In Re Netflix, Inc., Securities Litigation

Filing 102

Order by Hon. Samuel Conti granting 91 Motion to Dismiss(sclc2, COURT STAFF) (Filed on 2/13/2013)

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1 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE NORTHERN DISTRICT OF CALIFORNIA 8 9 United States District Court For the Northern District of California 10 11 ) Case No. 12-00225 SC ) In re NETFLIX, INC., SECURITIES ) ORDER GRANTING MOTION TO LITIGATION ) DISMISS ) 12 13 I. INTRODUCTION Plaintiffs Arkansas Teacher Retirement System and State-Boston 14 15 Retirement System ("Plaintiffs") bring this putative securities 16 class action against Netflix, Inc. ("Netflix"); Netflix Co-Founder, 17 Chairman of the Board, and CEO Reed Hastings ("Hastings"); current 18 Netflix CFO David Wells ("Wells"); and Barry McCarthy ("McCarthy"), 19 Netflix's CFO until December 10, 2010 (collectively "Defendants"). 20 Now before the Court is Defendants' Motion to Dismiss Plaintiffs' 21 Consolidated Class Action Complaint ("CCAC"). 22 The motion is fully briefed, 23 and is suitable for determination without oral argument, Civ. L.R. 24 7-1(b). 25 Defendants' Motion to Dismiss and DISMISSES the CCAC with leave to 26 amend. 27 /// 28 /// ECF No. 91 ("MTD"). ECF Nos. 94 ("Opp'n"), 97 ("Reply"), For the reasons set forth below, the Court GRANTS 1 II. BACKGROUND 2 Netflix is a public corporation that purports to be the 3 leading Internet subscription service for viewing movies and 4 television shows (collectively "movies"). 5 Netflix currently allows consumers to watch movies either by 6 streaming them over the Internet directly to their televisions, 7 computers, or mobile devices, or by receiving DVDs sent to their 8 homes. ECF No. 89 (CCAC) ¶ 20. Id. Netflix provided no streaming services -- only DVDs by mail -- 9 United States District Court For the Northern District of California 10 from 1999 to 2007. Id. ¶¶ 38-49. In 2007 Netflix began to allow 11 its subscribers to stream movies via the "hybrid plan," the only 12 plan it offered at the time, which allowed subscribers both to 13 stream movies and to receive DVDs. Id. In November 2010, as part of its plan to develop its streaming 14 15 services further, Netflix decided to offer its subscribers a 16 standalone streaming plan in addition to the hybrid plan. 17 76. 18 only plan cost $7.99 per month. 19 change, in October 2010, Defendants explained the "virtuous cycle" 20 that would drive Netflix's transition to a streaming-focused 21 company: "[A]s Netflix gained subscribers, it could afford to 22 license more streaming content, which would increase its appeal, 23 and therefore, allow [Netflix] to acquire more subscribers, and the 24 cycle would thus continue." 25 because Netflix's library of streaming content, unlike Netflix's 26 DVD library, demanded continuous licensing negotiations and would 27 require Netflix to continually increase its subscriber base in 28 order to acquire and maintain streaming content. Id. ¶ The hybrid plan cost $9.99 per month, and the new streamingSee id. Id. ¶ 65. 2 Shortly before this The cycle was important See id. ¶¶ 50-65. 1 Netflix planned to offset some of the increasing content costs by 2 decreasing DVD-related expenditures. See id. From June 2010 to July 2011, Netflix's subscriber count 3 4 steadily increased each quarter. Id. ¶ 91. Its stock price 5 followed suit, rising from a closing price of $153.15 on October 6 20, 2010 to a high of $298.73 on July 13, 2011. Id. ¶¶ 70, 73-74. On July 12, 2011, however, Netflix announced that effective 7 8 September 1, 2011 for existing subscribers and immediately for new 9 ones, it would no longer offer its hybrid plan. Id. ¶ 351. United States District Court For the Northern District of California 10 Instead, it would offer separate DVD-only and streaming-only plans, 11 both for $7.99 per month. 12 previously had access to both DVD and streaming services for $9.99 13 per month under the hybrid plan would now have to pay $15.98 to 14 subscribe to the new, separate plans. 15 Netflix's subscribers were unhappy, and Netflix experienced a net 16 loss in customers for the first time in years. Id. ¶¶ 351, 407. Subscribers who See id. ¶¶ 350-51. Id. ¶¶ 377-78. Netflix's fortunes fell further in September 2011. 17 First, on 18 September 2, the cable channel Starz announced that it would not 19 renew its streaming contract with Netflix effective February 28, 20 2012. 21 Id. ¶ 372. Second, on September 15, Netflix reported that it expected to 22 lose one million subscribers during the third quarter of 2011 -- 23 the first quarter in years that would close with a net loss in 24 subscribers. 25 by $39.46 to close at $169.25. 26 that "the investing public understood that the subscriber drop-off 27 was due, in large part, to the price increases in July 2011." 28 ¶ 378. After the announcement, Netflix's stock price dropped Id. ¶¶ 376-79. Plaintiffs state Id. Nevertheless, Netflix stood behind its decision as "the 3 1 right choice." Id. ¶ 380. 2 Third, on September 19, 2011, Netflix announced that it 3 planned to spin off its DVD services into a new subsidiary called 4 "Qwikster." 5 streaming services via its own subscription plans and website, 6 separately from the Qwikster subsidiary. 7 again recoiled from this change, and Netflix lost still more 8 subscribers. 9 3, at 15.1 Id. ¶ 152. Netflix planned to continue to provide Id. Netflix's customers ECF No. 93 (Request for Judicial Notice) ("RJN") Ex. Netflix soon abandoned the Qwikster idea, but continued United States District Court For the Northern District of California 10 its planned separation of the DVD-only and streaming-only plans, 11 thereby doing away with the hybrid plan altogether. 12 149, 154. CCAC ¶¶ 148, Shortly thereafter, on October 24, 2011 in documents related 13 14 to the fourth quarter of 2011 ("4Q11"), Netflix began to report 15 segmented financial information for the now-entirely-separate DVD- 16 only and streaming-only plans -- information that had previously 17 been unavailable. 18 financial results under the single "Domestic" segment, which 19 included customers on the hybrid plan and those on the newer 20 streaming-only plan, but did not provide segmented financial 21 information for the then-intertwined DVD and streaming services. Id. ¶ 225. Before 4Q11, Netflix reported its 22 23 24 25 26 27 28 When ruling on a motion to dismiss, a court may consider documents whose contents are incorporated by reference in a complaint or upon which a complaint necessarily relies when authenticity is not contested, and matters subject to judicial notice. Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1061 (9th Cir. 2008) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)). The Court takes judicial notice of the exhibits attached to the RJN because Plaintiffs refer to the documents included in those exhibits, thereby incorporating them by reference, and Plaintiffs did not object to the RJN. 1 4 1 2 See id. ¶¶ 149, 151, 407; RJN Ex. 4 at 71. In its 4Q11 reports, Netflix announced that its "contribution 3 margin for domestic streaming [would] be low in 4Q11 at around 8% 4 . . . due to [its] increasing content spend," whereas Netflix's DVD 5 business had a contribution profit of 50-52%. 6 Netflix continued to stand by its decision to offer the DVD and 7 streaming subscription plans as separate services with separate 8 prices, but admitted that it had made the change too quickly, 9 compounding the problem "with [a] lack of explanation about the Id. ¶¶ 382-85. United States District Court For the Northern District of California 10 rising cost of the expansion of streaming content, and steady DVD 11 costs." 12 members canceled their subscriptions in response to the pricing 13 changes than expected, thereby making Netflix's 4Q11 profits and 14 revenues lower than predicted, though Netflix would remain 15 profitable overall. 16 stock price fell $41.47 per share to close at $77.37 per share on 17 October 25, 2011. 18 Id. ¶ 389. Netflix stated further that more long-term Id. ¶ 390. After this announcement, Netflix's Id. Plaintiffs, Netflix shareholders, now sue Defendants for 19 alleged violations of the federal securities laws. 20 are all based on the theory that, between October 20, 2010 and 21 October 24, 2011, inclusive (the "Class Period"), Defendants misled 22 investors about the prospects of the new streaming-focused model, 23 thereby artificially inflating Netflix's stock price and leading to 24 a stock drop of almost 67 percent after the alleged falsity of 25 those statements was revealed. 26 Their claims See id. Plaintiffs allege that all Defendants violated Section 10(b) 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and 28 Securities Exchange Commission ("SEC") Rule 10b-5; that the 5 1 individual Defendants violated Section 20(a) of the Act; and that 2 Hastings violated Section 20A of the Act. Id. ¶¶ 418-23. 3 4 III. LEGAL STANDARD 5 A. Motion to Dismiss 6 A motion to dismiss under Federal Rule of Civil Procedure Block, 250 F.3d 729, 732 (9th Cir. 2001). 9 on the lack of a cognizable legal theory or the absence of 10 United States District Court 12(b)(6) "tests the legal sufficiency of a claim." 8 For the Northern District of California 7 Navarro v. sufficient facts alleged under a cognizable legal theory." 11 Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 12 1988). 13 should assume their veracity and then determine whether they 14 plausibly give rise to an entitlement to relief." 15 Iqbal, 556 U.S. 662, 679 (2009). 16 must accept as true all of the allegations contained in a complaint 17 is inapplicable to legal conclusions. 18 elements of a cause of action, supported by mere conclusory 19 statements, do not suffice." 20 Twombly, 550 U.S. 544, 555 (2007)). 21 "limited to the complaint, materials incorporated into the 22 complaint by reference, and matters of which the court may take 23 judicial notice." 24 U.S. at 322). 25 B. 26 Section 10(b) of the Exchange Act makes it unlawful "[t]o use 27 or employ, in connection with the purchase or sale of any security 28 registered on a national securities exchange . . . any manipulative "Dismissal can be based "When there are well-pleaded factual allegations, a court Ashcroft v. However, "the tenet that a court Threadbare recitals of the Id. (citing Bell Atl. Corp. v. A court's review is generally Metzler, 540 F.3d at 1061 (citing Tellabs, 551 Section 10(b) 6 1 or deceptive device or contrivance in contravention of such rules 2 and regulations as the [Securities and Exchange] Commission may 3 prescribe . . . ." 4 by the Commission is Rule 10b–5, which states that "[i]t shall be 5 unlawful for any person . . . [t]o engage in any act, practice, or 6 course of business which operates or would operate as a fraud or 7 deceit upon any person, in connection with the purchase or sale of 8 any security." 9 five elements to establish a violation of Rule 10b–5: "(1) a 15 U.S.C. § 78j(b). One such rule prescribed 17 C.F.R. § 240.10b–5(c). Plaintiffs must plead United States District Court For the Northern District of California 10 material misrepresentation or omission of fact, (2) scienter, (3) a 11 connection with the purchase or sale of a security, (4) transaction 12 and loss causation, and (5) economic loss." 13 F.3d 1006, 1014 (9th Cir. 2005). 14 In re Daou Sys., 411 Plaintiffs must also meet the heightened pleading standards of 15 Federal Rule of Civil Procedure 9(b) and the Private Securities 16 Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4. 17 PSLRA requires plaintiffs to "specify each statement alleged to 18 have been misleading [and] the reason or reasons why the statement 19 is misleading." 20 complaint must "state with particularity facts giving rise to a 21 strong inference that the defendant acted with the required state 22 of mind." 23 establishing securities fraud is the knowing, intentional, or 24 deliberately reckless disclosure of false or misleading statements. 25 See Daou, 411 F.3d at 1014–15. 26 scienter naturally results in a stricter standard for pleading 27 falsity, because falsity and scienter in private securities fraud 28 cases are generally strongly inferred from the same set of facts, 15 U.S.C. § 78u-4(b)(1). Id. § 78u-4(b)(2). The Additionally, the The "required state of mind" for "The stricter standard for pleading 7 1 and the two requirements may be combined into a unitary inquiry 2 under the PSLRA." Id. at 1015 (internal quotation marks omitted). 3 4 IV. DISCUSSION 5 A. Plaintiffs' Section 10(b) Claim 6 Plaintiffs allege that Defendants made materially false and 7 misleading statements about (1) Netflix's accounting practices, (2) 8 the virtuous cycle, (3) streaming's profitability relative to that 9 of the DVD business, (4) Netflix's statements about its price United States District Court For the Northern District of California 10 changes, and (5) Defendants' statements to the SEC. 11 argue that Plaintiffs have failed to adequately plead falsity or 12 scienter. 13 that Defendants' statements were materially false or misleading, 14 and accordingly need not address the issue of scienter. 15 Defendants The Court agrees that Plaintiffs have failed to show 1. Defendants' Alleged Accounting Fraud 16 Plaintiffs allege that Defendants materially misstated 17 Netflix's financial statements in violation of Generally Accepted 18 Accounting Principles ("GAAP") and SEC disclosure rules. 19 e.g., CCAC ¶¶ 41-56, 283, 331, 360. 20 were not required to implement segment reporting until 4Q11, when 21 they began to do so. 22 a. See, Defendants argue that they MTD at 8. GAAP 23 Plaintiffs state that the GAAP rule governing segment 24 reporting, Accounting Standards Codification § 280 ("ASC 280"), 25 requires a business component to be considered a separate operating 26 segment for financial reporting purposes if: 27 28 "(a) it engages in business activities from which it may generate revenues and incur expenses . . . (b) its operating results are regularly reviewed by the Company's upper 8 management . . . in order to assess the segment's performance and make decisions about resources to be allocated to the segment . . . and (c) its discrete financial information is available." 1 2 3 4 5 Id. ¶ 191. Plaintiffs allege that Defendants violate GAAP by failing to 6 provide segment reporting before 4Q11. See id. ¶¶ 193-221. This 7 allegation is not plausible because there is no indication that 8 Netflix had discrete financial information for its streaming and 9 DVD components until 4Q11. Plaintiffs claim that streaming United States District Court For the Northern District of California 10 generated "its own revenues and incurred its own expenses separate 11 and apart from those of the DVD business," but in doing so 12 Plaintiffs massage the fact that the "DVD business" at that time 13 was financially inseparable from the streaming component of the 14 hybrid plan -- therefore this information was not "discrete." 15 CCAC ¶¶ 194-195. 16 prospects of streaming generally, or the performance of the 17 streaming-only subscription plan, but this is not the same as 18 having information about streaming as a discrete component of 19 Netflix's overall service offerings. 20 See Defendants may have had information about the Confronting this fact, Plaintiffs "formulate approximations" 21 of their own devising of how the DVD and streaming components of 22 the hybrid plan could have been financially separated, which 23 Plaintiffs say "strongly suggest[s]" that discrete financial 24 information was available to satisfy ASC 280. 25 Plaintiffs' allocation is premised on their estimation that 26 Netflix's streaming revenue must have been $7.99, because that was 27 the price of the streaming-only plan after Netflix split its plans. 28 See id. ¶ 211-212 & nn. 6, 7. See id. ¶¶ 212-14. This kind of hypothesized allocation 9 1 does not plausibly show that Defendants actually had discrete 2 financial information available to them, because Plaintiffs do not 3 show that such an allocation was required or even possible given 4 the hybrid plan's unity of services and Netflix's statement that 5 until 4Q11, "revenues were generated and marketing expenses were 6 incurred in connection with the subscription offerings as a whole." 7 RJN Ex. 4 at 71. 8 9 Plaintiffs' argument that Netflix should have reported segments in its domestic financial reports because it did so abroad United States District Court For the Northern District of California 10 is also unavailing. Plaintiffs' pleadings do not explain what 11 kinds of plans Netflix offered abroad, which is a critical fact in 12 determining whether Netflix's domestic accounting practices were 13 inappropriate relative to what it did elsewhere. 14 agree that Netflix erred in not reporting its United States and 15 international financial data in the same way without evidence that 16 the facts were the same in the United States and abroad. The Court cannot 17 The Court finds that Plaintiffs have not pled any false or 18 misleading statements related to Defendants' accounting under GAAP. 19 20 b. SEC Regulation S-K Item 303 Plaintiffs also argue that Netflix violated SEC Regulation S-K 21 Item 303, which requires companies to "describe any other 22 significant components of revenues or expenses that . . . should be 23 described in order to understand the registrant's results of 24 operations." 25 (ii)). 26 uncertainties that have had or that the registrant reasonably 27 expects will have a material favorable or unfavorable impact on net 28 sales or revenues or income from continuing operations." CCAC ¶ 222 (citing 17 C.F.R. § 229.303(a)(3)(i)- These disclosures include "any known trends or 10 Id. Plaintiffs' allegations on this point are not plausible. 1 "It 2 is well established that violation of an exchange rule will not 3 support a [Section 10(b) or Rule 10b–5] claim." 4 Holdings, Inc. Secs. Litig., 11 F.3d 865, 870 (9th Cir. 1993). 5 any event, Plaintiffs' pleadings do not actually show that 6 Defendants withheld information about a known trend or uncertainty 7 in the streaming market, since Defendants repeatedly stated that 8 success in the streaming market depended on multiple factors, 9 especially Netflix's ability to keep its subscriber base large and In re VeriFone In United States District Court For the Northern District of California 10 happy. 11 Plaintiffs' allegations regarding Item 303 are therefore 12 insufficient to state a claim for a violation of Section 10(b) or 13 Rule 10b-5. 14 See, e.g., RJN Ex 1 at 16; Ex. 5 at 27; Ex. 16 at 24. 2. The Virtuous Cycle According to Defendant Hastings: "[By way of the virtuous 15 16 cycle, Netflix would] acquire more streaming content, which helps 17 grow [Netflix's] subscriber base and lessen[s] [Netflix's] DVD-by- 18 mail expense, which in turn provides [Netflix] with greater 19 financial resources to acquire more streaming content, improve the 20 user interface, and continue to grow the subscriber base." 21 64. 22 23 24 25 26 27 28 CCAC ¶ In December 2010, defendants Hastings and McCarthy stated further: [Defendant Hastings:] [W]e are on that virtuous cycle of more subscribers . . . . It means that we can write bigger checks and get more content, and that, in turn, attracts more subscribers. And we are going round and round that loop as we go . . . . [Defendant McCarthy]: And so to be explicitly clear, the benefit of paying less on DVD is not higher profit margins. In the alternative, it creates an opportunity for 11 us to re-task that money with our studio partners in the licensing of streamed content, which accelerates the virtuous cycles that we had already spoke about. 1 2 3 4 Id. ¶¶ 293-94. On other occasions, Netflix made similar 5 statements affirming its reliance on the virtuous cycle to drive 6 its business growth, so long as Netflix's subscriber base continued 7 to grow and decreases in DVD-related expenditures allowed Netflix 8 to offset some of the increases in streaming-related costs. 9 e.g., id. at ¶¶ 293-94, 303-05, 325-26. See, Indeed, the virtuous cycle United States District Court For the Northern District of California 10 seemed to work as Netflix had planned until, for the first time in 11 years, Netflix posted a loss in subscribers after its announcement 12 that it would increase prices. See id. ¶¶ 163, 377-78. 13 Plaintiffs allege that Defendants touted Netflix's turn toward 14 a streaming focus as a positive development, even though Defendants 15 allegedly knew that shifting to a streaming-focused model would be 16 unprofitable and unsustainable, thereby rendering Defendants' 17 explanations of and statements about the virtuous cycle false or 18 misleading. 19 Plaintiffs' allegations do not prove that any statement about the 20 virtuous cycle was false or misleading. 21 See, e.g., id. ¶¶ 277, 279. The Court agrees with Defendants. Defendants argue that See MTD at 17. The statements that 22 Plaintiffs allege to have been false or misleading appear to be 23 accurate descriptions of a business model that worked exactly as 24 Netflix said it would, until Netflix began to lose subscribers 25 after announcing its price increases and DVD-business spinoff. 26 CCAC ¶ 377-78. 27 Defendants made public statements about the virtuous cycle, any of 28 the Defendants knew that the virtuous cycle was unsustainable but See Plaintiffs do not show, for example, that when 12 1 pursued it as a strategy anyway; that any of Defendants' other 2 actions negatively impacted the virtuous cycle's operation; that 3 Defendants misrepresented the strength of the virtuous cycle at any 4 point; or that any of these statements did anything but confirm 5 Netflix's reliance on a model that worked as Defendants described 6 and failed due to circumstances Netflix had warned investors about 7 in earlier disclosures. 8 warned its investors of the virtuous cycle's reliance on subscriber 9 growth: "We must continually add new subscribers . . . If too many For example, on February 18, 2011, Netflix United States District Court For the Northern District of California 10 of our subscribers cancel our service, or if we are unable to 11 attract new subscribers in numbers sufficient to grow our business, 12 our operating results will be adversely affected." 13 This statement and others like it showed that Netflix warned 14 investors about the virtuous cycle's reliance on subscriber growth. RJN Ex. 5 at 4. Accordingly, the Court finds that Plaintiffs have failed to 15 16 plead that any of Defendants' statements about the virtuous cycle 17 were materially false or misleading.2 18 3. Profitability Plaintiffs also allege that Defendants' statements about the 19 20 prospects of the streaming business were materially false or 21 misleading because Defendants hid facts about streaming's 22 disparately low profitability relative to Netflix's DVD component, 23 and because Defendants misrepresented the prospects of streaming 24 for the future of Netflix's business. Defendants made several statements in SEC filings and 25 26 27 28 2 Defendants also argue that their statements were non-actionable statements of optimism or forward-looking statements. Since the Court finds the challenged statements are not false, it need not and does not address this argument. 13 1 conference calls indicating that Netflix would shift its business 2 focus to streaming. 3 example, Netflix stated in a press release on October 20, 2010 that 4 it had become "by every measure . . . primarily a streaming company 5 that also offers DVD by mail." 6 earnings call on that same day, defendant Hastings said that 7 "[Netflix's] evolution to a streaming company has just been 8 phenomenal," based on year-over-year subscriber growth of 52 9 percent and rising, more content, more device partnerships, and United States District Court For the Northern District of California 10 11 See, e.g., CCAC ¶¶ 62, 267, 277, 279. Netflix's entry into Canada. Id. ¶ 62. For Further, during an Id. ¶ 66. Hastings also told investors that increasing costs associated 12 with acquiring streaming content would be offset by the declining 13 costs of the DVD business (e.g., postage for DVDs), and that 14 "[Netflix] would like to keep [the long-term margin structure] 15 between 30% and 35% gross margin." 16 this principle, stating that the target margins could be sustained 17 by new content deals replacing postage. 18 characterize these statements as being part of a discussion about 19 "relative profitability" of DVD and streaming segments. 20 278-79. 21 to speculate about comparative long-term margins without more 22 knowledge of future market competitiveness. 23 Id. ¶ 278. McCarthy confirmed Id. ¶ 279. Plaintiffs See id. ¶¶ However, as Defendants note, Hastings specifically refused RJN Ex. 7 at 8. Plaintiffs' main contention as to these statements and others 24 like them is that Defendants misled investors as to the 25 profitability of its streaming component, because after Netflix 26 began segment reporting for the separate streaming and DVD plans in 27 4Q11, it revealed that the separate streaming plan had a 28 contribution profit of only about 8 percent compared to the DVD 14 1 plan's 50-52 percent. 2 that Defendants knew the streaming business would be less 3 profitable than Netflix's DVD component, but concealed this from 4 their investors, and, further, that Defendants had an obligation to 5 reveal such discrete data once they had emphasized streaming's 6 importance to Netflix's future business goals. 7 315, 328, 356. Plaintiffs allege See id. ¶¶ 281, Defendants argue that Plaintiffs fail to plead a false or 8 9 CCAC ¶¶ 275-370, 384-385. misleading statement regarding the streaming service's United States District Court For the Northern District of California 10 profitability, because "Plaintiffs do not allege facts reflecting 11 that Netflix ever made an affirmative public statement regarding 12 streaming's profitability," and because Plaintiffs do not plead 13 "any facts reflecting that the allegedly-omitted information was 14 known to Defendants at the time of the challenged statements." 15 at 14-16. 16 reference the streaming segment's profitability [in its SEC 17 disclosures and other statements about its shift to streaming] is 18 beside the point." 19 Initiatives, Inc. v. Siricusano, 131 S. Ct. 1309, 1321-22 (2011), 20 and Brody v. Transitional Hospitals Corp., 280 F.3d 997, 1006 (9th 21 Cir. 2002), for the proposition that disclosure is required where 22 failure to disclose would render statements misleading in light of 23 the circumstances in which they were made. 24 11. 25 hold that a defendant's statement is misleading merely because it 26 is complete or because a defendant could have said more. 27 Matrixx, 131 S. Ct. at 1321-22; Brody, 280 F.3d at 1006. 28 MTD Plaintiffs respond: "That Defendants did not explicitly Opp'n at 10. Plaintiffs cite to Matrixx See Opp'n at 1-2, 10- Contrary to Plaintiffs' suggestions, Matrixx and Brody do not In the instant matter, Plaintiffs have not shown that See 15 1 Defendants possessed information at odds with the state of affairs 2 they presented to investors, such that restatement or additional 3 disclosure was required. 4 profitability to have been misleading, Defendants must have 5 actually known specific information about the allegedly disparate 6 profit margins of separate DVD and streaming segments. 7 not until 4Q11, because streaming was never wholly separate from 8 the DVD component until that point. 9 allegation that Defendants touted the profitability of the For Defendants' statements about They did Further, Plaintiffs' United States District Court For the Northern District of California 10 streaming business is not convincing: the statements quoted by 11 Plaintiffs do not actually refer to the profitability of streaming, 12 but rather the interrelationship of the streaming and DVD 13 businesses contributing to one overall margin. 14 See CCAC ¶¶ 278-79. Further, Defendants made clear throughout the Class Period 15 that the success of a streaming-focused business model was 16 contingent on other factors, primarily the growth and retention of 17 Netflix's subscriber base, suggesting that Defendants did not omit 18 any information or warnings in a way that would be misleading under 19 Rule 10b-5. 20 at 24; Ex. 5 at 27. See, e.g., RJN Decl. Ex 1 at 16; Ex. 5 at 27; Ex. 16 21 None of what Plaintiffs plead therefore shows that Defendants 22 made any false or misleading statements about the profitability of 23 the streaming business. 24 4. 25 Defendants' Communications with the SEC Plaintiffs further argue that Defendants made false or 26 misleading statements in a series of letters exchanged between 27 Defendants and the SEC. 28 See CCAC ¶¶ 341-47. Plaintiffs point first to July 2009 correspondence between 16 1 Netflix and the SEC in which the SEC urged Netflix to discuss the 2 "types of plans that [it offers], the price per plan, the cost per 3 plan, [and] the total revenues by plan type." 4 did not supply that information in its response or subsequent 5 filings. 6 Id. ¶ 116. Netflix Id. Later, on April 28, 2011, the SEC asked Netflix to provide 7 more information about its changing business, "such as the number 8 of subscription streaming-only plans, streaming and DVD by mail 9 plans, and DVD by mail only plans," so that investors could observe United States District Court For the Northern District of California 10 and analyze that data. 11 consider adding "any other operating statistics that [it believed] 12 would be useful to investors, which may include rates of churn or 13 any other statistics that would better enable investors to 14 understand [Netflix's] business." 15 May 20, 2011, that though it did not think some of this information 16 would help, it would add more disclosures, giving the following 17 paragraph as an example: 18 19 20 21 22 23 24 25 26 27 28 Id. The SEC also requested that Netflix Id. ¶ 343. Netflix responded on We believe that the DVD portion of our service will be a fading differentiator given the rapid growth of streaming, and that in order to prosper in streaming we must concentrate on having the best possible streaming service. As a result, we are beginning to treat them separately in many ways. Nonetheless, we believe that the evolution of our business model in this manner does not change, except as otherwise disclosed in this MD&A, our expectations in terms of impact or trend to our operating results. As we continue to focus on streaming, we expect to continue to grow our number of subscribers, revenues, operating income and free cash flows. Specifically in fiscal 2011, we expect our domestic operating margin to increase as compared to fiscal 2010. 17 1 Id. ¶ 346. 2 the portion of that paragraph beginning "Nonetheless . . . ." 3 ¶ 347. 4 cease to provide certain operating metrics in 2012, namely gross 5 subscriber additions, subscriber acquisition costs, and churn (a 6 measurement of customer cancellations). 7 2011, the SEC again wrote to Netflix asking it to reconsider its 8 decision not to provide these metrics, but Netflix did not do so. 9 Id. ¶ 118. United States District Court For the Northern District of California 10 11 However, in its subsequent SEC filing, Netflix omitted Id. In that same letter, Netflix also stated that it would Id. ¶¶ 117, 344. In June In none of these letters did the SEC specifically ask for segmented financial information. Id. ¶¶ 117-18, 344. Plaintiffs allege that Netflix's choice not to include some 12 requested information in its public filings, as well as the 13 information that it did disclose in response to the SEC, prove that 14 these statements were misleading. 15 respond that Netflix's choice not to include certain information is 16 irrelevant because the exchanges between the SEC and Netflix are 17 public. 18 soon as the letters were published regardless of whether Netflix 19 repeated their contents in subsequent statements. 20 Defendants also point out that the SEC's 2009 correspondence with 21 Netflix could not possibly have concerned a streaming-only plan, as 22 none existed at that time. 23 Id. ¶¶ 341-49. Defendants Defendants reason that they put the public on notice as MTD at 18-19. Id. at 9 (citing CCAC ¶ 76). The Court agrees with Defendants that the exchange between 24 Netflix and the SEC in 2009 does not show that Defendants' 25 statements about streaming were false or misleading. 26 about metrics like subscriber information for Netflix's different 27 plans and other operating statistics, not about specific segmented 28 financial information for DVDs and streaming segments. 18 The SEC asked See CCAC ¶¶ 1 341-45. Moreover, Netflix did not offer standalone streaming plans 2 when the SEC sent its 2009 letters. 3 therefore irrelevant to Plaintiffs' claims and appears to serve 4 only as innuendo relating to Defendants' dealings with the SEC. 5 Further, since Defendants' correspondence with the SEC was 6 public, Plaintiffs' allegation that Netflix somehow hid information 7 from investors while simultaneously filing these letters with the 8 SEC hold no weight. 9 statements it made to the SEC in subsequent filings does not The 2009 correspondence is Netflix's decision not to reiterate the same United States District Court For the Northern District of California 10 indicate that Defendants misled investors. Plaintiffs do not 11 otherwise allege that Netflix misled the SEC. The Court finds that Netflix's statements to the SEC do not 12 13 support a 10b-5 claim. 14 5. Defendants' Statements About Price Increases In July 2011, Netflix posted on its official blog that it 15 16 would begin to offer a DVD-only plan in addition to its streaming- 17 only plan, but would phase out the hybrid plan. 18 new plans, the streaming-only and DVD-only plans, would be $7.99 19 per month -- $15.98 for both -- effective immediately for new 20 subscribers and September 1, 2011 for current ones. 21 407. 22 the long life we think DVDs by mail will have, treating DVDs as a 23 $2 add-on to our unlimited streaming plan neither makes great 24 financial sense nor satisfies people who just want DVDs. 25 an unlimited DVDs by mail plan (no streaming) at our lowest price 26 ever, $7.99, does make sense and will ensure a long life for our 27 DVDs by mail offering." 28 CCAC ¶ 351. Both Id. ¶¶ 350-51, Netflix explained the reasoning behind these changes: "Given Creating Id. ¶ 351. Plaintiffs argue that Netflix's announcement about price 19 1 changes was false and misleading because "it failed to disclose 2 and/or misrepresented the reason that Netflix increased its prices, 3 namely, that Netflix was suffering from decreased liquidity and was 4 unable to afford the growing costs associated with its businesses." 5 Id. ¶ 352. 6 allegation about decreased liquidity is unfounded because Netflix 7 had more than $375 million in liquid assets as of June 2011. 8 Plaintiffs did not respond to these arguments in their opposition. 9 Defendants' primary response is that Plaintiffs' The Court finds that the blog post about price increases was United States District Court For the Northern District of California 10 not false or misleading. 11 indicating that the real reason Netflix changed its prices had to 12 do with decreased liquidity or other concerns related to what 13 Plaintiffs claim is a faulty business model. 14 conclusory allegation that Netflix lied about its reason for 15 changing its pricing structures and subscription plans. 16 same documents on which Plaintiffs rely in their CCAC, Netflix 17 disclosed its cash, cash equivalents, and short-term investments as 18 of June 30, 2011. 19 or other disclosures as indications of Netflix's lack of liquidity. 20 See RJN Decl. Ex. 1 at 4. 21 22 B. Plaintiffs do not plead specific facts They state only a In the Plaintiffs do not point to any of those numbers Plaintiffs' Remaining Claims Absent an underlying violation of the Exchange Act, there 23 can be no control person liability under Section 20(a). Paracor 24 Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1161 (9th 25 Cir. 1996). 26 Section 10(b), their control person claim is also DISMISSED. 27 Shurkin v. Golden State Vinters, Inc., 471 F. Supp. 2d 998, 1027 28 (N.D. Cal. 2006). Because Plaintiffs have not pled a violation of Likewise, there can be no insider trading 20 See 1 liability under Section 20A without an underlying violation of 2 Section 10(b). 3 Section 20A claim is therefore DISMISSED. See In re VeriFone, 11 F.3d at 872. Plaintiffs' 4 5 V. CONCLUSION For the foregoing reasons, the Court GRANTS Defendants Reed 6 7 Hastings, David Wells, Barry McCarthy, and Netflix, Inc.'s Motion 8 to Dismiss. 9 State-Boston Retirement System's Consolidated Class Action Plaintiffs Arkansas Teacher Retirement System and United States District Court For the Northern District of California 10 Complaint is DISMISSED WITH LEAVE TO AMEND. Plaintiffs may file an 11 amended complaint within thirty (30) days of this Order's signature 12 date. 13 with prejudice. Failure to do so will result in dismissal of this action 14 15 IT IS SO ORDERED. 16 17 13 Dated: February ___, 2013 18 UNITED STATES DISTRICT JUDGE 19 20 21 22 23 24 25 26 27 28 21

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