On November 27, 2018, Judge Edward M. Chen of the United States District Court for the Northern District of California granted in part and denied in part a motion to dismiss a putative securities class action against Yelp, Inc. (the "Company") and several of its senior officers. Azar v. Yelp, Inc., No. 18-cv-00400 (N.D. Cal. Nov. 27, 2018). Plaintiffs—purchasers of Company stock between February 10, 2017 and May 9, 2017—alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading statements regarding the Company's expected revenues in relation to its advertising program with local businesses, leading to a drop in the Company's stock price when the Company subsequently made downward adjustments to its projections in May 2017. The Court held that while certain of the Company's statements were protected by safe harbor provisions of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), other alleged statements were actionable misrepresentations. The Court also held that plaintiffs adequately pleaded scienter and loss causation. The Court thus granted in part and denied in part defendants' motion to dismiss.
The Court first analyzed certain alleged forward-looking statements concerning the Company's expected revenue and growth for 2017 made in financial guidance published by the Company in February 2017 and related statements allegedly made by defendants on conference calls on February 9, 2017 and February 14, 2017. Plaintiffs alleged that the Company suggested that its local business advertising program had a strong retention rate and positive growth projections for 2017, despite knowing that much of its revenue growth from the previous year was from businesses that only had one-year contracts and low engagement with its advertising. The Court pointed out that while the financial guidance discussed the Company's advertising program, it contained meaningful cautionary language that notified investors that it contained forward-looking statements. Similarly, many of the statements allegedly made on the conference call accompanying the financial guidance concerned future performance and plans for future operations, and therefore were also forward-looking. Accordingly, the Court held that these statements were protected by the PSLRA safe harbor provision for forward-looking statements and were therefore inactionable. The Court similarly determined that an alleged statement made on a later conference call concerning a transition in the Company's advertising model was inactionable, finding that even though the statement was not accompanied by cautionary language, it was not misleading because it made no substantive representations about the performance of the advertising program that plaintiffs claimed was at issue, and plaintiffs did not sufficiently allege that it was made with actual knowledge with respect to its alleged falsity. As a result, the Court dismissed the allegations relating to these statements. Separately, the Court found that the alleged statement that "we've got a strong brand, we've got a great product experience for consumer and businesses" was not misleading because it was too vague to be actionable.
The Court then turned to non-forward-looking statements, including additional alleged statements from the February 9, 2017 conference call, the February 14, 2017 conference call, the Company's 2016 Form 10-K, and a March 1, 2017 conference call. Many of the alleged statements made on the first conference call made no reference at all to the Company's advertising program or the program's effects on their financial performance, and thus were inactionable. However, the Court found two alleged statements on that call were made directly in response to questions about local advertisers and their engagement. The Court determined that these alleged statements were materially misleading because they did not provide an accurate picture of how the advertising program was performing. Similarly, the Court held that defendants made actionable misstatements on the February 14, 2017 conference call when they expressed confidence in the fundamental soundness of the advertising program. The Court found that it was a material omission to tout the Company's local advertising model while omitting any mention of the issue that would likely significantly and negatively impact revenue. Regarding plaintiffs' allegation that the Company's Form 10-K contained misrepresentations, the Court determined that the filing contained accurate financials and was not misleading because it did not "affirmatively create" a misimpression of the Company's financial health. Lastly, the Court determined that general statements made on the March 1, 2017 conference call regarding the Company's client base and user numbers were not actionable and constituted non-actionable puffery, although one specific alleged statement discussing the "revenue opportunity" from increased advertising was an actionable misrepresentation because it affirmatively created an impression of a state of affairs of the Company that materially differed from the one that allegedly actually existed.
The Court then analyzed and determined that plaintiffs adequately alleged that defendants made the upheld statements with the requisite scienter. Plaintiffs pointed to statements demonstrating that defendants had plans to monitor advertiser retention rates and were aware of customer retention issues, finding that the inference that defendants made the misleading statements with "deliberate recklessness" to be at least as compelling as any opposing inference of nonfraudulent intent. The Court also considered whether stock sale allegations could raise an inference of scienter, as the Ninth Circuit has held that they cannot unless the sales were "dramatically out of line with prior trading practices." Ronconi v. Larkin, 253 F.3d 424 (9th Cir. 2001). After analyzing the alleged stock sale trends of the Company's CEO, the Court determined that his sales were sufficiently out of line with his prior trading patterns, particularly during the putative class period, to establish an inference of scienter. Further, the Court determined that scienter was also adequately alleged as to each of the individual defendants under the "core operations doctrine," finding that plaintiffs had made sufficient allegations to indicate that the Company's local advertiser program is such a "central component" of the Company's operations that defendants "can be presumed to have knowledge of the problems within the program." The Court then determined that plaintiffs had also adequately alleged loss causation, finding that they had sufficiently alleged a causal connection between defendants' alleged deceptive acts and plaintiffs' alleged injury.
Finding that plaintiffs had adequately pled a primary violation under Section 10(b), the Court denied the motion to dismiss the individual defendants' Section 20(a) control person liability claims.
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