On October 7, 2020, Judge Allison Burroughs of the District of Massachusetts granted in full a motion to dismiss a putative securities class action asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) against a cloud-based remote software services company (the “Company”) and certain of its executives. Wasson v. LogMeIn Inc., No. 18-cv-12330 (D. Mass. Oct. 7, 2020). Plaintiffs alleged defendants made materially false and misleading statements concerning the Company's integration of a newly acquired competitor. The Court granted defendants' motion to dismiss plaintiffs' amended complaint, holding that plaintiffs failed to plead any actionable material misstatements or scienter, but granted plaintiffs leave to amend.
According to the amended complaint, the Company misrepresented the success of its post-merger billing strategy. Plaintiffs alleged that the Company failed to disclose the problems it experienced in attempting to integrate legacy customers of the acquired competitor into the Company and transition them to the Company's billing approach which, unlike the competitor's approach, required an “annual subscription [that] would automatically renew for the next year,” and which was the financially stronger of the two company's approaches. According to confidential witnesses cited in the amended complaint, defendants “bungled the transition and lost customers as a result,” engaged in “hyperaggressive” and “coercive” tactics to “force legacy . . . customers” to transition to an annual billing plan, disallowed termination for convenience, were told that “customers were not happy about the switch from monthly to annual billing,” and were “warned” that such actions “would result in decreased retention rates.” According to plaintiffs, defendants continued to make allegedly fraudulent statements about the “encourag[ing] . . . early results of transitioning customers to an annual subscription,” the Company's “overall gross renewal rate remain[ing] consistent around 75%,” and failed to disclose issues and challenges related to the Company's “aggressive transitioning” of legacy customers such as increasing customer prices and the expected “significant . . . customer churn” relating to customers cancelling “ahead of their renewal dates.”
The Court first addressed plaintiffs' allegations that defendants misrepresented its 75% gross renewal rate by omitting that a material number of customers decided in advance of the renewal date that they would not renew their subscriptions, the Company's financial projections, and the Company's planned price increases for legacy customers. The Court disagreed that plaintiffs adequately pled a material misrepresentation, noting that with respect to the gross renewal rate plaintiffs failed to adequately allege the falsity of the statements and that, in fact, the alleged misstatement “explicitly refers to the Company's ‘gross renewal rate across all products' at a given time,” which was an accurate statement when made. The Court further held that defendants' alleged statements regarding the Company's financial projections were similarly not false or misleading as plaintiffs failed to allege facts that would make statements about the Company's projected 2017 GAAP revenue, EBITDA, or GAAP net income inaccurate or fraudulent. In addition, the Court found not misleading plaintiffs' allegations that defendants misled investors by suggesting price increases would take place in the future when in fact the Company “had already begun increasing prices for [legacy] customers who wanted to continue paying monthly” because plaintiffs failed to allege facts sufficient to demonstrate that the Company was in fact raising prices at that time and, furthermore, the CEO “explicitly stated that the Company would ‘continue' to address pricing changes” on a case-by-case basis. Next, the Court rejected plaintiffs' allegations that the Company's cautionary disclaimers that the “acquisition presented difficulties” and risks regarding the merger's profitability were false or misleading, holding that plaintiffs failed to allege “any facts” that such statements were false, and that the Company's “statements address precisely the types of risk that [p]laintiffs allege came to pass.” Similarly, the Court addressed, and rejected, plaintiffs' claims that defendants made misleading public statements about the “big opportunity” of the renewal base, the “greater opportunity for free cash flow” that would come from transitioning legacy customers from monthly to annual plans, the timeline of the billing transition for legacy customers, and the Company's growth and revenue figures, holding that plaintiffs failed to allege how these alleged statements made by the executives were false or misleading.
The Court then turned to statements plaintiffs alleged were misleading “regarding the Company's performance,” such as statements about the “encouraging” and impressive efforts to integrate legacy customers and that “much progress” had been made. The Court held that such statements were inactionable, commenting that such statements were “textbook examples of vague puffery” and that it would be “difficult to imagine that an investor would act” on such opinions. The Court also held that statements representing that the Company had “strong deferred revenue number[s] in Q4 ” were similarly non-actionable statements of puffery and that, in any event, plaintiffs failed to allege that the deferred revenue reported was inaccurate or fraudulent. The Court found that other statements were forward-looking and non-actionable under the PSLRA's safe harbor and that plaintiffs failed to sufficiently show that defendants made the alleged misstatements with knowledge that they were false.
Having addressed and found that 43 of the 45 paragraphs alleging misstatements were inactionable, the Court turned to the last two remaining alleged misstatements made on September 13, 2017 and May 15, 2018—that the Company was “just taking the willing conversions right now” with the intention to raise prices should legacy customers not switch to annual plans, and that the Company had not yet “insisted” that customers switch over to annual plans. After initially noting that it found these allegations to be a “close call” and presented a “difficult question,” the Court ultimately found these alleged misstatements to be inactionable as well. It held that while plaintiffs' allegations indicate that the Company “was employing aggressive techniques to transition customers,” the “facts in the complaint do not support” the assertion that the statements at issue were necessarily false. In fact, the confidential witnesses “stop short of saying that the Company was transitioning customers against their will” and that their statements indicate that although the Company was “creating frustrating hoops for customers,” this tactic “is not the same as transitioning unwilling customers.”
Although the Court found that none of the alleged misstatements were actionable, it considered scienter with respect to the two “close call” alleged misstatements as an alternate ground for dismissal—finding that plaintiffs “failed to plead sufficient facts to support the conclusion that the Company acted with the requisite state of mind.” Plaintiffs alleged that defendants “knew or recklessly disregarded” that the Company was “transitioning unwilling customers” given their “positions . . . [in] corporate management.” The Court was unconvinced, observing that even if the statements were taken as true, plaintiffs' reliance on the confidential witnesses fail to show that defendants “acted recklessly” as none of the confidential witnesses are alleged to have ever even interacted with the individual defendants and the statements they provide as to the individual defendants' knowledge were conclusory and failed to give rise to a strong inference of scienter. The Court found that the amended complaint fails to allege “that the [individual defendants] directed the Company's salespeople to force customers to transition” or that they were told that such measures were being taken at the Company. The Court concluded that “even if customers were being forced to transition against their will, [p]laintiffs have failed to plead facts sufficient to give rise a strong inference of scienter on the part of the” individual defendants and agreed with defendants that “the far more compelling inference is that [the Company] anticipated at the time of the acquisition that renewals presented one of many integration risks (which it disclosed).”
Having dismissed the Section 10(b) claim, the Court similarly dismissed plaintiffs' control-person liability claims under Section 20(a) finding no predicate violations of the Exchange Act under which such claims could be established. The Court granted plaintiffs leave to amend their complaint with respect to only the two allegations concerning whether customers were forcefully transitioned into an annual payment program.
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