On September 25, 2018, Judge Haywood S. Gilliam, Jr. of the United States District Court for the Northern District of California dismissed a putative securities class action against Netflix, Inc. (the “Company”), its CEO and CFO. Ziolkowski v. Netflix, Inc., et al., No. 17-cv-01070 (N.D. Cal Sept. 25, 2018). Plaintiffs—purchasers of the Company’s common stock during the proposed class period—claimed that the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading statements and omissions in order to minimize the effects of a recently enacted pricing increase on subscription figures. In dismissing the complaint without prejudice, the Court held that plaintiffs failed to adequately allege any untrue statement of material fact and also failed to adequately allege scienter.

The Court first considered plaintiffs’ allegations that defendants made materially false or misleading statements and omissions concerning the effect of price increases on the Company’s subscription figures. Plaintiffs pointed to several allegedly false and misleading statements, including a shareholder letter that stated there was minimal impact on membership growth from the price change, statements made on an earnings call describing the price change’s impact as “pretty nominal,” “background noise,” and having “no noticeable effect in the business,” and the Company’s Q2 quarterly report that did not include the price increase as a risk factor. The Court disagreed with plaintiffs, finding that “the allegations in the complaint do not establish that [d]efendants’ statements were actionable false statements.” Specifically, the Court found that the statements at issue were opinions that were not objectively verifiable and that plaintiffs failed to adequately allege that defendants “did not hold the belief [they] professed and that the belief is objectively untrue.” The Court further noted that although defendants later admitted the price change had a substantial impact on growth, this was merely hindsight analysis, not evidence of a material misstatement.

The Court similarly rejected plaintiffs’ argument that the Company’s outside data aggregator would eventually, through discovery, provide the particularity necessary to demonstrate a false misrepresentation. The Court noted that the burden is on plaintiff to present facts plausibly showing that the price increase’s impact on subscription figures was “not minimal, not nominal, not background noise, and made a noticeable effect in the business, and that the [d]efendants knew as much when they made the challenged statements.” The Court found that plaintiffs failed to meet that burden here and that it was not enough for plaintiffs to allege that the data aggregator’s “purported omniscience will provide the necessary facts later.” The Court also rejected plaintiff’s argument that the omission of any disclosure from the Company’s quarterly report was material, holding that any failure on the part of defendants to inform investors of the “basic economic principle” that higher prices can lower sales cannot constitute a material omission because “investors need not be informed of the obvious.”

The Court then turned to the element of scienter. After conducting a “holistic review” of the complaint, the Court determined that none of the allegations plausibly suggest that defendants intentionally misled investors about the price increase’s impact on subscriber figures. For example, plaintiffs contended that defendants’ Q3 statements were admissions that they intentionally misled investors with their post-Q2 statements, but the Court found defendants’ alternative explanation—that the Q3 statements were based on additional information—far more compelling. The Court noted that while falsity and scienter are distinct inquiries, plaintiffs’ ability to show intentional misrepresentation is substantially hindered by their inability to plead the existence of any material misrepresentation in the first instance.

Despite the complaint’s deficiencies, however, the Court granted plaintiffs leave to amend, noting that the Court could not definitively say at this stage that plaintiffs could not state their claims with sufficient specificity. The Court also instructed that any amended complaint should plead facts that plaintiffs contend establish timeliness given that the Court dismissed the operative complaint without addressing defendants’ argument that plaintiffs’ claims are time-barred.

Ziolkowski v. Netflix, Inc., et al.