Jiajia Luo v. Sogou, Inc.

• Decision Date: 08 June 2020
• Docket Number: 19-cv-230 (LJL)
• Parties: JIAJIA LUO, individually and on behalf of all others similarly situated, et al., Plaintiffs, v. SOGOU, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

465 F.Supp.3d 393

JIAJIA LUO, individually and on behalf of all others similarly situated, et al., Plaintiffs,

v.SOGOU, INC., et al., Defendants.

19-cv-230 (LJL)

United States District Court, S.D. New York.

Signed June 8, 2020

Cara Joy David, Joseph Alexander Hood, II, Jeremy Alan Lieberman, Pomerantz LLP, New York, NY, for Plaintiffs.

Nicholas Cutaia, Goulston & Storrs PC, New York, NY, Joshua Looney, Richard J. Rosensweig, Goulston & Storrs, P.C., Boston, MA, for Defendants Sogou Inc., Sohu, Inc.

Charlene S. Shimada, Frank Kennamer, Morgan, Lewis & Bockius LLP, San Francisco, CA, Kenneth Ian Schacter, Morgan Lewis & Bockius, LLP, New York, NY, for Defendants J. P. Morgan Securities LLC, Credit Suisse (USA) LLC, Goldman Sachs (ASIA) L.L.C.

Nicholas Cutaia, Goulston & Storrs PC, New York, NY, for Defendants Sogou Inc.com, Sohu.com Inc.

OPINION & ORDER

LEWIS J. LIMAN, United States District Judge:

Defendant Sogou Inc. ("Sogou") is a China-based technology company. (Dkt. No. 60 ¶ 2.) It is a subsidiary of defendant Sohu.com, Inc. ("Sohu"). (Id. ) On November 9, 2017, Sogou completed its initial public offering ("IPO") of 45,000,000 American Depositary Shares ("ADS") at a price of $13 per share. (Id. ¶ 7.) In connection with the IPO, Sogou filed a Registration Statement on Form F-1 (the "Registration Statement") and a Prospectus on Form 424B4 ("Prospectus" and, together with the Registration Statement, the "Offering Documents") with the Securities and Exchange Commission ("SEC"). (Id. ¶¶ 6, 7.) By October 30, 2018, approximately one year later, the price of Sogou's ADS had fallen to $5.50. (Id. ¶ 95.)

Lead Plaintiffs Lizhen Zhang, Juean Xu, Yuehua Ding, Maggie Xu, Mark S. Frater, and Ketan Patel ("Plaintiffs") purchased ADS pursuant and/or traceable to the Offering Documents. (Id. ¶¶ 1, 18.) Plaintiffs filed their first Complaint with this Court on January 9, 2019, alleging that the Offering Documents contained material misstatements and omissions in violation of Section 11 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77k (Count I), and Section 15 of the Securities Act (Count II). (Dkt. No. 1.) The most recent and operative complaint, the Third Amended Complaint ("TAC"), names seventeen defendants ("Defendants"). (Dkt. No. 60.) Defendants are: Sogou; Sohu; Tencent Holdings Limited (alleged to be a controlling shareholder of Sogou); Sogou's Chief Executive Officer (Xiaochuan Wang); Sogou's Chief Financial Officer (James (Xiufeng) Deng); the Chairman of Sogou's Board (Charles (Chaoyang) Zhang); three of Sogou's non-management directors (Yuxin Ren, Joanna (Yanfeng) Lu, and Chi Ping Martin Lau); three nominees for director of Sogou (Bin Gao, Joseph Chen, and Janice Lee); the authorized United States Representative of Sogou (Donald J. Puglisi); and underwriters of the IPO as financial advisors who allegedly assisted in preparing and disseminating the Offering Documents (J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC, Goldman Sachs (Asia) L.L.C., and China International Capital Corporation Hong Kong Securities Ltd.) (the "Underwriters"). (Id. )

Defendants Sogou, Sohu, and the Underwriters now move to dismiss the TAC pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6), arguing that the TAC fails to state a claim for relief. (Dkt. Nos. 65, 68, 70.) For the reasons that follow, the motions are granted.

BACKGROUND

The following facts are taken from the TAC, documents referenced therein, and/or documents of which the court may take judicial notice, including the Offering Documents. See Gray v. Wesco Aircraft Holdings, Inc. , 454 F.Supp.3d 366, 382, (S.D.N.Y. Apr. 16, 2020) ("[R]elying on Federal Rule of Civil Procedure Rule 10(c), the Second Circuit has long held that a complaint ‘is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference,’ and that a court may consider documents incorporated in a complaint by reference on a motion pursuant to Federal Rule of Civil Procedure 12(b)(6) without converting it to a motion for summary judgment pursuant to Federal Rule of Civil Procedure 56.") (quoting Cortec Indus., Inc. v. Sum Holdings , 949 F.2d 42, 47 (2d Cir. 1991) ); id. ("[I]n federal securities fraud cases, courts can consider ‘public disclosure documents required by law to be filed, and actually filed, with the SEC.’ ") (quoting Kramer v. Time Warner Inc. , 937 F.2d 767, 774 (2d Cir. 1991) ).

A. Sogou's Business and IPO

Sogou is a Beijing-based Internet search company that Sohu incorporated in December 2005. (Dkt. No. 60 ¶ 34.) By mobile queries, Sogou has the second largest search engine in China. (Id. ) Sogou characterizes itself as an innovator in China's Internet industry. (Id. ¶¶ 36, 67.) Its search engine, Sogou Search, is powered by artificial intelligence ("AI") and offers a unique cross-language search functionality. (Id. ¶ 36.) Sogou generates revenue primarily from its search and search-related advertising services. (Dkt. No. 67–1 at 2.) Sogou's other businesses, which comprise the rest of its revenue, consist of Internet value-added services (primarily the operation of Web games and mobile games) and other products and services, including smart hardware products. (Id. at 73, 115, F-17.)

On October 13, 2017, Sogou filed the Registration Statement with the SEC. (Dkt. No. 60 ¶ 37.) The SEC declared the Registration Statement effective on November 8, 2017. (Id. ) On November 9, 2017, Sogou filed the Prospectus with the SEC. (Id. ¶ 38.) The following day, Sogou completed its IPO of 45,000,000 ADS at a price of $13 per share. (Id. ¶ 39.) Within the next several weeks, underwriters of the IPO exercised their over-allotment option to purchase additional ADS. (Id. ¶ 40.) In all, and after deducting underwriting discounts and commissions, the IPO generated $625,450,000 in proceeds to Sogou from the sale of approximately 5,643,856 ADS. (Id. ¶ 41.)

B. Regulation of the Internet in China

As an Internet search company in China, Sogou was and is subject to heavy regulation. For example, the Advertising Law of the People's Republic of China provides that advertisements may not include material that People's Republic of China ("PRC") laws and regulations otherwise prohibit. (Id. ¶ 44.) Specifically, Article 9 of that law states:

An advertisement shall be prohibited from: (1) using, or using in a disguised form, the national flag, national anthem, national emblem, military flag, military song, or military emblem of the People's Republic of China; (2) using, or using in a disguised form, the name or image of any state authority or its staff member; (3) using ‘national,’ ‘highest,’ ‘best,’ or similar comparative words; (4) damaging the dignity or interest of the state or divulging any state secret; (5) disturbing social stability or damaging the public interest; (6) damaging personal or property safety or divulging individual privacy; (7) disturbing the public order or departing from a good social climate; (8) containing any obscene, pornographic, gambling, superstitious, horrible, or violent content; (9) containing any ethnically, racially, religiously, or sexually discriminatory content; (10) impeding the protection of environment, natural resources, or cultural heritages; or (11) falling under any other circumstances as set out by any law or administrative regulation.

(Id. ) Further, Article 47 of the Cybersecurity Law of the PRC requires network operators such as Sogou to:

[s]trengthen management of information published by users, and where they discover information of which the publication or dissemination is prohibited by law and regulations, they shall immediately stop dissemination of that information, take measures such as deleting it, prevent the information from spreading, save relevant records, and report to the relevant departments in charge.

(Id. ¶ 45.) There are other regulations applicable to entities that provide information to Internet users. (See id. ¶ 51; Dkt. No. 67–1 at 125–35.) For instance, since December 2013, the Administrative Measures for Content Self-Review by Internet Culture Business Entities have required Sogou "to review the content of products and services to be provided prior to providing such content and services to the public." (Dkt. No. 60 ¶ 49 (quoting Dkt. No. 67–1 at 132).) Sogou is also subject to the Measures for the Administration of Internet Information Services (the "ICP Measures"). (Id. ¶ 47 (quoting Dkt. No. 67–1 at 125).) Under the ICP Measures, entities that provide information to Internet users must obtain an operating license from the Ministry of Industry and Information Technology ("MIIT") or its local branch. (Id. (quoting Dkt. No. 67–1 at 125).) Licensed entities are required to police their Internet platforms and remove certain prohibited content. (Id. (quoting Dkt. No. 67–1 at 126).) Further, under regulations promulgated by the MIIT, Sogou is subject to liability ("including the imposition of fines or even the shutting down of the Internet platforms") for unlawful actions taken by users of Sogou products. (Id. ¶ 51 (quoting Dkt. No. 67–1 at 33).)

The PRC's Ministry of Public Security has authority to make any local Internet service provider block any website maintained outside the PRC at its sole discretion. (Id. (quoting Dkt. No. 67–1 at 33).) In the past, the PRC government has stopped distribution of information over the Internet that it believed to violate PRC laws, including content that was obscene, incited violence, endangered national security, was contrary to the national interest, or was defamatory. (Id. (quoting Dkt. No. 67–1 at 33).)

C. The Qiu Shaoyun Investigation

On April 27, 2018 (over five months after the IPO), the PRC enacted Article 22 of the Law of the PRC on the Protection of Heroes and Martyrs. (Dkt. No. 67–3.) That law makes it "forbidden to distort, smear, desecrate, or deny the deeds and spirit of heroes and martyrs" and provides that "[t]he names and...