. The district court concluded that Plaintiffs did not sufficiently allege loss causation because the decline in Yelp's stock was "attributable to market speculation about whether fraud ha[d] occurred," and it concluded that speculation of fraud could not form the basis for a viable loss causation theory. The district court concluded that Plaintiffs did not allege scienter with particularity because Plaintiffs did not allege that Yelp executives were personally involved in ensuring the authenticity of Yelp's reviews. The district court further concluded that "unusual insider sales" of stocks could not show scienter because Plaintiffs did not supply trading history. The district court also concluded that Plaintiffs' Section 20(a) derivative claim likewise failed. For these and related reasons, the district court dismissed Plaintiffs' original consolidated class action complaint but granted Plaintiffs leave to amend.

B

Plaintiffs then filed their First Amended Class Action Complaint for Violations of the Federal Securities Laws. Defendants again moved to dismiss, and the district court once more granted the motion to dismiss. The district court held that Plaintiffs did not sufficiently plead material falsity. The district court reasoned that Plaintiffs' new allegations did not implicate the veracity of Defendants' previous statements that Yelp reviews, by and large, are "authentic" and "firsthand" because Defendants had previously acknowledged that Yelp's screening technology was imperfect. The district court specifically found that "no reasonable investor could have understood Defendants' statements to mean that all Yelp reviews were authentic," and therefore, the FTC complaints did not alter the total mix of information available to the market. The district court also found that the WSJ article could not have affected the total mix of information in the market because it was published after the market had closed and Yelp's stock price had already declined. Finally, the district court found that the FTC disclosure did not affect the total mix of information because it was unclear when the FTC made its disclosure and what the FTC disclosed.

The district court further concluded that Plaintiffs' allegations of consumer complaints did not prove that Defendants' statements denying manipulation of Yelp reviews were false. Although the Plaintiffs had included nine more consumer complaints, the district court found that the complaints still only expressed business owners' inferences about Yelp's manipulation of reviews, and were not proof of wrongdoing. Plaintiffs also argued that Yelp's statements regarding future business prospects were false or misleading, but the district court rejected this argument because Defendants' claims as to the authenticity of the reviews did not contribute to Yelp's projected numbers. The district court held that the statements were not materially false because Plaintiffs did not allege that Defendants' optimistic statements about Yelp's prospects were contradicted by undisclosed facts that Defendants already knew.

The district court also concluded that Plaintiffs did not sufficiently allege loss causation because Plaintiffs did not allege that there was fraud on the market, only potential fraud. The district court found that Plaintiffs did not supply allegations connecting the stock drop to the FTC disclosures or to the WSJ article because the WSJ article came out after the stock drop occurred. The district court concluded that Plaintiffs did not sufficiently allege that Yelp's executives had the requisite scienter. The district court specifically held that Plaintiffs' reliance on management's general awareness of day-to-day workings did not show that they had knowledge and control over Yelp's content. The district court also held that Defendants' sales of Class A+B shares did not support an inference of scienter because Plaintiffs again did not provide any historical trading data showing the stock sales of insiders before the Class Period for comparison, even though the district court had noted that same deficiency in its prior order granting the first motion to dismiss. The district court dismissed Plaintiffs' derivative Section 20(a) claim because their Section 10(b) claim failed. Finally, the district court denied Plaintiffs' new motion for leave to amend, reasoning that further amendment would be futile because the first amended complaint did not cure the previously cited deficiencies.

Plaintiffs next filed a motion for reconsideration, which included a proposed second amended complaint. The district court denied Plaintiffs' motion for reconsideration, and this appeal timely followed.

II

We have jurisdiction to decide this appeal under 28 U.S.C. § 1291. In re Atossa Genetics, Inc. Sec. Lit. , 868 F.3d 784, 793 (9th Cir. 2017). We review de novo challenges to a dismissal for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). New Mexico State Inv. Council v. Ernst & Young, LLP , 641 F.3d 1089, 1094 (9th Cir. 2011). On review, we consider the materials incorporated by reference in the complaint, and judicially noticed matters. Id. We review the denial of leave to amend a complaint for abuse of discretion. Zucco Partners, LLC v. Digimarc Corp. , 552 F.3d 981, 989 (9th Cir. 2009).

III

The elements that must be pleaded to state a claim for securities fraud are strenuous but well established. To state a claim for violation of Rule 10b-5, a plaintiff...