In re Facebook, Inc. Sec. Litig.

• Decision Date: 07 August 2020
• Docket Number: Case No. 5:18-cv-01725-EJD
• Citation: 477 F.Supp.3d 980
• Parties: IN RE FACEBOOK, INC. SECURITIES LITIGATION
• Court: U.S. District Court — Northern District of California

477 F.Supp.3d 980

IN RE FACEBOOK, INC. SECURITIES LITIGATION

Case No. 5:18-cv-01725-EJD

United States District Court, N.D. California, San Jose Division.

Signed August 7, 2020

ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND

Re: Dkt. No. 126

EDWARD J. DAVILA, United States District Judge

Before the Court is Defendants’ motion to dismiss Plaintiffs’ second amended complaint.

Plaintiffs are persons who purchased shares of Facebook common stock between February 3, 2017 and July 25, 2018 ("the Class Period"), who believe that Defendant Facebook, Inc. and Executive Defendants Mark Zuckerberg, Sheryl K. Sandberg, and David W. Wehner made materially false and misleading statements and omissions in connection with the purchase and sale of Facebook stock. See Second Amended Complaint ("SAC") ¶ 1, Dkt. 123. Plaintiffs allege that Defendants violated Section 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b5 promulgated thereunder because Defendants made guarantees that the Cambridge Analytica, and related data-privacy scandals, would not impact Facebook stock while knowing this to be false. Specifically, Plaintiffs focus on Defendants’ statements and omissions concerning Facebook's "privacy and data protection practices" and their impact on Facebook's stock prices during the Class Period. Id.

Defendants have filed a motion to dismiss¹ arguing that Plaintiffs have failed to (for a second time) meet Federal Rule of Civil Procedure 9(b) ’s heightened pleading requirements for securities fraud. The Court agrees; while Plaintiffs have plead sufficient facts to show actionable misstatements, scienter, and reliance, their SAC fails to plead facts showing causation. Thus, the Court GRANTS Defendants’ motion to dismiss with leave to amend .

I. BACKGROUND

A. Factual Background

Defendant Facebook was founded by Defendant Mark Zuckerberg, who is the Chief Executive Office ("CEO") of the company and the Chairman of the Board of Directors. Id. ¶ 32. Defendant Sheryl Sandberg is the Chief Organization Officer ("COO") of the company and serves on the Board of Directors. Id. ¶ 34. Defendant David Wehner is the Chief Financial Officer ("CFO") of the company. Id. ¶ 35.

Facebook is the world's largest social networking company; its products and platforms are designed to facilitate connection and information sharing between users through mobile devices and personal computers. Id. ¶ 41. Plaintiffs allege that Facebook's business model depends on: monetizing user data, attracting new users, and engaging/retaining existing users. Id. ¶¶ 43–48 ("Facebook's main asset is the vast treasure-trove of user personal data that it has amassed since its founding."). The platform formerly allowed third-party app developers’ applications or websites ("apps") access to users’ information and to users’ friends’ information. Id. ¶ 48. Despite Defendants guarantees to the contrary, access to user data (in contravention of user privacy settings) continued through the class period. Allegedly, certain "whitelisted" app developers and corporate giants like Amazon, Google, Samsung, Blackberry, Huawei (a Chinese technology company), and Mail.Ru Group (a Kremlin-connected technology conglomerate) were able to access users’ friends’ data through the class period. Id. ¶¶ 15, 16.

The Court briefly outlines the background of Plaintiffs’ claims. Before April 2014, a user automatically consented to an app developer gaining access to their personal data and the personal data of his or her friends ("third-party consent"). Id. ; see also Ex. 25, Dkt. 126-26. However, in April 2014, Defendant Zuckerberg informed users that this third-party consent would be changed. See Ex. 30, Dkt. 126-31 ("Second, we've heard from people that they're often surprised when a friend shares their information with an app. So we've updated Facebook Login so that each person decides what information they want to share about themselves, including their friend list."). After reading this announcement and considering Facebook's 2014, 2015, and 2016 Privacy Policies, the Court understands this to mean that users could still share their friend list with third-party app developers, but users and users’ friends would have more control over the sharing of that list. This is to say, Facebook represented to consumers that they could control the privacy of their data by using desktop and mobile privacy settings to limit the information that Facebook could share with app-developers. In actuality, users lacked such control. Indeed, Plaintiffs maintain that Facebook's representations were false and/or materially misleading because "whitelisted" app developers could still access users’ data and users’ friends’ data in contravention of user privacy settings. See id. ¶¶ 54–64.

1. Relevant Agreements

Facebook-User Agreements. The use and sharing of data on Facebook are governed by agreements between Facebook and its users, including Facebook's Data Policy (formerly the "Data Use Policy" and the "Privacy Policy") and Facebook's Terms of Service (formerly "Statement of Rights and Responsibilities"). Id. ¶¶ 167, 170, 232, 276, 370, 462–64. These policies explain how users can control whether and how their data is shared with their Facebook friends, other Facebook users, and third parties. Id. ¶¶ 326, 469. For example, the September 2016 Data Policy informed users of the categories of information that third-party apps could access if users allowed (or "authorized") apps to do so. See Ex. 26 at 2, Dkt. 126-27. The policy also informed users how to control access to their data and cautioned users that use of third-party apps, websites, or other services that use, or are integrated with, the Facebook platform may result in the third-parties receiving information about what users post or share. Id. ; see also SAC ¶ 469.

Under the November 2013 Data Use Policy, Facebook's policies allowed users to share information about their friends with third-party app developers. Id. ¶¶ 48, 89. This policy stated that app developers could ask for certain information about users’ friends and alerted users that their friends might choose to share some of their information with app developers. Ex. 25, Dkt. 126-26. For example, the policy advised users that when using a music app, "[y]our friend might ... want to share the music you ‘like’ on Facebook." Id. at 4 ("[I]f you've shared your likes with just your friends, the application could ask your friend for permission to share them."). Thus, under this November 2013 policy, a user's friend could re-share the user's likes with an app that the friend had downloaded, so long as the original user consented to such sharing by their friends. The converse was also true; if a user chose to turn off all Platform apps, that user's friends could not share the user's information with apps (at least, not without running afoul of the stated policy).

In 2014, however, Facebook announced that it would implement changes to its Platform that would "dramatically limit the Facebook information apps could access," and "shut off third parties’ access to collect user friend data" to ensure that "everyone has to choose to share their own data with an app themselves." SAC ¶¶ 81–83, 186, 383, 434; see also Ex. 30, Dkt. 126-31 (disclosing that platform changes would be finalized one year later). The FTC interpreted this to mean that Facebook would stop allowing third-party developers to collect data [about friends]." Id. ¶ 83. The Court does not comment on whether that interpretation is correct. But see Ex. 26, Dkt. 126-27 (2016 data policy warned users that when they use third-party apps, you share your username, user ID, your age range and country/language, and your list of friends , as well as any information that you share with them); accord Ex. 27 at 2, Dkt. 126-28; see also id. ("We transfer information to vendors, service providers, and other partners who globally support our business ....").

Facebook-App Developer Agreements ("Platform Policy"). Third-party app developers must agree to Facebook's Platform Policy before offering apps on the Facebook platform. SAC ¶¶ 275–76 & n. 265, 368–70. The Platform Policy, which was in place at all times relevant to the allegations in the SAC, limits the extent to which developers can collect and use Facebook user data, and requires developers to explain to users the categories of information they will collect and how it will be used. Id. ¶¶ 210, 275–76, 383–70. The Platform Policy prohibits developers from selling or transferring user data, and from using their customers’ friend data outside of customer use of the app. Id. ¶ 468.

2. Alleged Events Relevant to Plaintiffs’ Claims

Aleksandr Kogan and Cambridge Analytica. In 2013, Aleksandr Kogan, a professor and data researcher at Cambridge University, developed a personality quiz app called "This is Your Digital Life." Id. ¶¶ 87–88; see also September 2019 Order at 4 (Plaintiffs admitted in first complaint that Kogan developed app in 2013); Hakopian v. Mukasey , 551 F.3d 843, 846 (9th Cir. 2008) ("Allegations in a complaint are considered judicial admissions."). The app appeared on the Facebook Platform in 2014 and told users that the results of the quiz would be used for academic purposes. Id. ¶¶ 87–88. Approximately 270,000 people installed the app and consented to sharing their data, including some information about their Facebook friends, see id. ¶ 89, which at that time was permitted under Facebook's policies, subject to the friends’ privacy and application settings, see Ex. 25, Dkt. 126-26.

The December 2015 Guardian Article and Facebook's Response . In December 2015, The Guardian reported that Kogan, through his company Global Science Research ("GSR"), sold some of the information collected through the "This Is Your Digital Life" app to Cambridge Analytica, in violation of Facebook's policies. Ex. 17, Dkt. 126-18; SAC ¶¶ 5, 86–89, 98, 468. According to the article,...