In Re Netflix, Inc., Securities Litigation

Filing 114

Order by Hon. Samuel Conti granting 108 Motion to Dismiss.(sclc2, COURT STAFF) (Filed on 8/20/2013)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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United States District Court

For the Northern District of California

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) Case No. 12-00225 SC
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In re NETFLIX, INC., SECURITIES ) ORDER GRANTING MOTION TO
LITIGATION
) DISMISS
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I.

INTRODUCTION
Plaintiffs Arkansas Teacher Retirement System and State-Boston

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Retirement System ("Plaintiffs") bring this putative securities

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class action against Netflix, Inc. ("Netflix"); Netflix Co-Founder,

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Chairman of the Board, and CEO Reed Hastings ("Hastings"); current

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Netflix CFO David Wells ("Wells"); and Barry McCarthy ("McCarthy"),

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Netflix's CFO until December 10, 2010 (collectively "Defendants").

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Now before the Court is Defendants' Motion to Dismiss

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Plaintiffs' First Amended Consolidated Class Action Complaint.

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Nos. 105 ("FAC"), 108 ("Mot").

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Nos. 110 ("Opp'n"), 111 ("Reply"), and is suitable for

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determination without oral argument, Civ. L.R. 7-1(b).

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reasons set forth below, the Court GRANTS Defendants' Motion to

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Dismiss and DISMISSES the CCAC with prejudice.

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The motion is fully briefed,

ECF

ECF

For the

1 II.

BACKGROUND

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A.

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Netflix is a public corporation that purports to be the

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leading Internet subscription service for viewing movies and

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television shows (collectively "movies").

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currently allows consumers to watch movies either by streaming them

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over the Internet directly to their televisions, computers, or

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mobile devices, or by receiving DVDs sent to their homes.

Factual Overview

FAC ¶ 3.

Netflix

Id.

Netflix provided no streaming services -- only DVDs by mail --

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United States District Court

For the Northern District of California

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from 1999 to 2007.

Id. ¶¶ 38-49.

In 2007 Netflix began to allow

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its subscribers to stream movies via the "hybrid plan," the only

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plan it offered at the time, which allowed subscribers both to

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stream movies and to receive DVDs.

Id. ¶ 41.

In November 2010, as part of its plan to develop its streaming

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services further, Netflix decided to offer its subscribers a

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standalone streaming plan in addition to the hybrid plan.

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57.

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only plan cost $7.99 per month.

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in October 2010, Defendants explained that the expansion of

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Netflix's streaming business would depend partly on its continually

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adding customers who wanted streaming content.

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Those customers' subscription payments would fuel the acquisition

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of more streaming content, attracting still more streaming-focused

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customers.

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increasing content costs by decreasing DVD-related expenditures.

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See id. ¶¶ 51-53.

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partly driven by its conclusion that more people were joining

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Netflix and subscribing to the hybrid plan to use streaming, but

Id. ¶

The hybrid plan cost $9.99 per month, and the new streaming-

Id.

Id.

Shortly before this change,

Id. ¶¶ 51-52.

Netflix also planned to offset some of the

Netflix's increasing focus on streaming was

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not renting any DVDs.

Id.

During the Class Period, Netflix's subscriber count steadily

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increased each quarter.

Id. ¶ 54; cf. 199-200.

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followed suit, rising from a closing price of $153.15 on October

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20, 2010 to a high of $298.73 on July 13, 2011.

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On July 12, 2011, however, Netflix announced that effective

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September 1, 2011 for existing subscribers and immediately for new

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ones, it would no longer offer its hybrid plan.

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Instead, it would offer separate DVD-only and streaming-only plans,

Id. ¶¶ 12, 55, 64.

Id. ¶ 122.

United States District Court

For the Northern District of California

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both for $7.99 per month.

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access to both DVD and streaming services for $9.99 per month under

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the hybrid plan would now have to pay $15.98 to subscribe to the

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new, separate plans.

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Netflix experienced a net loss in customers for the first time in

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years.

Id.

Id.

Its stock price

Subscribers who previously had

Netflix's subscribers were unhappy, and

See id. ¶ 143.

Netflix's fortunes fell further in September 2011.

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First, on

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September 2, the cable channel Starz announced that it would not

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renew its streaming contract with Netflix effective February 28,

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2012.

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Id. ¶ 129.
Second, on September 15, Netflix reported that it expected to

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lose one million subscribers during the third quarter of 2011 --

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the first quarter in years that would close with a net loss in

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subscribers.

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Netflix's stock price dropped by $39.46 to close at $169.25.

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¶¶ 136-37.

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right choice."

Id. ¶¶ 136, 199-200.

After the announcement,
Id.

Nevertheless, Netflix stood behind its decision as "the
Id. ¶ 380.

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Third, on September 19, 2011, Netflix announced that it

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planned to spin off its DVD services into a new subsidiary called

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"Qwikster."

Id. ¶ 125.

Netflix planned to continue to provide

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streaming services via its own subscription plans and website,

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separately from the Qwikster subsidiary.

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again recoiled from this change, and Netflix lost still more

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subscribers.

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Netflix soon abandoned the Qwikster idea, but continued its planned

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separation of the DVD-only and streaming-only plans, thereby doing

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away with the hybrid plan altogether.

Id.

Netflix's customers

See id. ¶¶ 136-37; see also Def.'s RJN Ex. 3, at 15.1

See FAC ¶¶ 122, 127.

Shortly thereafter, on October 24, 2011, in documents related

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United States District Court

For the Northern District of California

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to the fourth quarter of 2011 ("4Q11"), Netflix began to report

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discrete financial information for the now-entirely-separate DVD-

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only and streaming-only plans -- information that had previously

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been unavailable.

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announced that its "contribution margin for domestic streaming

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[would] be low in 4Q11 at around 8% . . . due to [its] increasing

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content spend," whereas Netflix's DVD business had a contribution

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profit of 50-52%.

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decision to offer the DVD and streaming subscription plans as

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separate services with separate prices, but admitted that it had

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made the change too quickly, compounding the problem "with [a] lack

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of explanation about the rising cost of the expansion of streaming

Id. ¶ 141.

Id. ¶ 142.

In its 4Q11 reports, Netflix

Netflix continued to stand by its

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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 grants the parties' requests for
judicial notice since the relevant documents are incorporated by
reference into Plaintiffs' FAC. ECF No. 92 ("Def.'s RJN").
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content, and steady DVD costs."

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that more long-term members canceled their subscriptions in

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response to the pricing changes than expected, thereby making

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Netflix's 4Q11 profits and revenues lower than predicted, though

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Netflix would remain profitable overall.

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announcement, Netflix's stock price fell $41.47 per share to close

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at $77.37 per share on October 25, 2011.

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Id. ¶ 210.

Netflix also stated

Id.

After this

Id. ¶ 211.

Plaintiffs, Netflix shareholders, now sue Defendants for
alleged violations of the federal securities laws.

Their claims

United States District Court

For the Northern District of California

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are all based on the theory that, between October 20, 2010 and

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October 24, 2011 (the "Class Period"), Defendants misled investors

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about the prospects of the new streaming-focused model, thereby

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artificially inflating Netflix's stock price and leading to a stock

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drop of almost 67 percent after the alleged falsity of those

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statements was revealed.

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Plaintiffs allege that all Defendants violated Section 10(b)

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of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and

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Securities Exchange Commission ("SEC") Rule 10b-5; that the

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individual Defendants violated Section 20(a) of the Act; and that

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Hastings violated Section 20A of the Act.

Id. ¶¶ 330-55.

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B.

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The previous pleading in this case, Plaintiffs' Consolidated

Procedural Summary

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Class Action Complaint, was the subject of a motion to dismiss

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decided on February 13, 2013.

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The CCAC asserted the same causes of action as the FAC, though

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Plaintiffs' underlying theories then were based on their

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allegations that Defendants made false and misleading statements

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about: (1) Netflix's accounting practices, which Plaintiffs

ECF Nos. 89 ("CCAC"), 102 ("Order").

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asserted were in violation of Generally Accepted Accounting

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Principles ("GAAP") and SEC disclosure rules; (2) the virtuous

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cycle, which was Netflix's name for its business model of acquiring

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streaming content and consequently increasing and retaining

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streaming-focused customers; (3) streaming's profitability relative

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to that of the DVD business; (4) Netflix's pricing changes; and (5)

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disclosures to the SEC.
The Court dismissed Plaintiffs' CCAC because it found that (1)

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Plaintiffs' accounting arguments were not plausible; (2)

United States District Court

For the Northern District of California

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Defendants' statements about the virtuous cycle were not false or

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misleading; (3) Defendants did not mislead their customers about

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streaming's profitability; (4) none of Defendants' statements about

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the pricing changes were false or misleading; and (5) Defendants'

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correspondence with the SEC was not actionable.

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Plaintiffs leave to amend their complaint to plead new facts

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supporting their allegation that Defendants made false or

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misleading statements during the Class Period.

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the FAC on March 22, 2013, and the motion at bar ensued.

The Court gave

Plaintiffs filed

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20 III.

LEGAL STANDARDS

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A.

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A motion to dismiss under Federal Rule of Civil Procedure

Motion to Dismiss

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12(b)(6) "tests the legal sufficiency of a claim."

Navarro v.

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Block, 250 F.3d 729, 732 (9th Cir. 2001).

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on the lack of a cognizable legal theory or the absence of

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sufficient facts alleged under a cognizable legal theory."

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Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.

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1988).

"Dismissal can be based

"When there are well-pleaded factual allegations, a court

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should assume their veracity and then determine whether they

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plausibly give rise to an entitlement to relief."

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Iqbal, 556 U.S. 662, 679 (2009).

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must accept as true all of the allegations contained in a complaint

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is inapplicable to legal conclusions.

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elements of a cause of action, supported by mere conclusory

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statements, do not suffice."

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Twombly, 550 U.S. 544, 555 (2007)).

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"limited to the complaint, materials incorporated into the

Ashcroft v.

However, "the tenet that a court

Threadbare recitals of the

Id. (citing Bell Atl. Corp. v.
A court's review is generally

United States District Court

For the Northern District of California

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complaint by reference, and matters of which the court may take

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judicial notice."

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U.S. at 322).

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B.

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Section 10(b) of the Exchange Act makes it unlawful "[t]o use

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or employ, in connection with the purchase or sale of any security

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registered on a national securities exchange . . . any manipulative

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or deceptive device or contrivance in contravention of such rules

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and regulations as the [Securities and Exchange] Commission may

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prescribe . . . ."

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by the Commission is Rule 10b–5, which states that "[i]t shall be

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unlawful for any person . . . [t]o engage in any act, practice, or

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course of business which operates or would operate as a fraud or

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deceit upon any person, in connection with the purchase or sale of

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any security."

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five elements to establish a violation of Rule 10b–5: "(1) a

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material misrepresentation or omission of fact, (2) scienter, (3) a

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connection with the purchase or sale of a security, (4) transaction

Metzler, 540 F.3d at 1061 (citing Tellabs, 551

Section 10(b)

15 U.S.C. § 78j(b).

One such rule prescribed

17 C.F.R. § 240.10b–5(c).

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Plaintiffs must plead

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and loss causation, and (5) economic loss."2

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F.3d 1006, 1014 (9th Cir. 2005).

In re Daou Sys., 411

Plaintiffs must also meet the heightened pleading standards of

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Federal Rule of Civil Procedure 9(b) and the Private Securities

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Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4.

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PSLRA requires plaintiffs to "specify each statement alleged to

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have been misleading [and] the reason or reasons why the statement

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is misleading."

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complaint must "state with particularity facts giving rise to a

15 U.S.C. § 78u-4(b)(1).

The

Additionally, the

United States District Court

For the Northern District of California

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strong inference that the defendant acted with the required state

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of mind."

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establishing securities fraud is the knowing, intentional, or

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deliberately reckless disclosure of false or misleading statements.

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See Daou, 411 F.3d at 1014–15.

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scienter naturally results in a stricter standard for pleading

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falsity, because falsity and scienter in private securities fraud

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cases are generally strongly inferred from the same set of facts,

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and the two requirements may be combined into a unitary inquiry

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under the PSLRA."

Id. § 78u-4(b)(2).

The "required state of mind" for

"The stricter standard for pleading

Id. at 1015 (internal quotation marks omitted).

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21 IV.

DISCUSSION

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A.

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Plaintiffs' theory of Defendants' liability is essentially

Plaintiffs' Section 10(b) Claim

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that Defendants knew streaming would be relatively less profitable

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than DVD offerings, but decided to tell the public that Netflix's

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The Court need not reach the issue of scienter, because the
Court finds Plaintiffs' claims about false or misleading statements
to be implausible.
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shift to streaming would be a good thing for the company.

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Opp'n at 11-17.

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Period, Defendants sold stock at prices their own statements

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artificially inflated, despite knowing that the truth would sink

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the company's stock price.

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Defendants' statements and omissions led to Netflix's stock crash

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after the disparate contribution margins of DVD and streaming

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became public in October 2011.

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See

Plaintiffs allege that throughout the Class

Id.

According to Plaintiffs,

See Opp'n at 6.

Defendants argue that they were never required to disclose any

United States District Court

For the Northern District of California

10

information about streaming's profitability before they actually

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did so; that they never made any affirmative statements about the

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profitability of streaming; that they disclosed the risks of their

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business's focus on streaming; and that Defendants had no knowledge

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that contradicted what they told the public.

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See MTD at 1-3.

The same cases the Court discussed in its previous Order,

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namely Matrixx Initiatives, Inc. v. Siricusano, 131 S. Ct. 1309,

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1321-22 (2011), and Brody v. Transitional Hospitals Corp., 280 F.3d

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997, 1006 (9th Cir. 2002), control here.

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establish the rules that companies can control what they disclose

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publicly, and that Section 10(b) and Rule 10b-5(b) do not create

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affirmative duties to disclose "any and all material information":

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they need only disclose what is necessary to render statements, in

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the light of the circumstances under which they were made, not

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misleading.

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sensitive rule, and the additional case Plaintiffs now cite, Berson

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v. Applied Signal Technology, Inc., 527 F.3d 982, 986-87 (9th Cir.

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2008), did not change that.

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Matrixx and Brody

Matrixx, 131 S. Ct. at 1321-22.

This is a context-

Berson concerned a defendant company that had specifically

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touted its backlog of anticipated revenues from uncompleted but

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still-extant contracts.

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some of those backlogged contracts were, at the time defendant made

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its disclosures, subject to stop-work orders that would not result

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in any value for the company.

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different from what the defendant had led its investors to believe:

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the defendant touted its backlogged contracts as a source of value,

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when in fact those contracts were valueless.

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defendant touted those contracts anyway, it had a duty to disclose

See id.

The company did not disclose that

Id.

The truth was therefore very

Id.

Since the

United States District Court

For the Northern District of California

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the truth about the stop-work orders even though it could have

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avoided such a duty by refusing to mention either the backlogs or

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the stop-work orders.

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Id. at 987.

Berson is inapposite.

Plaintiffs' argument is essentially

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that as soon as Netflix began to discuss its focus on streaming, it

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had a duty to disclose all manner of information about streaming's

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margins relative to DVD's, even if that information simply did not

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exist.

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concerned a discrete statement that hid the truth behind what the

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defendants had said.

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See Opp'n at 14-15.

But this takes Berson too far.

Berson

See 527 F.3d at 987.

In this case, as explained more fully below, Plaintiffs fail

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to plead that Defendants made such a statement.

The closest they

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come is to allege that Defendants discussed the risks of their

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shift to streaming in context of many other factors, including

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overall margins, and Berson specifically treats these kinds of

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candid statements of risk differently from companies' boasts about

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certainties.

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risk, the other a certainty.

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would treat the two differently.").

527 F.3d at 987 ("[One type of statement] indicates a
It goes without saying that investors

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Moreover, Berson's rule on

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discrete statements does not map to a factual situation in which

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plaintiffs have not shown -- as discussed below -- that defendants

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possess actual knowledge that a statement was false.

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accordingly does not change the general rules the Court must apply

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in cases like this one.

Berson

To prove that Defendants' statements were false and

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7

misleading, Plaintiffs have to show that Defendants both knew of

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streaming's disparate profitability as compared to DVD's and had a

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duty to disclose that in tandem with the public statements that

United States District Court

For the Northern District of California

10

Plaintiffs cite.

See Matrixx, 131 S. Ct. at 1321.

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also plausibly allege that Defendants' statements would have been

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misleading to a reasonable investor, either on their own or as a

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result of an omission.

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Plaintiffs' new pleadings first, then considers the pleadings that

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are essentially unchanged from the CCAC.

See id. at 1322-23.

Plaintiffs must

The Court addresses

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All of Plaintiffs' substantive allegations of falsity are

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based on their contentions that Defendants misrepresented or failed

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to disclose these general facts: "(i) the shift to streaming

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presented significant financial challenges to Netflix because it

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was far more expensive and far less profitable than DVD; (ii)

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streaming's relative profitability as compared to DVD was minimal;

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[] (iii) the soaring costs of the Streaming Business were not

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offset by the decreased costs of mailing in the DVD Business"; and

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(iv) giving "the impression that streaming is consistent with a 30-

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35% contribution margin, when, as later revealed, it was only at

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8%."

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92.

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///

FAC ¶¶ 153-56, 160-61, 164-65, 168-70, 176-79, 183-86, 188-

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1.

Plaintiffs' New Allegations

As noted above, Plaintiffs' FAC is almost the same as their

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CCAC.

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their agents, and expand on several more statements.

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statements concern Defendants' alleged knowledge of the truth about

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Netflix's streaming component's profitability and effect on

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Netflix's margins.

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"CW3," who discusses the same matter.

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Plaintiffs cite three new statements from Defendants or
All of these

Plaintiffs also add a new Confidential Witness,

June 2, 2011 Statement: Plaintiffs quote part of a Nomura

United States District Court

For the Northern District of California

10

Securities US Media Summit Call, on which Netflix was allegedly

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represented by non-defendant Ted Sarandos.

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Sarandos answered an analyst's questions about what has changed to

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increase Netflix's flow of content, what the biggest changes in

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physical rental were, and what the biggest changes or drop-offs in

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terms of usage were.

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not run its business with Netflix's mentality, which is "willing to

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kill our existing business to move on to the next one"; (2) people

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were mostly joining Netflix for streaming, so Netflix had been

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focusing on streaming while DVD ran "calmly on its own"; and (3)

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while DVD was still profitable and would be for a long time, "in

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markets where the streaming business is doing really well the DVD

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business is flattening out more."

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Id.

FAC ¶ 185.

Mr.

Mr. Sarandos said that (1) Hollywood did

Id.

The June 2, 2011 statements from Mr. Sarandos do not support

24

Plaintiffs' allegations.

Plaintiffs cited Mr. Sarandos's

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quotations somewhat selectively to make it seem as if he was

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actually saying that Netflix was prepared and willing to kill their

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DVD business to move on to the next one, i.e., streaming, thereby

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suggesting that the streaming component had completely supplanted

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the DVD component.

See Opp'n at 2, 5, 12, 14.

The Court finds

2

that this is not the case.

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philosophy of Hollywood versus Silicon Valley, characterizing the

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former as a "relationship town" that focuses on preserving the

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status quo and the latter as a place philosophically more prepared

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to make drastic business shifts.

7

Defendants' other statements make clear that, while they were

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planning to shift the business's focus to streaming, DVD would

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remain part of Netflix's business plan.

Mr. Sarandos was talking about the

See FAC ¶ 185.

Moreover, all of

See id. ¶ 180.

Mr.

United States District Court

For the Northern District of California

10

Sarandos himself said, during the same conversation Plaintiffs

11

cite, "The value proposition of the DVD business is going to be

12

very good for a very long time."

13

these statements are not plausibly false or misleading.

14

therefore insufficient to support Plaintiffs' claims.

Id. ¶ 185.

The Court finds that
They are

15

July 25, 2011 Statement: Plaintiffs refer to a shareholder

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letter filed on July 26, 2011, and an earnings call held on the

17

same day.

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streaming-only plan gained in popularity during Second Quarter

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2011, that DVD shipments had "likely peaked" with the "rapid

20

adoption of streaming," and that Defendants had "spoken frequently"

21

of how they were "directing savings generated from declining DVD

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demand into additional streaming content and marketing."

23

188.

24

Id. ¶¶ 188-89.

The letter indicated that Netflix's

Id. ¶

Defendants Hastings and Wells said during the July 25 earnings

25

call that they were gaining confidence over the last two years

26

about "the viability and strength of a pure streaming plan,"

27

especially since 75 percent of subscribers had chosen streaming-

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only plans even though DVD plans were only two dollars more

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expensive.

Id. ¶ 189.

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pricing change, Netflix could strengthen its streaming plan with

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more content.

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DVD business would continue to be a smart choice, and that even if

5

it did not grow it would at least shrink slowly instead of rapidly.

6

ECF No. 112-1 ("Decl. ISO Reply") Ex. E ("July 25 Tr.") at 3.

7

Defendant Hastings said that Netflix would "figure out" these

8

growth prospects over "the next couple of quarters."

9

Court finds these statements insufficient to support Plaintiffs'

Id.

Defendant Hastings stated that with the

Defendant Hastings added that investing in its

Id.

The

United States District Court

For the Northern District of California

10

claim: they are, in context, optimistic statements about streaming

11

among candid statements of risk.

12

Plaintiffs also point to Defendant Hastings' response to an

13

analyst's question about how separating the DVD and streaming

14

components of its business would impact its content partnerships.

15

FAC ¶¶ 190-91; July 25 Tr. at 3.

16

movie studios have had different DVD and streaming divisions "for a

17

while," leading Defendants not to see "any significant effect

18

coming out of the separation of the plans."

19

in response to separate question about whether DVD would become

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more or less of a priority after being decoupled from streaming,

21

Defendant Hastings stated that the DVD business would be "less

22

important to those people at Netflix working on streaming, and much

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more important to those people in the dedicated DVD division.

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that's the purpose of putting it in a separate group, so they can

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focus on that."

26

are false or misleading.

27

partnerships, not profitability or financial information.

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Id.

Defendant Hastings stated that

July 25 Tr. at 3.

And

And

The Court finds that none of these statements
The questions concerned content

Plaintiffs then point to Defendant Hastings' statement that,

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by having DVD "as a division within Netflix, [Netflix had] a way to

2

measure the P&L [profit and loss]."

3

that this reflects Defendants' capability of measuring the P&L for

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Netflix's DVD component while it was part of the hybrid plan,

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leading Plaintiffs to conclude that Netflix "necessarily also had

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the capability of measuring the P&L for streaming."

7

(At this point, Netflix had separate streaming and DVD plans for

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new users, but existing users' hybrid plans would not be phased out

9

until September 2011.)

Id.

¶ 191.

Plaintiffs state

Id. ¶ 190.

These statements are implausible as bases

United States District Court

For the Northern District of California

10

for Plaintiffs' allegations of securities fraud.

11

clear that Defendant Hastings was stating that Defendants would

12

have P&L information for the DVD component in the future -- he said

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nothing about the streaming component and, as noted above, did not

14

have to, either as a matter of duty or in response to the analyst's

15

question about Netflix's DVD-only business alone.

16

at 3.; see also supra Section IV.A.1.

17

Defendant Hastings' statement, taken alone or alongside Plaintiffs'

18

other allegations, suggests that Defendants knew it was false or

19

misleading, or that it rendered other statements actionable.

20

Court finds that these statements are not plausible bases for

21

Defendants' claims.

22

In context, it is

See July 25 Tr.

The Court does not find that

The

September 21, 2011 Statement: Plaintiffs add a quotation from

23

a Goldman Sachs Communacopia Conference Call in which Netflix

24

participated.

25

a "narrative" of Netflix's focus and a query about why investors

26

should own Netflix shares, Defendant Wells said this: "I think the

27

core message I'll deliver is that we feel strongly that the core

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thesis is intact.

Id. ¶ 204.

In response to an analyst's request for

The size and the opportunity of the domestic and

15

1

the international streaming market or electronic, entertainment

2

market is intact.

3

positioned to take advantage of that and to grow into a large

4

share."

5

mathematical models to predict streaming content's value in

6

negotiations.

7

continue to analyze the now-separate DVD division's revenue

8

streams.

9

Id.

And we're well positioned.

We're still well

Defendant Wells also stated that Netflix used

FAC ¶ 94.

Finally, he added that Netflix would

Id. ¶ 95.

Defendant Wells's September 21, 2011 statements do not provide

United States District Court

For the Northern District of California

10

plausible support for Plaintiffs' claims.

11

general to plausibly show that Defendants had knowledge of the

12

disparities in DVD's and streaming's contribution margins.

13

also do not make false or misleading representations about such

14

margins.

15

Plaintiffs' contention that Defendants were analyzing streaming's

16

profitability.

17

They are too vague and

They

The Court also finds that these statements do not support

Expansion of December 8, 2010 Statement: Plaintiffs expand on

18

December 8, 2010 statements referenced in the CCAC.

19

statements were made on a Barclays Capital Global Technology

20

Conference Call.

21

call rather selectively.

22

Decl.") Ex. A ("Barclays Tr.") at 5.

23

analyst's question as being about "the impact of streaming content

24

costs on margins."

25

and pay-TV networks with whom Netflix was negotiating for content.

26

The analyst asked about those parties' future plans; whether, in

27

the long term, it was "the right thing" for them to license content

28

to Netflix; and "whether [doing so] potentially hurts their seat at

Id. ¶ 160.

Id.

These

Plaintiffs quote sections of this

Compare id. with ECF No. 109 ("Liss
Plaintiffs characterize the

But the actual question concerned studios

16

1
2
3

the table a few years down the line."

Plaintiffs quote Defendant Hastings as responding to that
question by saying:
[T]here is no risk of a big negative thing
happening to Netflix.
And, in general,
investors ask us questions like, well, if
the cost of content is X, won’t that tank
your margins?
And we are always surprised
when we get that question because we are
like no, we manage the margins . . . the
margins would be preserved . . . [s]o it is
not going to ever manifest itself as margin
risk.

4
5
6
7
8
9

United States District Court

For the Northern District of California

10
11

Id.

FAC ¶ 160.
However, having carefully read the transcript, the Court finds

12

that Defendant Hastings is referring to the risk of having a

13

majority of its streaming content tied to a single provider, which

14

he calls a "concentration risk."

15

Hastings states that because Netflix had "added a lot of content,"

16

even since the prior year's statement that "no content provider was

17

more than 20% of [Netflix's] viewing."

18

thing" refers to the risk of a single content provider pulling

19

content, and Defendants' disclosure and explanation of such a risk

20

is to be treated differently from statements about certainties.

21

See Berson, 527 F.3d at 987.

Barclays Tr. at 5.

Id.

Defendant

The "big negative

22

Further, Defendant Hastings' statement that "[Netflix's]

23

margins would be preserved" as it continued to invest in content is

24

tucked between two ellipses in Plaintiffs' FAC, but in context on

25

the call's full transcript, the Court finds that Defendant Hastings

26

was referring to Netflix's management of margins in terms of its

27

not overspending in its content purchases.

28

about specific streaming margins, nor is it actionable in general.

17

This is not a statement

Similarly, the statement that purchasing content for streaming

1
2

was "not going to ever manifest itself as margin risk" comes

3

several sentences after Defendant Hastings hedges his statements on

4

the benefits of content spending and the importance of management

5

discipline.

6

content were ever more expensive than Netflix thought, they would

7

not purchase it, a decision that could lead to Netflix's having

8

less total content, being less exciting to consumers, and resulting

9

in less growth, but preserving Netflix's margins.

Before he refers to "margin risk," he says that if

Id.

The Court

United States District Court

For the Northern District of California

10

finds that this statement, like those above, is a statement about

11

risk, not certainty -- it is not actionable.

12

987.

Berson, 527 F.3d at

Expansion of December 20, 2010 Statement: Plaintiffs add more

13
14

quotations from an article by Defendant Hastings.

15

Defendant Hastings responded to an investment advisor's suggestion

16

that investors should short Netflix because of rising content costs

17

and a more competitive streaming landscape.

18

Hastings stated that Netflix's subscriber base was growing fast

19

enough, with DVD shipments slowing down enough, for Netflix both to

20

pay for existing streaming content and to add more content to its

21

library.

22

overspending relative to [its] margin structure, and there is no

23

specific content that [Netflix] 'must have' at nearly any cost."

24

Id.

25

revenue on Cost of Goods Sold (which is mostly content and postage)

26

in its domestic business,

27

than we expected, then in practice we'd have less content than

28

otherwise, rather than less margin.

Id. ¶ 164.

In the article,

FAC ¶ 163.

Defendant

He added that Netflix had "no intention of

He concluded by saying that Netflix spends 65-70 percent of

and that "if content costs rose faster

18

This would ultimately show up

1

in less subscriber growth than we wanted from a not-as-good-as-it-

2

would-otherwise-be service; it would not likely show up as a sudden

3

hit to margins."

Id.

4

The Court finds that Plaintiffs' expanded discussions of

5

Defendants' December 8 and 20, 2010, statements do not render

6

Plaintiffs' claims plausible.

7

that these statements were "specific representations concerning

8

Netflix's streaming profit margins" and that the statements did not

9

refer "explicitly to streaming's profitability."

Plaintiffs attempt to argue both

Opp'n at 15, 17

United States District Court

For the Northern District of California

10

n.14.

11

refer to Netflix's overall margins, just as the Court found in its

12

previous Order.

13

months before Defendants could have evaluated different components'

14

profit margins, according to Plaintiffs' measurements.

15

at 5; see also FAC ¶¶ 157, 160-62, 164-65.

16

Hastings' statements both make clear that Netflix planned to be

17

cautious in its content investments, and that presenting less

18

content to its subscribers could result in less subscriber growth.

19

See FAC ¶¶ 160, 64.

20

plausible bases for Plaintiffs' claims.

21

In context, the Court finds it clear that the statements

See Order at 15-16.

The statements issued several

See Ex. A

Moreover, Defendant

The Court finds that these statements are not

CW3: CW3 was a Manager of Content Planning and Analysis at

22

Netflix from June 2011 to July 2012.

23

that CW3 "confirms that Netflix had the capability to: (i) track

24

the profitability of streaming; (ii) determine a profit margin for

25

the purposes of determining separate streaming pricing; and (iii)

26

calculate what the streaming profit margin needed to be."

27

Plaintiffs allege that CW3 confirmed that Netflix's decision to

28

split streaming and DVD was made before June 2011, and that

19

Id. ¶ 224.

Plaintiffs state

Id.

1

streaming was a fixed-cost business with profit based almost

2

entirely on the fixed cost of content.

3

assert that according to CW3, Netflix was performing ROI analyses

4

to determine different streaming packages' profitability, and that

5

these analyses helped them to determine that Starz's requested

6

dollar amount for its content exceeded that content's

7

profitability.

8
9

Id. ¶ 224.

Plaintiffs also

Id. ¶ 226.

Plaintiffs claim that on a September 21, 2011 conference call,
Defendants corroborated CW3's allegations.

Id. ¶ 227.

On that

United States District Court

For the Northern District of California

10

call, Defendant Wells stated that in negotiations for groups of

11

television or movie titles, Netflix would use hours viewed by its

12

streaming subscribers as a proxy for value, and "to the extent that

13

[Netflix uses] regression and other math valuation models" to

14

predict a group of titles' relative value, Netflix could estimate a

15

reservation price for its deals.

16

during the same call, Defendants revealed that they had segmented

17

operating profits for its DVD division, pointing to another of

18

Defendant Wells' statements -- devoid of context here and not

19

explained elsewhere -- about "the long-term earnings stream from a

20

DVD division" and the notion that Netflix would continue to

21

"segment that out" while "looking at operating profit."

22

Id.

Plaintiffs also state that

Id. ¶ 228.

The parties dispute the relevance of CW3's statements to

23

Plaintiff's theory that Defendants knew of actual profit

24

information about streaming.

25

learned that CW3 had signed a declaration prepared by Netflix's

26

counsel, clarifying that "[t]erms like 'profitability' or 'return

27

on investment,' to the extent used by [CW3] or in [CW3's] group,

28

referred to whether the cost of content would be justified by the

Plaintiffs say that they recently

20

1

anticipated consumption (viewing hours) of that content" and did

2

not mean "financial profitability," i.e., revenue minus costs.

3

Opp'n at 1 n.2.

4

Plaintiffs apparently wanted to stipulate to amend their FAC

5

to add this clarifying statement, but the parties never agreed to

6

do so.

7

about the procedural aspects of this declaration at this point in

8

litigation, see id.; Reply at 4 n.4.

9

is that Plaintiffs concede that CW3's statements refer not to

Id.

The parties engage in some footnoted back-and-forth

However, the important point

United States District Court

For the Northern District of California

10

financial profitability (revenue minus costs) but to estimates of

11

anticipated content consumption.

12

statements do not indicate that Defendants had actual knowledge of

13

streaming's relative profitability at any point before they

14

actually declared it.

15

Opp'n at 1 n.1.

Thus, CW3's

None of Plaintiffs' CWs, even CW3, make Plaintiffs' claims any

16

more plausible than they were last time.

17

supra, Plaintiffs clarify that CW3 actually uses the word

18

"profitability" to mean "cost efficiency," which is not the same as

19

profitability.

20

show that Defendants hid the real state of their business affairs

21

from their investors.

22

have extrapolated complicated financial data from estimated values

23

derived for purposes of negotiation do not render that claim any

24

more plausible: forecasting and estimating are not the same as

25

knowing the present value of an interrelated business component.

26

Further, the fact that Defendants later began tracking information

27

about DVDs still does not indicate that they knew the same

28

information about streaming until that product was separated from

Opp'n at 1 n.2.

As noted in Section II.B,

Moreover, CW3's statements do not

Conclusory assertions that Defendants could

21

1
2

Defendants' other plans.
CW1 and CW2, as discussed in the Court's previous Order, also

3

do not support Plaintiffs' claims or render them plausible, because

4

those CWs did not possess discrete profitability data and were not

5

employed by Netflix at a relevant time.

6

therefore finds that Plaintiffs' CWs' statements do not plausibly

7

support Plaintiffs' claims.

8

Order at 16.

The Court

In general, all of Plaintiffs' allegations -- new and old --

United States District Court

depend on the tenuous theory that Defendants withheld discrete and

10
For the Northern District of California

9

accurate financial information about streaming while also touting

11

streaming's profitability.

12

case for any statement Plaintiffs cite.

13

of vague, sometimes conclusory, statements to support a theory that

14

requires much more by virtue of its being narrow and fact-

15

sensitive.

16
17

The Court has not found this to be the
Plaintiffs supply an array

This is not enough to state a claim under the PSLRA.
1.

Plaintiffs' Re-pled Claims

Plaintiffs allege numerous facts that mirror what they pled

18

about profitability in their CCAC.

As for the statements the Court

19

addressed in its prior Order, and to the application of Plaintiffs'

20

newly cited cases more generally, Plaintiffs have not shown that

21

Defendants touted the independent profitability of streaming such

22

that they would have a duty to disclose any of the negative aspects

23

of their streaming business.

24

to discuss the independent profitability of streaming.

25

RJN Ex. 7 ("Q3 Earnings Call") (in which Defendant Hastings says,

26

in response to a question about what Netflix's US streaming margins

27

would be, that Defendants did not know what the margins were or

28

would be in the future).

Indeed, Defendants explicitly refused

22

See Def.'s

The Court finds that Plaintiffs' claims based on Defendants'

1
2

statements and other facts that Plaintiffs also pled in their CCAC

3

are implausible now for the same reasons they were when the Court

4

dismissed Plaintiffs' CCAC.

5

parts of Plaintiffs' CCAC that remain essentially unchanged in the

6

FAC).

7

following paragraph briefly summarizes the factual problems with

8

Plaintiffs' restated pleadings.

9

See Order at 11-18 (considering the

The Court will not rewrite its previous Order here, so the

Plaintiffs do not plead plausible facts indicating that

United States District Court

For the Northern District of California

10

Defendants touted the streaming business's profitability as opposed

11

to the projected or hoped-for strength of the interrelated DVD and

12

streaming business.

13

Class Period that the success of a streaming-focused business model

14

was contingent on other factors, primarily the growth and retention

15

of Netflix's subscriber base, suggesting that Defendants did not

16

omit any information or warnings in a way that would be misleading

17

under Rule 10b-5.

18

that Defendants made any false or misleading statements about the

19

profitability of the streaming business.

Moreover, Defendants made clear throughout the

None of what Plaintiffs plead therefore shows

20

B.

Plaintiffs' Remaining Claims

21

Absent an underlying violation of the Exchange Act, there can

22

be no control person liability under Section 20(a).

Paracor Fin.,

23

Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir.

24

1996).

25

10(b), their control person claim is also DISMISSED.

26

v. Golden State Vintners, Inc., 471 F. Supp. 2d 998, 1027 (N.D.

27

Cal. 2006).

28

under Section 20A without an underlying violation of Section 10(b).

Because Plaintiffs have not pled a violation of Section
See Shurkin

Likewise, there can be no insider trading liability

23

1

See In re VeriFone, 11 F.3d at 872.

2

Plaintiffs' Section 20A claim

is therefore DISMISSED.

3

C.

4

The Court is aware that the heightened pleading standards of

Leave to Amend

5

the PSLRA serve as a higher bar for plaintiffs in securities fraud

6

class actions.

7

in the Ninth Circuit -- is often viewed favorably in many PSLRA

8

cases.

9

claims based on their failure to plead false or misleading

Granting leave to amend -- already liberally given

However, in this case, the Court dismisses Plaintiffs'

United States District Court

For the Northern District of California

10

statements.

Falsity, unlike scienter, generally does not require

11

the same depth of investigation.

12

two opportunities to plead false statements, but in both cases they

13

have failed to do so.

14

Plaintiffs leave to amend their FAC.

In this case, Plaintiffs have had

Therefore the Court declines to grant

15
16
17

V.

CONCLUSION
For the foregoing reasons, the Court GRANTS Defendants Reed

18

Hastings, David Wells, Barry McCarthy, and Netflix, Inc.'s Motion

19

to Dismiss.

20

State-Boston Retirement System's First Amended Consolidated Class

21

Action Complaint is DISMISSED WITH PREJUDICE.

Plaintiffs Arkansas Teacher Retirement System and

22
23

IT IS SO ORDERED.

24
25
26

Dated: August 20, 2013
UNITED STATES DISTRICT JUDGE

27
28

24