Yuan v. Facebook, Inc. et al

Filing 137

Order granting 126 motion to dismiss with leave to amend. Should Plaintiffs choose to file an amended complaint, they must do so by September 23,2020. Signed by Judge Edward J. Davila on August 7, 2020.(ejdlc2S, COURT STAFF) (Filed on 8/7/2020)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 SAN JOSE DIVISION 7 8 9 IN RE FACEBOOK, INC. SECURITIES LITIGATION Case No. 5:18-cv-01725-EJD 11 United States District Court Northern District of California 10 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND Re: Dkt. No. 126 12 13 Before the Court is Defendants’ motion to dismiss Plaintiffs’ second amended complaint. 14 Plaintiffs are persons who purchased shares of Facebook common stock between February 3, 2017 15 and July 25, 2018 (“the Class Period”), who believe that Defendant Facebook, Inc. and Executive 16 Defendants Mark Zuckerberg, Sheryl K. Sandberg, and David W. Wehner made materially false 17 and misleading statements and omissions in connection with the purchase and sale of Facebook 18 stock. See Second Amended Complaint (“SAC”) ¶ 1, Dkt. 123. Plaintiffs allege that Defendants 19 violated Section 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 (the “Exchange 20 Act”) and Rule 10b5 promulgated thereunder because Defendants made guarantees that the 21 Cambridge Analytica, and related data-privacy scandals, would not impact Facebook stock while 22 knowing this to be false. Specifically, Plaintiffs focus on Defendants’ statements and omissions 23 concerning Facebook’s “privacy and data protection practices” and their impact on Facebook’s 24 stock prices during the Class Period. Id. 25 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 1 Defendants have filed a motion to dismiss1 arguing that Plaintiffs have failed to (for a 1 2 second time) meet Federal Rule of Civil Procedure 9(b)’s heightened pleading requirements for 3 securities fraud. The Court agrees; while Plaintiffs have plead sufficient facts to show actionable 4 misstatements, scienter, and reliance, their SAC fails to plead facts showing causation. Thus, the 5 Court GRANTS Defendants’ motion to dismiss with leave to amend. I. 6 BACKGROUND A. Factual Background 7 Defendant Facebook was founded by Defendant Mark Zuckerberg, who is the Chief 8 Executive Office (“CEO”) of the company and the Chairman of the Board of Directors. Id. ¶ 32. 10 Defendant Sheryl Sandberg is the Chief Organization Officer (“COO”) of the company and serves 11 United States District Court Northern District of California 9 on the Board of Directors. Id. ¶ 34. Defendant David Wehner is the Chief Financial Officer 12 (“CFO”) of the company. Id. ¶ 35. Facebook is the world’s largest social networking company; its products and platforms are 13 14 designed to facilitate connection and information sharing between users through mobile devices 15 and personal computers. Id. ¶ 41. Plaintiffs allege that Facebook’s business model depends on: 16 monetizing user data, attracting new users, and engaging/retaining existing users. Id. ¶¶ 43–48 17 (“Facebook’s main asset is the vast treasure-trove of user personal data that it has amassed since 18 its founding.”). The platform formerly allowed third-party app developers’ applications or 19 websites (“apps”) access to users’ information and to users’ friends’ information. Id. ¶ 48. 20 Despite Defendants guarantees to the contrary, access to user data (in contravention of user 21 privacy settings) continued through the class period. Allegedly, certain “whitelisted” app 22 developers and corporate giants like Amazon, Google, Samsung, Blackberry, Huawei (a Chinese 23 technology company), and Mail.Ru Group (a Kremlin-connected technology conglomerate) were 24 able to access users’ friends’ data through the class period. Id. ¶¶ 15, 16. 25 26 27 28 1 Pursuant to N.D. Cal. Civ. L.R. 7-1(b) and General Order 72-5, this Court found this motion suitable for consideration without oral argument. See Dkt. 136. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 2 1 The Court briefly outlines the background of Plaintiffs’ claims. Before April 2014, a user 2 automatically consented to an app developer gaining access to their personal data and the personal 3 data of his or her friends (“third-party consent”). Id.; see also Ex. 25, Dkt. 126-26. However, in 4 April 2014, Defendant Zuckerberg informed users that this third-party consent would be changed. 5 See Ex. 30, Dkt. 126-31 (“Second, we’ve heard from people that they’re often surprised when a 6 friend shares their information with an app. So we’ve updated Facebook Login so that each 7 person decides what information they want to share about themselves, including their friend list.”). 8 After reading this announcement and considering Facebook’s 2014, 2015, and 2016 Privacy 9 Policies, the Court understands this to mean that users could still share their friend list with thirdparty app developers, but users and users’ friends would have more control over the sharing of 11 United States District Court Northern District of California 10 that list. This is to say, Facebook represented to consumers that they could control the privacy of 12 their data by using desktop and mobile privacy settings to limit the information that Facebook 13 could share with app-developers. In actuality, users lacked such control. Indeed, Plaintiffs 14 maintain that Facebook’s representations were false and/or materially misleading because 15 “whitelisted” app developers could still access users’ data and users’ friends’ data in contravention 16 of user privacy settings. See id. ¶¶ 54–64. 17 1. Relevant Agreements 18 Facebook-User Agreements. The use and sharing of data on Facebook are governed by 19 agreements between Facebook and its users, including Facebook’s Data Policy (formerly the 20 “Data Use Policy” and the “Privacy Policy”) and Facebook’s Terms of Service (formerly 21 “Statement of Rights and Responsibilities”). Id. ¶¶ 167, 170, 232, 276, 370, 462–64. These 22 policies explain how users can control whether and how their data is shared with their Facebook 23 friends, other Facebook users, and third parties. Id. ¶¶ 326, 469. For example, the September 24 2016 Data Policy informed users of the categories of information that third-party apps could 25 access if users allowed (or “authorized”) apps to do so. See Ex. 26 at 2, Dkt. 126-27. The policy 26 also informed users how to control access to their data and cautioned users that use of third-party 27 apps, websites, or other services that use, or are integrated with, the Facebook platform may result 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 3 1 2 in the third-parties receiving information about what users post or share. Id.; see also SAC ¶ 469. Under the November 2013 Data Use Policy, Facebook’s policies allowed users to share information about their friends with third-party app developers. Id. ¶¶ 48, 89. This policy stated 4 that app developers could ask for certain information about users’ friends and alerted users that 5 their friends might choose to share some of their information with app developers. Ex. 25, Dkt. 6 126-26. For example, the policy advised users that when using a music app, “[y]our friend 7 might . . . want to share the music you ‘like’ on Facebook.” Id. at 4 (“[I]f you’ve shared your likes 8 with just your friends, the application could ask your friend for permission to share them.”). Thus, 9 under this November 2013 policy, a user’s friend could re-share the user’s likes with an app that 10 the friend had downloaded, so long as the original user consented to such sharing by their friends. 11 United States District Court Northern District of California 3 The converse was also true; if a user chose to turn off all Platform apps, that user’s friends could 12 not share the user’s information with apps (at least, not without running afoul of the stated policy). 13 In 2014, however, Facebook announced that it would implement changes to its Platform 14 that would “dramatically limit the Facebook information apps could access,” and “shut off third 15 parties’ access to collect user friend data” to ensure that “everyone has to choose to share their 16 own data with an app themselves.” SAC ¶¶ 81–83, 186, 383, 434; see also Ex. 30, Dkt. 126-31 17 (disclosing that platform changes would be finalized one year later). The FTC interpreted this to 18 mean that Facebook would stop allowing third-party developers to collect data [about friends].” 19 Id. ¶ 83. The Court does not comment on whether that interpretation is correct. But see Ex. 26, 20 Dkt. 126-27 (2016 data policy warned users that when they use third-party apps, you share your 21 username, user ID, your age range and country/language, and your list of friends, as well as any 22 information that you share with them); accord Ex. 27 at 2, Dkt. 126-28; see also id. (“We transfer 23 information to vendors, service providers, and other partners who globally support our 24 business . . . .”). 25 Facebook-App Developer Agreements (“Platform Policy”). Third-party app developers 26 must agree to Facebook’s Platform Policy before offering apps on the Facebook platform. SAC 27 ¶¶ 275–76 & n. 265, 368–70. The Platform Policy, which was in place at all times relevant to the 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 4 1 allegations in the SAC, limits the extent to which developers can collect and use Facebook user 2 data, and requires developers to explain to users the categories of information they will collect and 3 how it will be used. Id. ¶¶ 210, 275–76, 383–70. The Platform Policy prohibits developers from 4 selling or transferring user data, and from using their customers’ friend data outside of customer 5 use of the app. Id. ¶ 468. 6 7 2. Alleged Events Relevant to Plaintiffs’ Claims Aleksandr Kogan and Cambridge Analytica. In 2013, Aleksandr Kogan, a professor and 8 data researcher at Cambridge University, developed a personality quiz app called “This is Your 9 Digital Life.” Id. ¶¶ 87–88; see also September 2019 Order at 4 (Plaintiffs admitted in first complaint that Kogan developed app in 2013); Hakopian v. Mukasey, 551 F.3d 843, 846 (9th Cir. 11 United States District Court Northern District of California 10 2008) (“Allegations in a complaint are considered judicial admissions.”). The app appeared on the 12 Facebook Platform in 2014 and told users that the results of the quiz would be used for academic 13 purposes. Id. ¶¶ 87–88. Approximately 270,000 people installed the app and consented to sharing 14 their data, including some information about their Facebook friends, see id. ¶ 89, which at that 15 time was permitted under Facebook’s policies, subject to the friends’ privacy and application 16 settings, see Ex. 25, Dkt. 126-26. 17 The December 2015 Guardian Article and Facebook’s Response. In December 2015, 18 The Guardian reported that Kogan, through his company Global Science Research (“GSR”), sold 19 some of the information collected through the “This Is Your Digital Life” app to Cambridge 20 Analytica, in violation of Facebook’s policies. Ex. 17, Dkt. 126-18; SAC ¶¶ 5, 86–89, 98, 468. 21 According to the article, Cambridge Analytica developed psychological profiles of U.S. voters 22 using the data of tens of millions of Facebook users (which had been harvested from Kogan’s 23 data) to support Ted Cruz’s presidential campaign. Ex. 17, Dkt. 126-18; ¶¶ 5, 86–89. After the 24 article was published, Facebook removed Kogan’s app from Facebook, and privately asked GSR 25 and Cambridge Analytica to delete the data and was told by the companies that the data had been 26 deleted. ¶¶ 5, 93, 137–38, 150, 186, 210, 377. 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 5 The Cambridge Analytica Story Resurfaces in 2018. On March 17, 2018, three years 1 2 after the original Cambridge Analytica story broke, The New York Times and The Guardian 3 reported that Defendants (1) delayed in addressing the Cambridge Analytica data breach and that 4 (2) the data had not been deleted (as reported by Defendants), but was used in connection with 5 President Donald Trump’s campaign. See id. ¶ 189. Cambridge Analytica had lied when it 6 represented to Facebook in 2016 that it had deleted all user data. Id. ¶¶ 20, 189-190. Facebook 7 then suspended Cambridge Analytica, its parent company, and certain related employees from the 8 Facebook Platform. ¶ 186. In response to the stories, Facebook’s common stock dropped nearly 7% on Monday, 9 March 19, 2018, the first trading day after the news broke, and fell an additional 2.5% the next 11 United States District Court Northern District of California 10 trading day. Id. ¶ 198. 12 Facebook’s First Quarter 2018 Earnings Report (“1Q18”) and the GDPR. On April 25, 13 2018, Defendants released a favorable first quarter earnings report, 1Q18, with quarterly revenue, 14 earnings, and daily and monthly active user growth exceeding analyst expectations. Id. ¶¶ 25, 15 219, 221, 223, 427. Although a “handful” of advertisers had “paused spend” with Facebook after 16 the Cambridge Analytica news, Facebook reported that this did not appear to reflect a “meaningful 17 trend.” Id. ¶ 429. During the earnings call, Facebook told investors that it anticipated expenses to 18 increase due to its investments in data security programs and the 48% increase in the number of 19 Facebook employees from the prior year. Id.; see also Ex. 9 at 7–8, Dkt. 126-10. The stock price 20 climbed more than 9% following the release of this report. SAC ¶ 25. By July, Facebook’s stock 21 price was trading well above $200 per share. Id. On this earnings call, Facebook also addressed the possible impact of the General Data 22 23 Protection Regulation, (“GDPR”)2 which took effect the month after 1Q18 results were released. 24 25 26 27 28 2 The GDPR is a broad set of privacy regulations governing the collection and use of personal data. It is designed to protect the privacy of European Union (“EU”) citizens. The GDPR has a host of disclosure and user-control requirements. For instance, (and notable here) the GDPR requires corporations to make their data collection and sharing policies opt-in, rather than opt-out. SAC ¶ 229. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 6 Id. ¶¶ 430–31; see also Ex. 9 at 8, 11, 15–16, 18, 23, Dkt. 126-10. Facebook claimed that 2 compliance with the GDPR would not be an issue because Facebook was already almost 3 compliant. SAC ¶ 232. However, Facebook did note that it was “early and difficult to 4 know . . . in advance” the business implications of Facebook’s implementation of the GDPR. 5 Indeed, Facebook anticipated that Facebook’s European daily and monthly user base could be “flat 6 to slightly down.” Ex. 9 at 8, 23, Dkt. 126-10. Facebook also noted that while they did not 7 anticipate the GDPR to significantly impacting advertising revenue, there was “certainly the 8 potential for some impact.” Id. at 8; see also id. at 18 (“[T]he amount of uncertainty [] for us and 9 all the other companies in the digital advertising industry is reasonably higher than it’s been [] 10 because we’re in the process of rolling out GDPR. We’re going to all know a lot more after we 11 United States District Court Northern District of California 1 rollout.”). 12 Facebook’s Second Quarter 2018 Earnings Report (“2Q18”). On July 25, 2018, 13 Facebook announced its 2Q18 earnings, which reported lower than expected revenue growth, 14 profitability, and user growth. SAC ¶¶ 243–44, 247–48. On July 26, 2018 the common stock 15 price dropped nearly 19%, resulting in a single-day loss of approximately $120 billion in market 16 capitalization. Id. ¶ 249. 17 Following the 2Q18 earnings, the Pew Research Center issued a report that it conducted 18 following the aftermath of the 2018 Cambridge Analytica scandal. The report—titled “Americans 19 are changing their relationship with Facebook”—documented changes in Facebook user 20 engagement. Id. ¶ 252. It revealed substantial disengagement by Facebook users during May 29 21 to July 11, 2018 (the study period). Id. Specifically, it stated that more than half (54%) of 22 Facebook users had changed their privacy settings to share less with Facebook, 42% had taken 23 extended breaks from engaging with Facebook, while more than a quarter (26%) had deleted the 24 Facebook app from their cell phones. Id. Disengagement was particularly pronounced among the 25 younger users, who are more coveted by advertisers. Id. 26 Facebook attributed the user growth slowdown to the effects of the “GDPR rollout, 27 consistent with the outlook we gave on the Q1 call,” but noted that the “vast majority of people 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 7 1 [had continued] opting in to . . . third-party data use.” Ex. 10 at 7, 18, Dkt. 126-11. During the 2 earnings call, one analyst remarked that Facebook had given an “accurate read into the June 3 quarter” on the likely impact of the GDPR. Id. at 15 (You have—you gave us a—what turned out 4 to be a pretty accurate read into the June quarter . . . .”); see also id. (“We had indicated . . . in the 5 first quarter that we would expect to see a decline [in daily active users and monthly active users 6 in Europe following implementation of the GDPR].”). Facebook also reported that its expenses 7 were up “50%” year-over-year, which accorded with estimates made in the prior quarter. Id. at 8 8 (“There are several factors contributing to that deceleration. For example, we expect currency to 9 be a slight headwind in the second half vs. the tailwinds we have experienced over the last several quarters. We plan to grow and promote certain engaging experiences like Stories that currently 11 United States District Court Northern District of California 10 have lower levels of monetization. We are also giving people who use our services more choices 12 around data privacy which may have an impact on our revenue growth.”). 13 Executive Defendants’ Sale of Facebook Stock. During the Class Period, Defendant 14 Zuckerberg sold approximately 30,000 Facebook shares for proceeds of more than $5.2 billion, 15 while Defendant Sandberg sold $389 million in Facebook shares and Defendant Wehner sold $21 16 million worth in Facebook shares. SAC ¶ 19. Plaintiffs use this to corroborate scienter. 3. Alleged Misstatements/Omissions 17 18 Plaintiffs allege that Defendants made a total of 83 materially misleading statements or 19 omissions in press releases, U.S. Securities and Exchange Commission (“SEC”) filings, earnings 20 calls, and public remarks at conferences. The Court has arranged these statements by source and 21 bolded/italicized the relevant portions of the statements. 22 Statements Concerning Facebook Users’ “Control” Over Their Data 23 Statement 1 24 “You own all of the content and information you post on Facebook, and you can control how it is shared through your privacy and application settings.” 25 26 SAC ¶ 326 (stated in Facebook’s Statement of Rights and Responsibilities) 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 8 1 Statement 2 2 “[W]hen you share on Facebook, you need to know that no one’s going to steal our data. No one is going to get your data that shouldn’t have it. That we’re not going to make money in ways that would make you feel uncomfortable . . . . And that you’re controlling who you share with. . . . Privacy for us is making sure that you feel secure, sharing on Facebook.” 3 4 5 6 SAC ¶ 327 (stated by Defendant Sandberg during 2017 Axios interview) Statement 3 7 “[T]he Facebook family of apps already applies the core principles in the [GDPR] framework because we built our services around transparency and control.” 8 SAC ¶ 328 (stated by Defendant Sandberg during 3Q17 earnings call) 9 Statement 4 “Our apps have long been focused on giving people transparency and control . . . .” 11 United States District Court Northern District of California 10 SAC ¶ 329 (stated by Defendant Sandberg during Facebook Gather Conference in January 2018) 12 Statement 5 13 “[T]he Facebook family of apps already applies the core principles in the GDPR framework, which are transparency and control.” 14 15 16 SAC ¶ 330 (stated by Defendant Sandberg during 4Q17 earnings call) Statement 6 17 “So we think with transparency and control, we’re set up well to be in a position where we’re compliant with GDPR when the regulation goes into effect in May.” 18 SAC ¶ 331 (stated by Defendant Wehner during 2018 Conference Call) 19 Statement 7 20 22 “In 2014, after hearing feedback from the Facebook community, we made an update to ensure that each person decides what information they want to share about themselves, including their friend list. This is just one of the many ways we give people the tools to control their experience. Before you decide to use an app, you can review the permissions the developer is requesting and choose which information to share. You can manage or revoke those permissions at any time.” 23 SAC ¶ 332 (stated by Defendant Facebook in 2018 post after 2018 Cambridge Analytica scandal) 24 Statement 8 25 26 “[T]he main principles are, you have control over everything you put on the service, and most of the content Facebook knows about you it [sic] because you chose to share that content with your friends and put it on your profile.” 27 SAC ¶ 333 (stated by Defendant Zuckerberg during 2018 phone conference) 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 9 21 1 Statement 9 2 3 “You’ve been hearing a lot about Facebook lately and how your data is being used. While this information can sometimes be confusing and technical, it’s important to know that you are in control of your Facebook, what you see, what you share, and what people see about you.” 4 SAC ¶ 334 (stated by Defendant Facebook in April 2018 post) 5 Statement 10 6 “We already show people what apps their accounts are connected to and allow them to control what data they’ve permitted those apps to use.” 7 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 SAC ¶ 335 (stated by Defendant Facebook in June 2018 to U.S. House of Representatives) Statement 11 “Privacy is at the core of everything we do, and our approach to privacy starts with our commitment to transparency and control. [. . .] Our approach to control is based on the belief that people should be able to choose who can see what they share and how their data shapes their experience on Facebook. People can control the audience for their posts and the apps that can receive their data. SAC ¶ 336 (stated by Defendant Facebook in June 2018 to U.S. House of Representatives) Statement 12 “This is the most important principle for Facebook: Every piece of content that you share on Facebook, you own and you have complete control over who sees it and — and how you share it, and you can remove it at any time. That’s why every day, about 100 billion times a day, people come to one of our services and either post a photo or send a message to someone, because they know that they have that control and that who they say it's going to go to is going to be who sees the content. And I think that that control is something that's important that I think should apply to — to every service.” 19 SAC ¶ 337(a) (stated by Defendant Zuckerberg in April 2018 to Joint Commerce & Judiciary Committees of U.S. Senate) 20 Statement 13 21 “That’s what the [Facebook] service is, right? It’s that you can connect with the people that you want, and you can share whatever content matters to you, whether that’s photos or links or posts, and you get control over it.” 22 23 24 SAC ¶ 337(b) (stated by Defendant Zuckerberg in April 2018 to Joint Commerce & Judiciary Committees of U.S. Senate) 25 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 10 1 Statement 14 2 “The two broad categories that I think about are content that a person is [sic] chosen to share and that they have complete control over, they get to control when they put into the service, when they take it down, who sees it. And then the other category are data that are connected to making the ads relevant. You have complete control over both.” 3 4 5 SAC ¶ 337(c) (stated by Defendant Zuckerberg in April 2018 to Joint Commerce & Judiciary Committees of U.S. Senate) 6 Statement 15 7 “Every person gets to control who gets to see their content.” 8 SAC ¶ 337(d) (stated by Defendant Zuckerberg in April 2018 to Joint Commerce & Judiciary Committees of U.S. Senate) 9 10 United States District Court Northern District of California 11 12 Statement 16 “But, Senator, the — your point about surveillance, I think that there’s a very important distinction to draw here, which is that when — when organizations do surveillance[,] people don’t have control over that. But on Facebook, everything that you share there[,] you have control over.” 13 SAC ¶ 337(e) (stated by Defendant Zuckerberg in April 2018 to Joint Commerce & Judiciary Committees of U.S. Senate) 14 Statement 17 15 “[O]n Facebook, you have control over your information.” 16 SAC ¶ 338(a) (stated by Defendant Zuckerberg in April 2018 to U.S. House of Representatives’ Energy and Commerce Committee) 17 18 19 20 21 22 23 24 25 26 Statement 18 “[E]very single time that you share something on Facebook or one of our services, right there is a control in line, where you control who — who you want to share with.” SAC ¶ 338(b) (stated by Defendant Zuckerberg in April 2018 to U.S. House of Representatives’ Energy and Commerce Committee) Statement 19 “Congresswoman, giving people control of their information and how they want to set their privacy is foundational to the whole service [on Facebook]. It’s not just a — kind of an add-on feature, something we have to . . . comply with. . . . all the data that you put in, all the content that you share on Facebook is yours. You control how it’s used.” SAC ¶ 338(c) (stated by Defendant Zuckerberg in April 2018 to U.S. House of Representatives’ Energy and Commerce Committee) 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 11 1 Statement 20 2 4 “Privacy is at the core of everything we do, and our approach to privacy starts with our commitment to transparency and control. [. . .] Our approach to control is based on the belief that people should be able to choose who can see what they share and how their data shapes their experience on Facebook. People can control the audience for their posts and the apps that can receive their data.” 5 SAC ¶ 339 (stated by Defendant Facebook in response to questions from the U.S. Senate) 6 Statement Concerning Users’ Privacy Settings 7 Statement 21 8 “We respected the privacy settings that people had in place. Privacy and data protections are fundamental to every decision we make.” 3 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 SAC ¶ 344 (stated by Defendant Facebook in March 2018 to The Washington Post) Statements Concerning Risks to Facebook’s Business Statement 22 “Security breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our systems, could harm our reputation and adversely affect our business.” SAC ¶ 350(a) (stated by Defendant Facebook in 2016 Form 10-K) Statement 23 “Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position.” SAC ¶ 350(b) (stated by Defendant Facebook in 2016 Form 10-K) Statement 24 “We provide limited information to . . . third parties based on the scope of services provided to us. However, if these third parties or developers fail to adopt or adhere to adequate data security practices . . . our data or our users’ data may be improperly accessed, used, or disclosed.” SAC ¶ 350(c) (stated by Defendant Facebook in 2016 Form 10-K) Statement 25 “Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss and to prevent or detect security breaches, we cannot assure you that such measures will provide absolute security.” SAC ¶ 355 (stated by Defendant Facebook in 2016 Form 10-K) Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 12 1 Statement 26 2 “If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenue, financial results, and business may be significantly harmed. 3 4 5 6 7 8 9 10 United States District Court Northern District of California 11 12 13 14 The size of our user base and our users’ level of engagement are critical to our success. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users of our products, particularly for Facebook and Instagram. We anticipate that our active user growth rate will continue to decline over time as the size of our active user base increases, and as we achieve higher market penetration rates. If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. . . . Any number of factors could potentially negatively affect user retention, growth, and engagement, including if: there are decreases in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security, or other factors SAC ¶ 358 (stated by Defendant Facebook in 2016 Form 10-K) Statements Concerning the Results of Facebook’s Investigation into Cambridge Analytica Statement 27 15 “Our investigation to date has not uncovered anything that suggests wrongdoing with respect to Cambridge Analytica’s work on the [Brexit] and Trump campaigns.” 16 SAC ¶ 362 (stated by Defendant Facebook to The Guardian in March 2017) 17 Statement 28 18 “Our investigation to date has not uncovered anything that suggests wrongdoing [with respect to Cambridge Analytica].” 19 20 21 SAC ¶ 363 (stated by Defendant Facebook to The Intercept in March 2017) Statement 29 22 “Our investigation to date has not uncovered anything that suggests wrongdoing [with respect to Cambridge Analytica].” 23 SAC ¶ 363 (stated by Defendant Facebook to The Intercept in March 2017) 24 25 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 13 1 Statements Concerning Facebook’s Response to Instances of Data Misuse 2 Statement 30 3 4 “Misleading people or misusing their information is a direct violation of our policies and we will take swift action against companies that do, including banning those companies from Facebook and requiring them to destroy all improperly collected data.” 5 SAC ¶ 368 (stated by Defendant Facebook to BuzzFeed News in February 2017) 6 Statement 31 7 8 “Misleading people or misusing their information is a direct violation of our policies and we will take swift action against companies that do, including banning those companies from Facebook and requiring them to destroy all improperly collected data.” 9 SAC ¶ 369 (stated by Defendant Facebook to Newsweek in June 2017) Statement 32 11 United States District Court Northern District of California 10 12 “Enforcement is both automated and manual, and can include disabling your app, restricting you and your app’s access to platform functionality, requiring that you delete data, terminating our agreements with you or any other action that we deem appropriate.” 13 SAC ¶ 370 (stated by Defendant Facebook in Data Policy) 14 Statement 33 “We are committed to vigorously enforcing our policies to protect people’s information. We will take whatever steps are required to see that this happens. We will take legal action if necessary to hold them responsible and accountable for any unlawful behavior. 15 16 17 18 19 20 21 22 * * * On an ongoing basis, we also do a variety of manual and automated checks to ensure compliance with our policies and a positive experience for users. These include steps such as random audits of existing apps along with the regular and proactive monitoring of the fastest growing apps. We enforce our policies in a variety of ways — from working with developers to fix the problem, to suspending developers from our platform, to pursuing litigation.” SAC ¶ 376 (stated by Defendant Facebook in March 2018 in group entitled “Suspending Cambridge Analytica and SCL Group from Facebook”) 23 24 25 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 14 1 Statements About Facebook Users Consenting to/Knowingly Giving Information to Kogan 2 Statement 34 3 “The claim that this is a data breach is completely false. Aleksandr Kogan requested and gained access to information from users who chose to sign up to his app, and everyone involved gave their consent. People knowingly provided their information, no systems were infiltrated, and no passwords or sensitive pieces of information were stolen or hacked.” 4 5 6 7 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 SAC ¶ 380 (stated by Defendant Facebook in March 2018 Facebook post) Statement 35 “The good news is that the most important actions to prevent this from happening again today we have already taken years ago. . . . In 2014, to prevent abusive apps, we announced that we were changing the entire platform to dramatically limit the data apps could access. . . . In this case, we already took the most important steps a few years ago in 2014 to prevent bad actors from accessing people’s information in this way.” SAC ¶ 383 (stated by Defendant Zuckerberg on March 2018 on personal Facebook page) Statements About Facebook’s Compliance with 2012 FTC Consent Decree Statement 36 “Violation of existing or future regulatory orders or consent decrees could subject us to substantial monetary fines and other penalties that could negatively affect our financial condition and results of operations.” SAC ¶ 389 (stated by Defendant Facebook in 2016 Form 10-K) Statement 37 “[W]e respect local laws and regulations . . . Certainly, regulation is always an area of focus that we work hard to make sure that we are explaining our business clearly and making sure regulators know the steps we take to protect privacy as well as making sure that we’re in compliance.” SAC ¶ 391 (stated by Defendant Sandberg during 2Q17 Earnings Call) Statement 38 “We reject any suggestion of violation of the consent decree.” SAC ¶ 392 (stated by Defendant Facebook to The Washington Post in March 2018) Statement 39 25 “You asked about the FTC consent order. We’ve worked hard to make sure that we comply with it.” 26 SAC ¶ 393 (stated by Defendant Zuckerberg in April 2018) 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 15 1 Statement 40 2 “We’re in constant conversation with the FTC, and that consent decree was important, and we’ve taken every step we know how to make sure we’re in accordance with it.” 3 4 5 SAC ¶ 394 (stated by Defendant Sandberg in April 2018 interview) Statement 41 6 “Our view is that — is that we believe that we are in compliance with the consent order, but I think we have a broader responsibility to protect people's privacy even beyond that.” 7 SAC ¶ 395 (stated by Defendant Zuckerberg in April 2018 to U.S. Senate) 8 Statement 42 9 11 “Affected users or government authorities could initiate legal or regulatory actions against us in connection with any security breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Any of these events could have a material and adverse effect on our business, reputation, or financial results. 12 SAC ¶ 401 (stated by Defendant Facebook in 2016 Form 10-K) 13 Statements About Facebook Users Whose Accounts Were Compromised 14 Statement 43 15 16 “We notify our users with context around the status of their account and actionable recommendations if we assess they are at increased risk of future account compromise by sophisticated actors or when we have confirmed their accounts have been compromised.” 17 SAC ¶ 405 (stated by Defendant Facebook in April 2017 on its corporate website) 18 Statement 44 19 Facebook stated that it would provide: United States District Court Northern District of California 10 20 21 22 23 • “Notifications to specific people if they have been targeted by sophisticated attackers, with custom recommendations depending on the threat models”; and • “Proactive notifications to people who have yet to be targeted, but whom we believe may be at risk based on the behavior of particular malicious actors.”
 SAC ¶ 405 (stated by Defendant Facebook in April 2017 on its corporate website) 24 25 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 16 1 Statement About Facebook Compliance with GDPR 2 Statement 45 3 “Europe[] has passed a single privacy law [i.e., the GDPR] and we are adhering to that. But privacy is something we take really seriously.” 4 5 6 7 8 9 SAC ¶ 411 (stated by Defendant Sandberg in October 2017) Statements About Use of Platform to Influence Elections Statement 46 “Though the volume of these posts was a tiny fraction of the overall content on Facebook, any amount is too much. Those accounts and Pages violated Facebook’s policies — which is why we removed them, as we do with all fake or malicious activity we find.” SAC ¶ 414 (stated by Facebook’s General Counsel [Mr. Strech] to U.S. Senate/U.S. House of Representatives) 11 United States District Court Northern District of California 10 Statement 47 12 SWALWELL: Can each of you assure the American people that you have fully searched your platforms and disclosed to this committee every Russian effort to influence the 2016 election? Mr. Edgett? 13 14 15 16 EDGETT: We’ve provided everything we have to date, and we’re continuing to look at this. So there will be more information that we share. SWALWELL: Mr. Stretch? 17 STRETCH: The same is true, particularly in connection with, as I mentioned earlier, some of the threat sharing that the companies are now engaged in. 18 SAC ¶ 415 (stated by Facebook’s General Counsel [Mr. Stretch] to House subcommittee) 19 Statement 48 20 Feinstein QFR #4: Facebook confirmed in the House Intelligence committee hearing that they found no overlap in the groups targeted by the Trump campaign’s advertisements, and the advertisements tied to the Russia-linked accounts identified thus far. . . . Does this assessment extend to both the content used and groups targeted by the companies associated with the campaign — like Cambridge Analytica — and Russian accounts? 21 22 23 24 Stretch: We have seen only what appears to be insignificant overlap between the targeting and content used by the IRA and that used by the Trump campaign (including its third-party vendors). We are happy to schedule a meeting with your staff to discuss our findings in more detail. 25 SAC ¶ 416 (stated by Facebook’s General Counsel [Mr. Stretch] to Senator Feinstein) 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 17 1 Statements About Daily Active Users (“DAU”) and Monthly Active Users (“MAU”) Metrics 2 Statement 49 3 4 May 3, 2017: “Daily active users (DAUs) — DAUs were 1.28 billion on average for March 2017, an increase of 18% year-over-year. Monthly active users (MAUs) — MAUs were 1.94 billion as of March 31, 2017, an increase of 17% year-over- year.” 5 SAC ¶ 420(a) (stated by Defendant Facebook in press release) 6 Statement 50 7 “Our community now has more than 1.9 billion people, including almost 1.3 billion people active every day.” 8 9 10 United States District Court Northern District of California 11 12 13 14 SAC ¶ 420(a) (stated by Defendant Zuckerberg in May 2017) Statement 51 July 26, 2017: “Daily active users (DAUs) — DAUs were 1.32 billion on average for June 2017, an increase of 17% year-over-year. Monthly active users (MAUs) — MAUs were 2.01 billion as of June 30, 2017, an increase of 17% year-over- year.” SAC ¶ 420(b) (stated by Defendant Facebook in press release) Statement 52 15 “Our community is now more than 2 billion people, including more than 1.3 billion people who use Facebook every day.” 16 SAC ¶ 420(b) (stated by Defendant Zuckerberg in June 2017) 17 Statement 53 18 19 November 1, 2017: “Daily active users (DAUs) — DAUs were 1.37 billion on average for September 2017, an increase of 16% year-over- year. Monthly active users (MAUs) — MAUs were 2.07 billion as of September 30, 2017, an increase of 16% year-over-year.” 20 SAC ¶ 420(c) (stated by Defendant Facebook in press release) 21 Statement 54 22 23 “Our community continues to grow, now with nearly 2.1 billion people using Facebook every month, and nearly 1.4 billion people using it daily. Instagram also hit a big milestone this quarter, now with 500 million daily actives.” 24 SAC ¶ 420(c) (stated by Defendant Zuckerberg in November 2017) 25 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 18 1 Statement 55 2 3 January 31, 2018: “Daily active users (DAUs) — DAUs were 1.40 billion on average for December 2017, an increase of 14% year-over-year. Monthly active users (MAUs) — MAUs were 2.13 billion as of December 31, 2017, an increase of 14% year-over-year. 4 SAC ¶ 420(d) (stated by Defendant Facebook in press release) 5 Statement 56 6 “Our community continues to grow with more than 2.1 billion people now using Facebook every month and 1.4 billion people using it daily. Our business grew 47% year-over-year to $40 billion.” 7 8 9 SAC ¶ 420(d) (stated by Defendant Zuckerberg in January 2018) Statement 57 “We monitor the sentiment and engagement of people engaging in News Feed. We’re really pleased with the strength of sentiment and engagement as we’ve ramped up News Feed ads.” 11 United States District Court Northern District of California 10 SAC ¶ 421(a) (stated by Defendant Wehner) 12 Statement 58 13 “Because your experience on Facebook or Instagram is about the quality of what you see . . . what we do is we monitor it carefully. We ramp slowly. We monitor engagement sentiment, quality of ads. We get a lot of feedback directly from people who use Facebook. . . . And we just continue to monitor the metrics.” 14 15 16 17 18 19 20 21 22 23 24 SAC ¶ 421(b) (stated by Defendant Sandberg) Statement 59 “Improving the quality and the relevance of the ads has enabled us to show more of them, without harming the experience. And, our focus really remains on the experience. So, we’ll continue to monitor engagement and sentiment very carefully.” SAC ¶ 421(c) (stated by Defendant Wehner) Statement 60 “When we introduce ads into feed and continue to increase the ad load, we monitor really carefully. We’re looking at user engagement on the platform. We also look at the quality of ads.” SAC ¶ 421(d) (stated by Defendant Sandberg) 25 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 19 Statement 61 2 Analyst: “Can you just talk about some of the biggest trends you’re monitoring? 3 4 Wehner: “Yes, I can start with the stats. So on — yes, Mark, on the engagement front, we’re seeing time spent growth per DAU across the Facebook family of apps and that includes Facebook itself.” 5 SAC ¶ 421(e) 6 Statement 62 7 8 “We have also increased our estimate for inauthentic accounts to approximately 2% to 3% of worldwide MAUs. . . . We continuously monitor and aggressively take down those accounts. These accounts tend to be less active and thus, we believe, impact DAU less than MAU.” 9 SAC ¶ 421(f) (stated by Defendant Wehner) 10 Statements About 1Q18 Financial Results 11 United States District Court Northern District of California 1 Statement 63 12 13 Facebook Reports First Quarter 2018 Results: “Daily active users (DAUs) — DAUs were 1.45 billion on average for March 2018, an increase of 13% year-over-year. Monthly active users (MAUs) — MAUs were 2.20 billion as of March 31, 2018, an increase of 13% year-over- year.” 14 SAC ¶ 427. 15 Statement 64 16 “Despite facing important challenges, our community continues to grow. More than 2.2 billion people now use Facebook every month and more than 1.4 billion people use it daily.” 17 18 19 20 21 22 23 24 25 26 27 28 SAC ¶ 428 (stated by Defendant Zuckerberg) Statement 65 “Before going through our results, I want to take a minute to talk about ads and privacy. [. . .] We also believe that people should control their advertising experience. For every ad we show, there’s an option to find out why you’re seeing that ad and to turn off ads from that advertiser entirely. And you can opt out of being targeted based on certain information like the websites you visit or your relationship status. Advertising and protecting people’s information are not at odds. We do both. Targeted ads that respect people’s privacy are better ads. They show people things that they’re more likely to be interested in. We regularly hear from people who use Facebook that they prefer to see ads that are relevant to them and their lives. Effective advertising is also critical to helping businesses grow. * * * Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 20 1 2 3 In the coming months, GDPR will give us another opportunity to make sure people fully understand how their information is used by our services. It’s an EU regulation, but as Mark said a few weeks ago, we’re going to extend these controls to everyone who uses Facebook, regardless of where in the world they live. Our commitment to you is that we will continue to improve our ads model by strengthening privacy and choice while giving businesses of all sizes new and better tools to help them grow. 4 5 6 7 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 * * * Going forward, we will continue to focus on these 3 priorities and ensure that people’s privacy is protected on Facebook.” SAC ¶ 430 (stated by Defendant Sandberg on 1Q18 earnings call) Statement 66 “The changes that Mark and Sheryl described will, we believe, benefit our community and our business and will serve to strengthen Facebook overall. At the highest level, we believe that we can continue to build a great ads business while protecting people’s privacy. * * * So on GDPR, I think fundamentally, we believe we can continue to build a great ads business while protecting the privacy of the people that use Facebook. As part of the rollout of GDPR, we’re providing a lot of control to people around their ad settings. And we’re committed, as Sheryl and Mark mentioned, to providing the same controls worldwide. And while we don’t expect these changes will significantly impact advertising revenue, there’s certainly potential for some impact. Any change of our — of the ability for us and our advertisers to use data can impact our optimizational potential at the margin, which could impact our ability to drive price improvements in the long run. So we’ll just have to watch how that plays out over time. I think it’s important to note that GDPR is affecting the entire online advertising industry. And so what’s really most important in winning budgets is our relative performance versus other opportunities presented to marketers, and that’s why it will be important to watch kind of how this plays out at the industry level. * * * 26 I don’t know that we really see a doomsday scenario here. I think what we think is that depending on how people react to the controls and the ad settings, there could be some limitations to data usage. We believe that those will be relatively minor. But depending on how broadly the controls are adopted and set, there is a potential to impact targeting for our advertisers. Obviously, if they are less able to target effectively, they’ll get a lower ROI on their advertising campaigns. They’ll then bid differently into the auction. That ultimately will flow through into how we can realize price on the impressions that we’re selling. So I think that’s the mitigating issue that we could see, depending on how GDPR and our broader commitment to providing these same controls worldwide could play out. We think that there is a great case for not just our business but also for the user experience on Facebook to have targeting because we think it’s a better experience for the people who use Facebook to have targeted ads. We think we can do that in a privacy-protected way, and it’s just a better experience. You get more relevant ads, and it’s — and I think overall benefits that only the advertisers but also the people who use Facebook. So I don’t think see a real doomsday scenario here. We see an opportunity to really make the case.” 27 SAC ¶ 431 (stated by Defendant Wehner on 1Q18 Earnings Call) 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 21 20 21 22 23 24 25 1 Statement 67 2 “I also want to talk about data privacy. And what happened with Cambridge Analytica was a major breach of trust. An app developer took data that people had shared with them and sold it. So we need to make sure that this never happens again, so we’re taking a number of steps here. 3 4 5 6 7 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 First, as you all know we’re restricting the data that developers will be able to request from people. Now the good news here is that back in 2014, we already made a major change to how the platform works to prevent people from sharing a lot of their friends’ information. So this specific situation could not happen again today.” SAC ¶ 434 (stated by Defendant Zuckerberg) Statement 68 “So we recently went through this process of rolling out our flows and settings for GDPR compliance, first, in Europe, and we’re going to do it around the world. And one of the settings that we ask people proactively to make a decision on is, do you want your ads, for how we do ad targeting, to be informed by the other apps and websites that you use? People have to proactively make a decision. Yes or no. Do they want that data used? And the majority, I think we can even say vast majority of people say, yes, they want that data used. Because if they’re going to see ads, you want to see good ads, right? So I think that this is one of the core questions that society faces and individuals face across the different services that we use, are how do we want our data to be used and where? . . . This is going to be a core thing that we need to think about going forward, but we think about it very deeply as this is a — just a core part of the value that we’re trying to provide.” SAC ¶ 437 (stated by Defendant Zuckerberg) Statement 69 “Privacy is at the core of everything we do, and our approach to privacy starts with our commitment to transparency and control. Our threefold approach to transparency includes, first, whenever possible, providing information on the data we collect and use and how people can control it in context and in our products. Second, we provide information about how we collect and use data in our user agreements and related educational materials. And third, we enable people to learn more about the specific data we have about them through interactive tools such as Download Your Information, which lets people download a file containing data that they may want to take to another service, and Access Your Information, a tool we are launching that will let people more easily access and manage their data on Facebook. Our approach to control is based on the belief that people should be able to choose who can see what they share and how their data shapes their experience on Facebook. People can control the audience for their posts and the apps that can receive their data. They can see and delete the history of their activities on Facebook, and, if they no longer want to use Facebook, they can delete their account and the data associated with it. Of course, we recognize that controls are only useful if people know how to find and use them. That is why we continuously deliver inproduct educational videos in people’s News Feeds on important privacy topics. We are also inviting people to take our Privacy Checkup — which prompts people to review key data controls — and we are sharing privacy tips in education campaigns off of Facebook, including through ads on other websites. To make our privacy controls easier to find, we are launching a new settings menu that features core privacy settings in a single place. We are always working to help people understand and control how their data shapes their experience on Facebook. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 22 1 2 3 * 6 7 8 9 * United States District Court Northern District of California 14 15 16 17 18 19 20 21 22 23 * We believe targeted advertising creates value for people and advertisers who use Facebook. Being able to target ads to the people most likely to be interested in the products, service or causes being advertised enables businesses and other organizations to run effective campaigns at reasonable prices. * * * We do not have a “business reason” to compromise the personal data of users; we have a business reason to protect that information. 12 13 * We maintain our commitment to privacy by not telling advertisers who users are or selling people’s information to anyone. That has always been true. We think relevant advertising and privacy are not in conflict, and we’re committed to doing both well. 10 11 * Like many other free online services, we sell advertising space to third parties. Doing so enables us to offer our services to consumers for free. This is part of our mission to give people the power to build community and bring the world closer together. 4 5 * * * * We believe that everyone has the right to expect strong protections for their information, and that we also need to do our part to help keep our community safe, in a way that’s consistent with people’s privacy expectations.” SAC ¶ 440 (stated by Defendant Facebook in June 2018 in response to questions from the U.S. Senate) Statements About Selling User Data Statement 70 “We don’t sell your data. We don’t sell personal information like your name, Facebook posts, email address, or phone number to anyone. Protecting people’s privacy is central to how we’ve designed our ad system.” SAC ¶ 445 (stated by Defendant Facebook in November 27) Statement 71 24 “These principles are our commitment to the people who use our services. They are: We build for people first. We don’t sell your data.” 25 SAC ¶ 446 (stated by Defendant Facebook in January 2018) 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 23 1 Statement 72 2 “We provide a free service that’s an ad-based business model, and in order to do that, we do not sell your data.” 3 4 5 SAC ¶ 447 (stated by Defendant Sandberg in March 2018) Statement 73 8 “There are other internet companies or data brokers or folks that might try to track and sell data, but we don’t buy and sell. [. . .] The second point, which I touched on briefly there: for some reason we haven’t been able to kick this notion for years that people think we will sell data to advertisers. We don’t. That’s not been a thing that we do. Actually it just goes counter to our own incentives. . . And we’re going to use data to make those services better . . . but we’re never going to sell your information.” 9 SAC ¶ 448 (stated by Defendant Zuckerberg in April 2018) 6 7 Statement 74 11 United States District Court Northern District of California 10 12 “What we share: We will never sell your information to anyone. We have a responsibility to keep people’s information safe and secure, and we impose strict restrictions on how our partners can use and disclose data.” 13 SAC ¶ 449 (stated by Defendant Facebook) 14 Statement 75 15 16 “It’s a good opportunity to remind everyone what we say all the time, but we need to keep saying so people understand it — which is that we don’t sell data, period, . . . And again, we do not sell data, ever.” 17 SAC ¶ 450 (stated by Defendant Sandberg during April 2018 NPR interview) 18 Statement 76 19 “We do not sell data or give your personal data to advertisers, period.” 20 SAC ¶ 451 (stated by Defendant Sandberg during April 2018 NPR interview) 21 Statement 77 22 “I want to be clear. We don’t sell information. So regardless of whether we could get permission to do that, that’s just not a thing we’re going to go do.”418 Zuckerberg further stated, “Well, Senator, once again, we don’t sell any data to anyone. We don’t sell it to advertisers, and we don’t sell it to developers.” 23 24 25 SAC ¶ 452 (stated by Defendant Zuckerberg before U.S. Senate Committees) 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 24 1 Statement 78 2 “Mr. Chairman, you’re right that we don’t sell any data. . . . There is a common misperception, as you say, that is just reported — often keeps on being reported, that, for some reason, we sell data. I can’t be clearer on this topic. We don’t sell data. . . . Congressman, we don’t sell people’s data. So I think that’s an important thing to clarify up front.” 3 4 5 6 7 8 9 10 SAC ¶ 453 (stated by Defendant Zuckerberg before U.S. House of Representatives Committee) Statement 79 “We use the information you provide and that we receive from websites to target ads for advertisers, but we don’t tell them who you are. We don’t sell your information to advertisers or anyone else.” SAC ¶ 454(a) (stated by Defendant Zuckerberg during 1Q18 Earnings Call) Statement 80 United States District Court Northern District of California 11 “At Facebook, we have always built privacy protection into our ads system. [. . .] We don’t sell your information to advertisers or anyone else.” 12 SAC ¶ 454(b) (stated by Defendant Sandberg during 1Q18 Earnings Call) 13 Statement 81 14 “We don’t tell advertisers who you are; and we don’t sell your data.” 15 SAC ¶ 455 (stated by Defendant Facebook in May 2018) 16 Statement 82 17 19 “Facebook does not sell people’s information to anyone, and we never will. When the individual is a Facebook user, we are also able to use this information to personalize their experiences on Facebook, whether or not they are logged out, but we will not target ads to users relying on this information unless the user allows this in their privacy settings. We don’t sell or share this information with third parties.” 20 SAC ¶ 456 (stated by Defendant Facebook in June 2018 to U.S. House of Representatives) 21 Statement 83 22 “We don’t sell data. . . . So while it may seem like a small difference to you, this distinction on ‘selling data,’ I actually think to people it’s like the whole game, right? So we don’t sell data, we don’t give the data to anyone else, but overwhelmingly people do tell us that if they’re going to see ads on Facebook, they want the ads to be relevant; they don’t want bad ads.” 18 23 24 25 SAC ¶ 457 (stated by Defendant Zuckerberg in a July 2018 interview with Recode) 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 25 B. Procedural History 1 On October 15, 2018, Plaintiffs filed their Consolidated Class Action Complaint. See Dkt. 2 3 86. On September 25, 2019, this Court granted Defendants’ motion to dismiss the consolidated 4 complaint after finding that Plaintiffs had failed to carry their burden to plead with particularity 5 falsity and scienter—the Court did not address reliance or loss causation in that order. Order 6 Granting Defendants’ Motion to Dismiss (“September 2019 Order”), Dkt. 118. Plaintiffs filed their second amended consolidated complaint on November 15, 2019. See 7 Dkt. 123. Thereafter, Defendants filed a motion to dismiss the second amended consolidated class 9 action complaint. Motion to Dismiss Second Amended Consolidated Class Action Complaint 10 (“Mot.”), Dkt. 126. Plaintiffs filed an opposition. Lead Plaintiffs’ Memorandum of Points and 11 United States District Court Northern District of California 8 Authorities in Opposition to Defendants’ Motion to Dismiss (“Opp.”), Dkt. 130. Defendants then 12 filed a reply. Reply in Support of Defendants’ Motion to Dismiss (“Reply”), Dkt. 132. 13 14 II. JUDICIAL NOTICE Defendants ask this Court to take judicial notice of Exhibits 1 through 30, which are 15 attached to the Declaration of Brian M. Lutz in Support of Defendant’s Motion to Dismiss. See 16 Request for Judicial Notice in Support of Defendants’ Motion to Dismiss Second Amended 17 Consolidated Class Action Complaint (“RJN re MTD”), Dkt. 127. Defendants also ask this Court 18 to take judicial notice of Exhibit 31, which is attached to the Declaration of Brian M. Lutz in 19 Support of Defendants’ Reply (“RJN Reply”), Dkt. 133. Plaintiffs do not oppose this request and 20 also ask the Court to take judicial notice of Exhibits A-K. Plaintiffs’ Request for Judicial Notice 21 and Response to Defendants’ Request for Judicial Notice (“P RJN”), Dkt. 131. 22 Generally, district courts may not consider material outside the pleadings when assessing 23 the sufficiency of a complaint under Federal Rule of Civil Procedure 12(b)(6). Lee v. City of L.A., 24 250 F.3d 668, 688 (9th Cir. 2001). When matters outside the pleadings are considered, the 25 12(b)(6) motion typically must convert into a motion for summary judgment. Khoja v. Orexigen 26 Therapeutics, Inc., 899 F.3d 988, 998 (9th Cir. 2018); see also Fed. R. Civ. P. 12(d). This rule, 27 however, does not apply to the incorporation by reference doctrine or judicial notice. Khoja, 899 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 26 1 F.3d at 998. Federal Rule of Evidence 201 permits a court to take judicial notice of an adjudicative fact 2 3 “not subject to reasonable dispute,” that is “generally known” or “can be accurately and readily 4 determined from sources whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201(b). 5 Specifically, a court may take judicial notice: (1) of matters of public record, Khoja, 899 F.3d at 6 999, (2) that the market was aware of information contained in news articles, Heliotrope Gen., Inc. 7 v. Ford Motor Co., 189 F.3d 971, 981 n.18 (9th Cir. 1999), and (3) publicly accessible websites 8 whose accuracy and authenticity are not subject to dispute, Daniels-Hall v. Nat’l Educ. Ass’n, 629 9 F.3d 992, 998–99 (9th Cir. 2010). A court may consider the facts contained in the noticed 10 materials. Barron v. Reich, 13 F.3d 1370, 1377 (9th Cir. 1994). Incorporation by reference treats certain documents as though they are part of the United States District Court Northern District of California 11 12 complaint itself. Daniels-Hall, 629 F.3d at 998. These are situations where the complaint 13 “necessarily relies” upon a document or where the complaint alleges the contents of the document 14 and the document’s authenticity and relevance is not disputed. Coto Settlement v. Eisenberg, 593 15 F.3d 1031, 1038 (9th Cir. 2010). For the following reasons, Defendants’ Exhibits 1–31 are subject to judicial notice. 16 17 • Exhibits 1–5 and 7–8 are SEC filings and Exhibit 6 is a table Defendants created that 18 summarizes the forms contained in Exhibit 5. Judicial notice of these exhibits is 19 appropriate because they are public filings made by Facebook with the SEC (or summaries 20 of such public filings), and are therefore matters of public record not subject to reasonable 21 dispute. See Fed. R. Evid. 201(b); see also Weller v. Scout Analytics, Inc., 230 F. Supp. 3d 22 1085, 1094 n.5 (N.D. Cal. 2017) (taking judicial notice of SEC filings). 23 • Exhibits 9–11 are transcripts of Defendants’ earnings calls and shareholder meetings. 24 Judicial notice of Exhibits 9 through 11 is appropriate—these exhibits are publicly 25 available documents and are thus matters of public record not subject to reasonable 26 dispute. See Fed. R. Evid. 201(b); see also In re Energy Recovery Inc. Sec. Litig., 2016 27 WL 324150, at *3 (N.D. Cal. Jan. 27, 2016). 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 27 1 • Exhibit 12 is a transcript of a November 27, 2018 witness examination before the Digital, 2 Culture, Media, and Sport Committee of the House of Commons of the United Kingdom. 3 Exhibit 13 is a February 2019 report from the Information Commissioner’s Office of the 4 Parliament of the United Kingdom. Judicial notice of Exhibits 12 and 13 is appropriate 5 because they are matters of public record not subject to reasonable dispute. See Fed. R. 6 Evid. 201(b); Khoja, 899 F.3d at 999. 7 • Exhibits 14–16 are court filings. Judicial notice is appropriate because these exhibits are 8 matters of public record not subject to reasonable dispute. See Fed. R. Evid. 201(b). 9 “Materials from a proceeding in another tribunal are appropriate for judicial notice.” Biggs v. Terhune, 334 F.3d 910, 915 n.3 (9th Cir. 2003); Foster Poultry Farms v. Alkar- 11 United States District Court Northern District of California 10 Rapidpak-MP Equip., Inc., 868 F. Supp. 2d 983, 990 (E.D. Cal. 2012) (“Courts routinely 12 take judicial notice of publicly available records . . . from other court proceedings.”). 13 • Exhibits 17–24 are news articles. Exhibits 17 through 24 are publicly available 14 documents, available on publicly accessible websites, they are capable of accurate and 15 ready determination from sources whose accuracy cannot reasonably be questioned, and 16 are thus subject to judicial notice. Fed. R. Evid. 201(b); Daniels-Hall, 629 F.3d at 999. 17 • Exhibits 25–27 are versions of Facebook’s Data Policy, which were in effect during the 18 time period covered by Plaintiffs’ allegations. The exhibits are subject to judicial notice 19 because they are capable of accurate and ready determination from sources whose accuracy 20 cannot reasonably be questioned. Fed. R. Evid. 201(b). It is common for courts to take 21 judicial notice of a company’s historical privacy policies. See, e.g., Matera v. Google Inc., 22 2016 WL 8200619, at *5 (N.D. Cal. Aug. 12, 2016) (taking judicial notice of multiple 23 versions of Google’s privacy policy, including archived versions); Oracle Am., Inc. v. 24 CedarCrestone, Inc., 938 F. Supp. 2d 895, 901 (N.D. Cal. 2013) (same). 25 • Exhibit 28 is Facebook’s white paper, which is referenced and relied on in paragraphs 405 26 through 407 of the SAC. Because it is referenced and relied on in the SAC, the Court may 27 consider it under the incorporation by reference doctrine. See Coto, 593 F.3d at 1038. 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 28 1 • Exhibit 29 is a Bloomberg stock table showing the historical stock prices of Facebook 2 from January 2, 2018 to December 11, 2018. The Court may take judicial notice of 3 Facebook’s stock prices. See Lloyd v. CVB Fin. Corp., 2012 WL 12883522, at *13 (C.D. 4 Cal. Jan 12, 2012) (collecting cases); Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 5 F.3d 1049, 1064 n.7 (9th Cir. 2008); In re Copper Mountain Sec. Litig., 311 F. Supp. 2d 6 857, 864 (N.D. Cal. 2004) (“Information about the stock price of publicly traded 7 companies [is] the proper subject of judicial notice.”). 8 • Exhibit 30 is an April 30, 2014 Facebook blog post entitled “The New Facebook Login and Graph API 2.0.” Because Exhibit 30 is a publicly available document, available on a 10 publicly accessible website, it is capable of accurate and ready determination from sources 11 United States District Court Northern District of California 9 whose accuracy cannot reasonably be questioned, and it is thus subject to judicial notice. 12 Fed. R. Evid. 201(b); see also Daniels-Hall, 629 F.3d at 999; Diaz, 2018 WL 2215790, at 13 *3 (“Publically accessible websites and news articles are proper subjects of judicial 14 notice.”). 15 • Exhibit 31 is Facebook’s February 3, 2017 Annual Report on Form 10-K. Judicial notice 16 is appropriate because it is a public filing made by Facebook with the SEC and is thus a 17 matter of public record, not subject to reasonable dispute. See Weller, 230 F. Supp. 3d at 18 1094 n.5. 19 Plaintiffs’ Exhibits A-K are also subject to judicial notice. These exhibits are either news 20 articles, court filings, or other matters of public record. For the same reasons above, the Court 21 finds them suitable for judicial notice. Accordingly, the Court GRANTS both Plaintiffs’ and 22 Defendants’ requests for judicial notice. 23 24 25 III. DISCUSSION A. Legal Standard To survive a Rule 12(b)(6) motion to dismiss, a complaint must contain sufficient factual 26 matter to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 27 (2009); Fed. R. Civ. Pro. 8(a). Threadbare recitals of the elements of a cause of action supported 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 29 1 by mere conclusory statements “do not suffice.” Ashcroft, 556 U.S. at 678. 2 Securities fraud cases, however, must meet Rule 8’s plausibility standard, the Private 3 Securities Litigation Reform Act (“PSLRA”), and Rule 9(b)’s higher pleading standard. See 4 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319–22 (2007); Zucco Partners, LLC v. 5 Digimarc, Corp., 552 F.3d 981, 991 (9th Cir. 2009). The PSLRA mandates that securities fraud complaints “‘specify’” each misleading 7 statement, set forth the facts “‘on which [a] belief’” that a statement is misleading was “‘formed,’” 8 and “‘state with particularity facts giving rise to a strong inference that the defendant acted with 9 the required state of mind [scienter].’” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 345 (2005) 10 (quoting 15 U.S.C. §§ 78u–4(b)(1)–(2)); see also Metzler, 540 F.3d at 1070 (“The PSLRA has 11 United States District Court Northern District of California 6 exacting requirements for pleading ‘falsity.’”). Plaintiffs bear the burden of proving that the 12 defendant’s misrepresentations ‘“caused the loss for which the plaintiff seeks to recover.’” Dura 13 Pharm., 544 U.S. at 345–46 (quoting § 78u-4(b)(4)). In determining whether a “strong inference” 14 of scienter has been sufficiently alleged, this Court must not only draw “inferences urged by the 15 plaintiff,” but also engage in a “comparative evaluation,” and examine and consider “competing 16 inferences [in defendants’ favor] drawn from the facts alleged.” Tellabs, 551 U.S. at 314. Hence, 17 scienter must not only be “plausible or reasonable,” it must also be “cogent and at least as 18 compelling as any opposing inference of nonfraudulent intent.” Id. at 324. 19 20 21 Federal Rule of Civil Procedure 9(b) further requires a plaintiff pleading securities fraud to state, with particularity, the circumstances constituting fraud or mistake. B. Defendants’ Motion to Dismiss 22 To show securities fraud under Section 10(b) and Rule 10b-5, plaintiffs must allege facts 23 sufficient to establish (1) a material misrepresentation or omission; (2) made with scienter, i.e., a 24 wrongful state of mind; (3) a connection between the misrepresentation and the purchase or sale of 25 a security; (4) reliance upon the misrepresentation; (5) economic loss; and (6) loss causation. 26 Loos v. Immersion Corp., 762 F.3d 880 (9th. Cir. 2014), amended (Sept. 11, 2014). “To 27 determine whether a private securities fraud complaint can survive a motion to dismiss for failure 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 30 1 to state a claim, the court must determine whether particular facts in the complaint, taken as a 2 whole, raise a strong inference that defendants intentionally or with deliberate recklessness made 3 false or misleading statements to investors.” In re LeapFrog Enter., Inc. Sec. Litig., 527 F. Supp. 4 2d. 1033, 1039–40 (N.D. Cal. 2007). 5 In their motion to dismiss, Defendants challenge the sufficiency of Plaintiffs’ Section 10b 6 and Rule 10b-5 claim as to (1) misrepresentation, (2) scienter, (3) reliance, and (4) causation. 7 First, Defendants argue that Plaintiffs fail to plead actual misrepresentations—that is, statements 8 by Defendants that are actually false and/or omit material facts. The Court agrees that some of the 9 alleged misrepresentations are not actionable or that Plaintiffs have failed to plead with particularity the circumstances that make the alleged misrepresentations actionable. However, for 11 United States District Court Northern District of California 10 the below reasons, the Court finds a number of the alleged misrepresentations actionable. Second, 12 Defendants argue that Plaintiffs have failed to plead scienter. The Court disagrees; Plaintiffs have 13 alleged sufficient facts to connect the alleged misrepresentations with a wrongful state of mind. 14 Third, Defendants argue that Plaintiffs have failed to plead reliance. The Court disagrees, 15 Plaintiffs have established the presumption of reliance. Finally, Defendants argue that Plaintiffs 16 have failed to plead loss causation. The Court agrees. Plaintiffs have not connected the alleged 17 loss with alleged misrepresentations. For that reason, the Court must dismiss Plaintiffs’ SAC. 18 19 20 C. Discussion 1. Misrepresentation For a misstatement to be actionable, the statement must be both false and material. See 21 Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988) (“It is not enough that a statement is false or 22 incomplete, if the misrepresented fact is otherwise insignificant.”). To survive a motion to 23 dismiss, a complaint must “specify each statement alleged to have been misleading, [and] the 24 reason or reasons why the statement is misleading.” Metzler, 540 F. 3d at 1070 (quoting 15 25 U.S.C. § 78u–4(b)(1)). 26 Statements are misleading only if they “affirmatively create an impression of a state of 27 affairs that differs in a material way from the one that actually exists.” Brody v. Transitional 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 31 1 Hosp. Corp., 280 F.3d 997, 1006 (9th Cir. 2002). Rule 10b-5 prohibits “only misleading and 2 untrue statements, not statements that are incomplete.” Id. Silence, absent a duty to disclose, “is 3 not misleading under Rule 10b-5.” Basic, 485 U.S. at 239 n.17. “Often a statement will not 4 mislead even if it is incomplete or does not include all relevant facts.” Brody, 280 F.3d at 1006. 5 Not all material adverse events must be disclosed to investors. See In re Rigel Pharm., Inc. 6 Sec. Litig., 697 F.3d 869, 880 n.8 (9th Cir. 2012) (discussing Matrixx Initiatives, Inc. v. 7 Siracusano, 563 U.S. 27, 38–45 (2011)). Information that a reasonable investor might consider 8 material need not always be disclosed; companies can control “what they have to disclose [per 9 § 10(b)] by controlling what they say to the market.” Matrixx, 563 U.S. at 45. Consequently, omissions are only actionable if a defendant has a duty to disclose information and fails to do so. 11 United States District Court Northern District of California 10 Basic, 485 U.S. at 239 n.17. Hence, if the omission does not “make the actual statement[] 12 misleading,” a company need not supplement the statement “even if investors would consider the 13 omitted information significant.” Rigel, 697 F.3d at 880 n.8. 14 Finally, an actionable statement must also “be capable of objective verification.” Retail 15 Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268, 16 1275 (9th Cir. 2017). For example, business puffery or opinion statements—i.e., vague, optimistic 17 statements—are not actionable because they do not “induce the reliance of a reasonable investor.” 18 Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 606 (9th Cir. 2014). 19 In their SAC, Plaintiffs allege thirteen categories of allegedly misleading statements: (1) 20 statements about control; (2) statements about respecting users’ privacy; (3) statements about risk 21 factors; (4) statements about the Cambridge Analytica investigation; (5) statements about data 22 misuse; (6) statements about user consent; (7) statements about compliance with the FTC consent 23 decree; (8) statements about user notification; (8) statements about GDPR compliance; (9) 24 statements about Russian interference in U.S. elections; (10) statements about user metrics; (11) 25 statements about 1Q18 results; and (12) statements about the sale of user data. The Court 26 addresses the alleged misstatements by category. 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 32 a. Deletion Certifications 1 2 An overarching issue through the alleged misrepresentations is whether or not Facebook 3 knew that Kogan, GSR, and Cambridge Analytica did not delete the misappropriated data in 2015. 4 Plaintiffs’ main theory of securities fraud is that Defendants knew that Cambridge Analytica had 5 sensitive user information and was using that information for improper purposes, which created a 6 significant risk of business, reputational, and/or economic harm to Facebook. And, despite this 7 knowledge, represented the risks posed by Cambridge Analytica as “hypothetical.” See, e.g., SAC 8 ¶¶ 135, 136. 9 The Parties each agree that Defendants did not know about Kogan’s connections with Cambridge Analytica until December 2015—when The Guardian article broke. Id. ¶ 137. Once 11 United States District Court Northern District of California 10 the article broke, Facebook learned that Kogan had used GSR to collect user data from Facebook 12 and create personality scores for Facebook users. Id. Facebook also discovered that GSR, 13 through Kogan, had transferred these personality scores (and not the underlying data) to 14 Cambridge Analytica. Id. Both Parties also agree that Kogan’s transfer of personality scores to a 15 third-party violated Facebook’s Platform Policy (Kogan’s retention of users’ friends’ data is 16 another matter). Id. ¶ 138. Thereafter, Facebook privately asked GSR and Cambridge 17 Analytica—the entities with illicit access to the data—to delete the personality scores. Id. Both 18 GSR and Cambridge Analytica represented that the scores had been deleted. Id. 19 Plaintiffs belabor the point that Facebook did “nothing else to confirm that the data had 20 been deleted.” Id. ¶ 139. This misses the mark; this is not a tort action. The relevant inquiry is 21 not whether Defendants had a “duty” to do more. That question is already before Judge Chhabria. 22 See In re Facebook, Inc., Consumer Privacy User Profile Litig., 402 F. Supp. 3d 767, 800 (N.D. 23 Cal. 2019). Rather, the question is whether Facebook misrepresented its efforts to contain the 24 Cambridge Analytica “breach.” Thus, that Facebook did nothing else to confirm that the data had 25 been deleted is only relevant if Facebook represented that it would confirm such deletion. 26 Plaintiffs maintain that Facebook made such representations in their data use policy. Yet, 27 nowhere in Facebook’s data policy is there any representation that Facebook would confirm 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 33 1 deletion. To the contrary, the data policy only represents that it would “require” data to be 2 deleted. See Statement 32. It makes no guarantees about how Facebook would enforce that 3 requirement. 4 Perhaps recognizing that their “lack of confirmation” argument essentially boils into a duty 5 argument, Plaintiffs argue that “Facebook did not believe the oral statements from GSR and 6 Cambridge Analytica that the data had been deleted.” SAC ¶ 140. This is closer; with this theory, 7 Plaintiffs can argue that Facebook knew GSR and Cambridge Analytica still could access the data 8 and that representations to the contrary were false. But, Plaintiffs encounter another problem— 9 they fail to provide the Court with any reason why Facebook’s belief would be misplaced. Instead, Plaintiffs use speculation to argue that Facebook should have known that Cambridge 11 United States District Court Northern District of California 10 Analytica was still involved in data mining. For instance, Plaintiffs highlight February 2016 12 reports that a group supporting Brexit signed up Cambridge Analytica. Id. ¶ 141. From this, 13 Defendants were supposed to deduce that Cambridge Analytica was using the misappropriated 14 personality scores. Id. ¶ 42. Of course, Plaintiffs do not explain why the equally likely 15 inference—that Cambridge Analytica was using data other than the misappropriated Facebook 16 data—is overcome. 17 More damning is Plaintiffs’ admission that after the June 2016 Brexit vote, Facebook 18 contacted Cambridge Analytica to confirm deletion. Id. ¶ 142. Plaintiffs argue that this shows a 19 “guilty conscience” by Facebook. The converse is true; it also shows that Defendants wanted to 20 ensure their policies had been followed and that the data had been deleted. Again, Plaintiffs 21 provide no reason as to why this inference is not also possible. 22 Next, Plaintiffs point the Court toward the “Confidential Settlement Agreement and 23 Mutual Release” agreement Facebook signed with Kogan following the June 2016 Brexit vote. Id. 24 ¶ 143. Two important things occurred in this agreement: first, Kogan certified that he and GSR 25 had deleted the data. Id. ¶ 144. Second, the agreement revealed that the data Kogan transferred to 26 Cambridge Analytica was not just personality scores, but also included highly sensitive user 27 information like name, birthdays, page likes, and locations. Id. Plaintiffs focus on this later 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 34 1 revelation and show that it “revealed beyond doubt” that GSR and Cambridge Analytica had lied 2 when initially describing the types of user data they had misappropriated. This is literally true. 3 But, the inference Plaintiffs draw from it is mere speculation. Plaintiffs argue that this second 4 revelation showed Facebook that Cambridge Analytica had not deleted the data and that the 5 company was still misusing the data. Id. ¶ 146. Plaintiffs, however, provide no specific facts to 6 support this inference. Instead, Plaintiffs point the Court toward vague evidence about Cambridge 7 Analytica use of personality profiles—which they could have compiled with non-Facebook data— 8 to target political advertising. Id. The significance of these “red flags” is never explained. The 9 Court, rather, is supposed to draw inferences in Plaintiffs’ favor, on the sole basis that the SEC identified these facts as “red flags.” This is not enough. See In re UBS Auction Rate Secs. Litig., 11 United States District Court Northern District of California 10 2010 WL 2541166, at *19 n.11 (S.D.N.Y. June 10, 2010); see also Vess v. Ciba-Geigy Corp. USA, 12 317 F.3d 1097, 1107 (9th Cir. 2003) (“[T]he circumstances constituting the alleged fraud [must] 13 be specific enough to give the defendants notice of the particular misconduct . . . . Averments of 14 fraud must be accompanied by the who, what, when, where, and how of the misconduct charged.” 15 (quotation marks and citations omitted)). 16 Finally, Plaintiffs focus on Roger McNamee’s warnings to Defendants about bad actors 17 using Facebook data to “harm innocent people.” Id. ¶¶ 147, 148. These warnings, however, fail 18 to establish that McNamee told Defendants that Cambridge Analytica did not delete the data or 19 that he would even have such personal knowledge about Cambridge Analytica’s data use. 20 This is all to say, the SAC does not have sufficient allegations from which the Court can 21 infer that Defendants knew that GSR and Cambridge Analytica did not delete the relevant data. 22 This undercuts many of Plaintiffs’ theories of falsity because it demonstrates that Defendants’ 23 representations about the Cambridge Analytica scandal were not false and/or made with scienter. 24 The Court will not re-analyze this in each below section, but it should be noted, that this is in the 25 background of the below analysis. 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 35 b. Statements About Control 1 Statements 1–20 concern Facebook users’ ability to control their data and information. 2 3 See SAC ¶ 325. Importantly, this Court held in its September 2019 Order that Statement 2 was 4 plead with adequate falsity. Plaintiffs have now presented the Court with every statement by 5 Defendants using the word “control” and have attempted to lump together any statement that 6 references control. This is incorrect. Metzler, 540 F. 3d at 1070 (noting that plaintiff must allege 7 why each statement is false). Simply stating that users have control over their experience does not 8 render the statement inaccurate. Rather, the relevant inquiry is whether Plaintiffs have alleged 9 particular facts showing that the alleged misstatements were false when made. See Ronconi v. 10 Larkin, 253 F.3d 423, 430 (9th Cir. 2001). Three sub-categories emerge. There are statements like Statements 2, 8, and 12–19, United States District Court Northern District of California 11 12 where an Executive Defendant pledges that users “control what they share” and how the data is 13 used. These statements are of the type that the Court previously found actionable. There are 14 statements like Statements 1, 7, 9–11, and 20, where Defendant Facebook pledges that users can 15 control the audience for their posts and the apps that receive their data via the privacy settings. 16 These statements are of the type previously found inactionable.3 And then, there are statements 17 like Statements 3–6, which focus on “transparency and control.” These statements have not been 18 previously analyzed. Plaintiffs argue the statements (irrespective of the sub-category) are false by 19 their literal terms and because they omit material facts necessary to make them not misleading. 20 But see supra III.C.1.a. (finding that Plaintiffs have not alleged sufficient facts to show 21 Defendants omitted information about the Cambridge Analytica data deletion, or mislead investors 22 about deletion and access to data). Specifically, Plaintiffs argue that the statements are false 23 because users did not have control over their data since (i) Facebook continued to give whitelisted 24 25 26 27 28 3 Specifically, the Court previously held Statements 1 & 7 inactionable. In their Consolidated Class Action Complaint, Plaintiffs alleged that these statements were false because (1) Defendants’ privacy policies were deliberately confusing to users and (2) they were meant to cast doubt on new reports about Facebook’s failure to address data breaches. See September 2019 Order at 33, 41. Plaintiffs’ theory of falsity has changed in this action and the Court finds this new theory, coupled with the factual background, sufficient to show falsity. See infra III.C.1.b. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 36 1 parties users’ friend’s data (and overrode user privacy settings to do so), (ii) bad actors (like 2 Cambridge Analytica) could still access Facebook data, and (iii) Facebook could not control the 3 data once it was given to third-parties. SAC ¶¶ 340, 343. 4 In Statements 2, 8, and 12–19, an Executive Defendant (either Defendant Sandberg or 5 Defendant Zuckerberg) made assurances like “you have complete control over who sees your 6 content,” “no one is going to get your data that shouldn’t have it,” “you are controlling who you 7 share with,” and “you have control over everything you put on the service.” Plaintiffs have 8 alleged that the contrary was true—that is, that users did not control their data as whitelisted 9 developers could override privacy controls. See, e.g., id. ¶ 3. More concerning, once data was in the hands of app developers, developers could share the data with “bad actors” or other third- 11 United States District Court Northern District of California 10 parties without Facebook’s knowledge. As demonstrated by the Cambridge Analytica data 12 scandal, Facebook had limited control over the data once it “left” Facebook’s servers. Id. ¶ 9 13 (noting that the data Kogan misappropriated was not deleted despite certifications to the contrary). 14 This is to say, users did not have control over their data; whitelisted developers could still access, 15 use, and potentially abuse user data, much like Kogan did in 2015. 16 Plaintiffs have plead sufficient, particular facts which show that Statements 2, 8, and 12– 17 19 were false when made. In April 2014, Facebook issued a press release promising to shut-off 18 third party access to user-friend data to ensure that “everyone has to choose to share their own data 19 with an app themselves.” Id. ¶ 82; see also Ex. 30, Dkt. 126-31. This announcement established 20 two timelines: new apps would be immediately confined to the new privacy terms, while existing 21 apps would have a full year to upgrade. Ex. 30, Dkt. 126-31. This “transition period” ended April 22 30, 2015. During this transition period, existing developers could continue to access friends’ data, 23 subject to a users’ privacy and application setting. Ex. 30, Dkt. 126-31. 24 Plaintiffs allege that new-whitelisted app developers were able to access user data and 25 users’ friends’ data in contravention of the April 2014 announcement. More concerning, 26 Statements 2, 8, and 12–19 were made in 2018, which is long after the “transition period” 27 discussed in the April 2014 announcement. Thus, at the time Statements 2, 8, and 12–19 were 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 37 1 made, there was no notification to users that their data or their friends’ data could still be accessed 2 by whitelisted developers (whether such developers were using new or existing apps). It was thus 3 false for Defendants to say users “controlled” their data since whitelisted app-developers could 4 access user-data in contravention of user privacy settings. See SAC ¶¶ 111–25 (alleging the 5 specifics of whitelisting, including that whitelisted apps could override privacy settings through to 6 nearly the end of the Class Period); see also ¶ 116 (investigation by The New York Times revealed 7 that during the Class Period, Facebook allowed at least 60 phone and other device makers 8 continued access to users’ friends’ data without consent). Two such third-party developers were 9 Huawei, a Chinese telecom company, with ties to the Chinese government and Mail.Ru Group, a Kremlin-connected technology conglomerate. Id. ¶¶ 16, 125. After Cambridge Analytica, and 11 United States District Court Northern District of California 10 especially after the 2018 The Guardian story, Defendants knew or should have known that once 12 data is released to third-party app developers, it is near-impossible for Facebook to control the 13 sharing or deletion of that data. See id. ¶¶ 86–106, 171–72. Hence, it was false for Defendants to 14 state that users had “complete control” over their data when they knew that user data was released 15 to whitelisted developers with little to no oversight. For these reasons, the Court holds that 16 Plaintiffs have adequately plead falsity as required by the PSLRA for Statements 2, 8, and 12–19. 17 Statements 1, 7, 9–11, and 20 pertain to statements made by Defendant Facebook about 18 user control on the platform. For instance, Statement 1 told users that they could control the 19 sharing of their content and information via privacy and application settings. Likewise, 20 Statement 7 told users that they were being given “tools to control their experience.” And, 21 Statement 9 stated that users were told they could “control what data . . . apps [could] use.” 22 Defendants argue that these statements are “indisputably true,” see Mot. at 11, because these 23 statements describe how Facebook’s platform functions, see Reply at 4. But, these statements do 24 not fully describe how Facebook’s platform functions. Take Statement 20, where Defendant 25 Facebook stated: “People can control the audience for their posts and the apps that can receive 26 their data.” Accepting Plaintiffs’ allegations that, despite Defendant Facebook’s assurances of 27 control, certain whitelisted developers and phone companies were able to access user data and 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 38 1 circumvent user privacy settings, renders Statement 20 false. Indeed, the issue is not what users 2 chose to post, but whether Defendants’ promises of control were true. By default, if a third-party 3 can access a users’ data, without permission and in contravention of Facebook’s stated policy, a 4 user does not have control over their content. Hence, Statements 1, 7, 9–11, and 20 are 5 misleading because they indicate that users could control who accessed their data, when 6 whitelisted developers and certain phone companies could still access user information. Users 7 thus did not have “control” over their content and the Court holds that Plaintiffs have adequately 8 plead falsity as to these statements. In Statements 3–6, Plaintiffs challenge Defendants’ representations that Facebook “built 9 [its] services around transparency and control.” Defendants argue that these statements are too 11 United States District Court Northern District of California 10 vague to be actionable. Reply at 5. In the alternative, Defendants argue that these statements are 12 true. 13 To be misleading, a statement must be “capable of objective verification.” Hewlett- 14 Packard Co., 845 F.3d at 1275. For example, “puffing”—expressing an opinion rather than a 15 knowingly false statement of fact—is not misleading. Id. The Court finds that Statements 3–6 16 are capable of objective verification. These statements are not the “soft statements,” “loose 17 predictions,” or “aspirational goals” typically found to be puffery. See id. at 1049. Paradigm 18 examples of puffery include “business remained strong,” “consolidation would be very positive,” 19 or “we want to be a company known for its ethical leadership.” An investor cannot quantify terms 20 like “strong,” “very positive,” or “wants.” Such statements are too vague to impact an investors 21 investment decisions and are thus inactionable. In contrast, these statements can be verified—if 22 Plaintiffs’ allegations are true, Facebook was not built around transparency and control. The 23 secret whitelisting practice is antithetical to Defendants’ statements that Facebook is built around 24 “transparency and control.” In other words, if Facebook shared user data, as is alleged, then the 25 service is neither transparent nor focused on user control. For these reasons, Plaintiffs have 26 adequately plead falsity as to Statements 3–6 and Defendants’ motion to dismiss Statements 1– 27 20 on falsity grounds is DENIED. 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 39 c. Statement About Respecting Users’ Privacy 1 Plaintiffs claim that Statement 21—“We respected the privacy settings that people had in 2 3 place”—was false and misleading because Facebook continued to give whitelisted third-parties 4 and others access to users’ friends’ data after April 2014. SAC ¶ 345. For the reasons detailed 5 above, see III.C.1.b., the Court finds that Plaintiffs have adequately plead falsity as to Statement 6 21 and DENIES Defendants’ motion to dismiss this statement on falsity grounds. d. Statements About Risk Factors 7 8 Statements 22–26 refer to Defendant Facebook’s 10-K SEC risk disclosure statements. 9 Plaintiffs again argue that these statements are materially false and misleading because the risks warned of had already materialized and were not disclosed. Opp. at 9 (“The above statements 11 United States District Court Northern District of California 10 were materially misleading because they presented the risk of improper access, disclosure, and use 12 of user data as merely hypothetical . . . .”). Plaintiffs first allege that it was misleading for 13 Facebook to state that, “[a]ny failure to prevent or mitigate security breaches and improper access 14 to or disclosure of our data could result in the loss or misuse of such data, which could harm our 15 business and reputation and diminish our competitive position.” (Statement 23). Plaintiffs next 16 allege that it was misleading for Facebook to warn that if “third parties or developers fail to adopt 17 or adhere to adequate data security practices, or in the event of a breach of their networks, our 18 data or our users’ data may be improperly accessed, used, or disclosed.” (Statement 24). In 19 Plaintiffs’ view, these statements are misleading because Defendants knew that Kogan had already 20 improperly disclosed the data of tens of millions of Facebook users to Cambridge Analytica and 21 that the data was still in use by Cambridge Analytica. Opp. at 94; but see supra III.C.1.a. For a risk disclosure to be false or misleading, a plaintiff must allege facts indicating that, 22 23 when the risk factor was made, the risk warned of was “already affecting” the defendant. Lloyd v. 24 25 26 27 28 4 Plaintiff relies on the SEC’s Complaint, which alleges that Facebook’s risk factor statements were misleading. This reliance is misplaced. Defendant Facebook did not admit to this charge. Ex. 16 at ¶ 2, Dkt. 126-17 (“Without admitting or denying the allegations of the complaint . . . .”). Statements made by the SEC in settlement documents are not law, they are “untested assertions by litigants” and the position articulated by the SEC is “not binding on this Court.” In re UBS Auction Rate Secs. Litig., 2010 WL 2541166, at *19 n.11. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 40 1 CVB Fin. Corp., 2012 WL 12883522, at *19 (C.D. Cal. Jan. 12, 2012); see also Baker v. Seaworld 2 Entm’t, Inc., 2016 WL 2993481, at *12 (S.D. Cal. Mar. 31, 2016) (holding that risk disclosure 3 statements not materially false or misleading because “[p]laintiffs . . . fail to plausibly allege 4 Defendants knew that [warned-of risks] were having any impact on attendance”); Kim v. Advanced 5 Micro Devices, Inc., 2019 WL 2232545, at *7–8 (N.D. Cal. May 23, 2019) (“An omission is 6 misleading where it ‘affirmatively create[s] an impression of a state of affairs that differs in a 7 material way from the one that actually exists.” (quoting Brody, 280 F.3d at 1006). 8 Williams v. Globus Medical Inc., 869 F.3d 235 (3d Cir. 2017) is instructive. There, the 9 relevant risk disclosure warned that “if any of our independent distributors were to cease to do business with us, our sales could be adversely affected.” Id. at 242. The plaintiffs argued that this 11 United States District Court Northern District of California 10 statement was misleading because the defendants failed to warn investors that they had in fact lost 12 an independent distributor. Id. at 241. The court disagreed. The risk warned of was the risk of 13 adverse effects on sales, not the loss of independent distributors generally. Id. The risk at issue 14 thus only materialized if sales were adversely affected at the time the risk disclosures were made. 15 Id. Accordingly, because the plaintiffs failed to allege that the company’s sales were adversely 16 affected by the decision to terminate the distributor, the risk disclosure was not misleading and the 17 defendants’ duty to disclose was not triggered. Id. at 243; see also Kim, 2019 WL 2232545, at 18 *7–8 (finding risk factors statements not misleading because “the potential risks disclosed in the 19 SEC filings had not come to fruition when Defendants filed the challenged risk disclosures”). 20 The same analysis applies here. The relevant risks discussed in Statements 22, 23, 25, 21 and 26 are reputation, business, or competitive harm, not improper access to or the disclosure of 22 user data. Plaintiffs do not allege that, at the time the risk disclosure was made, the Cambridge 23 Analytica scandal was harming Facebook’s reputation, business, or competitive position. Nor can 24 they. At the time these risk disclosures were made in February 2017, both Kogan’s and 25 Cambridge Analytica’s misuse of user data were matters of public knowledge (with no alleged 26 harm to Facebook’s business, reputation, or competitive positions). See Ex. 17, Dkt. 126-18 27 (Guardian story published in December 2015). Accordingly, Statements 22, 23, 25, and 26 were 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 41 1 not misleading because the potential risks presented therein were not yet “affecting” Facebook. 2 Statement 24 presents a different scenario. There, the risk identified is the improper use 3 or disclosure of user data. This is what Plaintiffs allege occurred (see supra for more discussion 4 on whitelisting). However, Plaintiffs have a chronology problem.5 When Defendants identified 5 data misuse and disclosure as relevant risks in 2016, Kogan’s and Cambridge Analytica’s misuse 6 of Facebook user data was already public knowledge, and had been so for more than a year. See 7 SAC ¶ 5 n.3 (citing Harry Davies, Ted Cruz Using Firm that Harvested Data on Millions of 8 Unwitting Facebook Users, The Guardian (Dec. 11, 2015), https://www.theguardian.com/us- 9 news/2015/dec/11/senator-ted-cruz-president-campaign-facebook-user-data). Thus, as of December 2015, investors knew that Kogan had collected user data through his app and then sold 11 United States District Court Northern District of California 10 that data to Cambridge Analytica in violation of Facebook’s policies, and that Cambridge 12 Analytica in turn used Kogan’s data to create psychological profiles of voters for the purpose of 13 assisting political campaigns. SAC ¶¶ 5, 86–92, 232, 280. Investors therefore had all of the 14 information they needed to evaluate Statement 24—because the risk of data misuse and loss had 15 already been realized, investors would not have been misled as to this risk. See Paskowitz v. 16 Arnall, 2019 WL 3841999, at *9 (W.D.N.C. Aug. 15, 2019) (“At the same time the Company 17 disclosed the ‘risks’ of attracting and retaining key personnel[,] the Company also disclosed the 18 identities of the key personnel and the numbers of investment professionals working in the 19 business. Therefore, investors would not have been misled concerning the degree to which the 20 ‘risk’ of employee departures had been realized . . . .”); cf. Sgarlata v. PayPal Holdings, Inc., 2018 21 WL 6592771, at *2 (N.D. Cal. Dec. 13, 2018) (finding material misstatement where statement 22 failed to fully disclose an unknown-risk because that created a false impression of reality); see 23 also Brody, 280 F.3d at 1006 (“[An omission] must affirmatively create an impression of a state of 24 25 26 5 The Court also notes that Plaintiffs have not overcome Defendants’ argument that Facebook reasonably believed that the data had been deleted and thus that there was no risk of improper access. 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 42 1 affairs that differs in a material way from the one that actually exists.”).6 For these reasons, the Court holds that Plaintiffs have failed to plead falsity as required by 2 3 the PSLRA for Statements 22–26 and the Court GRANTS Defendants’ motion to dismiss as to 4 those statements. e. Statements About Cambridge Analytica Investigation 5 Plaintiffs next argue that Defendants’ statements about “the results of Facebook’s 6 7 investigation into Cambridge Analytica’s data misuse” were false and/or misleading. SAC 8 ¶¶ 361–66 (Statements 27–29).7 Plaintiffs claim it was misleading for Defendant Facebook to 9 state in March 2017 that its “investigation to date ha[d] not uncovered anything that suggests wrongdoing with respect to Cambridge Analytica’s work on the [Brexit] and Trump campaigns” 11 United States District Court Northern District of California 10 because Facebook had found evidence of wrongdoing by Cambridge Analytica in or before 12 December 2015—namely, that Cambridge Analytica had improperly accessed the data of 13 Facebook users, had misused it during campaigns, and that Kogan had violated Facebook policies 14 by transferring user data to Cambridge Analytica. Id. ¶¶ 97–100, 136–38, 141–49, 152, 365–66. 15 Defendants argue that the SAC lacks contemporaneous facts from which the Court can 16 infer that, as of March 2017, Facebook had determined that the misappropriated data was still 17 being used in connection with the Brexit and Trump campaigns. Id.; see also Reply at 13. The 18 Court agrees. In their Opposition, for the first time, Plaintiffs allege that top management knew 19 about Cambridge Analytica’s involvement with the Trump campaign because around June 2016, 20 Facebook embedded three employees in the Trump campaign, where the employees worked side- 21 by-side with Cambridge Analytica people on a gigantic dataset that “was obviously the same one 22 that had been misappropriated by Cambridge Analytica two years earlier.” Opp. at 15. Yet, the 23 24 25 26 27 28 6 For this reason, Plaintiffs reliance on Berson v. Applied Signal Technology, Inc., 527 F.3d 982 (9th Cir. 2008) is misplaced. There, the company failed to disclose information that rendered its risk disclosures misleading. Id. at 987. In contrast, the events that Plaintiffs claim render Facebook’s risk disclosures misleading were fully disclosed in 2015 (i.e., before Defendant Facebook’s risk disclosure statements were submitted to the SEC). 7 Importantly, these statements focus on Cambridge Analytica’s use of misappropriated Facebook user-data on political campaigns only. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 43 1 SAC mentions Trump’s campaign and Brexit only in passing. See SAC ¶ 164 (“Facebook [had] 2 repeatedly lied to journalists about the severity of the Cambridge Analytica scandal as part of an 3 alleged coverup of a privacy breach that gave up to 87 million users’ personal data to the Trump- 4 linked political firm.”); Id. ¶¶ 140–43 (stating only that Facebook knew of Cambridge Analytica’s 5 involvement in Brexit, but failing to plead specific factual allegations to that effect).8 It is well established that a complaint may not be amended by briefs in opposition to a 6 motion to dismiss. See Diamond S.J. Enter. v. City of San Jose, 395 F. Supp. 3d 1202, 1231 (N.D. 8 Cal. 2019). Given the dearth of allegations in the SAC linking Cambridge Analytica’s privacy 9 violations to the Brexit and Trump campaigns, there is no factual basis for this Court to conclude 10 that Defendant Facebook made a material misrepresentation when it stated that its investigation 11 United States District Court Northern District of California 7 “had not uncovered anything that suggests wrongdoing with respect to Cambridge Analytica’s 12 work on the [Brexit] and Trump campaigns.” See Metzler, 540 F.3d at 1070 (“The PSLRA has 13 exacting requirements for pleading ‘falsity.’ . . . A litany of alleged false statements, 14 unaccompanied by the pleading of specific facts indicating why those statements were false, does 15 not meet this standard.”). Although the SAC includes voluminous allegations which tend to show 16 that Facebook’s investigation revealed wrongdoing by Kogan and Cambridge Analytica, the SAC 17 fails to connect that wrongdoing to either the Brexit or Trump campaign. For that reason, the 18 Court cannot conclude that Statements 27–29 are actionable and the Court GRANTS 19 20 21 22 23 24 25 26 27 28 8 The Court cautions Plaintiffs about misrepresenting the context of an alleged misrepresentation. In their opposition, Plaintiffs contend that Statement 28 was not limited to the Trump/Brexit campaign. Opp. at 21. By the statement’s terms, this might be true. However, in context of the article in which it is quoted, it is obvious from the title of that article alone that Statement 28 relates to Facebook’s investigation into wrongdoing during the Trump campaign. See Mattathias Schwartz, Facebook Failed to Protect 30 Million Users from Having Their Data Harvested by Trump Campaign Affiliate, Intercept (Mar. 30, 2017), https://theintercept.com/2017/03/ 30/facebook-failed-to-protect-30-million-users-from-having-their-data-harvested-by-trumpcampaign-affiliate/ (discussing the models or algorithms used by the Trump campaign and stating that Facebook “continues to maintain that whatever happened during the run-up to the election was business as usual” (emphasis added)). This is to say, Statements 27–29 are all confined to Facebook’s investigation of data misuse by Cambridge Analytica during the Trump and Brexit campaigns. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 44 1 Defendants’ motion to dismiss as to these statements.9 f. Statements About Response to Data Misuse 2 Statements 30–33 concern statements about Facebook’s “responses to instances of data 3 4 misuse.” In January, February and June 2017, Defendants stated that they would take “swift 5 action” against companies that mislead people or misuse their information and would require such 6 companies to destroy improperly collected data. SAC ¶¶ 368–70 (Statements 30–32). In March 7 2018, Defendants stated that they were “committed to vigorously enforcing their policies to 8 protect people’s information” and would take necessary steps against third-parties who had 9 misused data. Id. ¶ 376 (Statement 33). Plaintiffs argue that these statements were misleading because Facebook did not: (1) take swift action against third parties who had misused information; 11 United States District Court Northern District of California 10 (2) require data misusers to destroy or delete improperly collected data; or (3) vigorously enforce 12 its policies. Id. ¶¶ 375, 379. The Court previously dismissed these statements. The analysis underlying that dismissal 13 14 has not changed. When Statements 30–32 were made in 2017, Facebook “[had] investigate[d] 15 the alleged data misuse, [had] remove[d] Kogan’s app from Facebook, and [had] obtain[ed] 16 certifications and confirmations that all user data had been destroyed.” September 2019 Order at 17 30; see also SAC ¶¶ 137–38; supra III.C.1.a. Likewise, Facebook never made a promise that it 18 would “automatically” require improperly collected data to be destroyed. Facebook only 19 20 21 22 23 24 25 26 27 28 9 Plaintiffs again rely on the SEC Complaint to show falsity as to Statements 27–29. A closer look at the SEC Complaint, however, reveals that the SEC’s complaint contains no allegations linking Cambridge Analytica’s policy violation to the Brexit or Trump campaign; in fact, the complaint omits that portion of the challenged statement all together. Ex. 15, Dkt. 126-16. Secondly, the SAC includes a footnote, see ¶ 152 n.131, which references an article in which Roger McNamee, a Facebook investor and mentor of Defendant Zuckerberg, discusses how Facebook had three employees infiltrate President Trump’s campaign. Pursuant to the incorporation by reference doctrine, the Court can consider this article. However, Plaintiffs do not argue that this footnote alone meets the PSLRA’s specificity requirements and the Court cannot find any precedent stating that the PSLRA’s requirements can be met through the incorporation by reference doctrine. For that reason, the Court finds that this footnote does not show “specific facts” demonstrating falsity. See Irving Firemen’s Relief & Ret. Fund v. Uber Techs., 2018 WL 4181954, at *6 (N.D. Cal. Aug. 31, 2018) (noting that, in this district, courts have rejected the “laborious deconstruction and reconstruction of a great web of . . . allegations”). Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 45 1 promised that it would require the data to be destroyed; it did not specify the means it would use to 2 ensure such deletion. Thus, relying on certifications of deletion—however unverified and self- 3 serving those certifications may have been—was permissible. See SAC ¶¶ 138, 144; 171–80. 4 This Court thus cannot say that Statement 33 was false when made because it is not clear that 5 Facebook was neither committed “to vigorously enforcing [its] policies to protect people’s 6 information” nor taking “whatever steps [were] required” (whatever those might be) against third 7 parties who had misused user information.10 For these reasons, the Court holds that Plaintiffs have 8 failed to plead falsity as required by the PSLRA for Statements 30–33 and the Court GRANTS 9 Defendants’ motion to dismiss as to these statements. g. Statements About User Consent 10 Statement 34 pertains to the issue of consent, specifically whether users knowingly United States District Court Northern District of California 11 12 provided Kogan with their data. This Court previously held that these statements were not 13 actionable. Plaintiffs allege three main theories of misconduct regarding consent: (i) third-party 14 consent (i.e., allowing a user to give share information about their friends with third-party app 15 developers), (ii) whitelisting, and (iii) sharing of data with third-parties contrary to stated policy. 16 At issue here is (i) and (ii). See id. ¶ 89 (admitting that specific users who took Kogan’s quiz 17 consented to Kogan’s app’s use of their personal data, but arguing that the app’s access of the 18 personal data of users’ friends’ violated the then-existing privacy policy). 19 Under the first consolidated complaint Statement 34 was not “false,” because the 20 operative privacy policy in 2014 (which is when users allegedly took the quiz) allowed for third- 21 party consent. See September 2019 Order at 43. In their SAC, Plaintiffs allege that the user data 22 obtained by Cambridge Analytica was taken after the April 2014 announcement in which 23 24 25 26 27 28 10 Moreover, Statement 33 is seemingly inactionable puffery. “[S]tatements projecting ‘excellent results,’ a ‘blowout winner’ product, ‘significant sales gains,’ and ‘10% to 30% growth rate over the next several years’” have been held not actionable as mere puffery. In re Fusion-io, 2015 WL 661869, at *14 (citing In re Cornerstone Propane Partners, L.P. Sec. Litig., 355 F. Supp. 2d 1069, 1087 (N.D. Cal.2005)). A promise to “vigorously enforce” privacy policies or “take whatever steps necessary” is comparable to the vague, generalized statements of corporate optimism discussed in In re Fusion-io. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 46 1 Defendant Zuckerberg pledged to shut off third-party access. SAC ¶¶ 89, 101. Allegedly, in the 2 summer and early fall of 2014—after the April 2014 announcement—GSR (controlled by Kogan) 3 retained a surveying firm to recruit and pay approximately 270,000 Facebook users to download 4 Kogan’s app and take his personality quiz. From this, Kogan collected the Facebook data of the 5 270,000 takers and many app users’ friends. Id. ¶ 104. This is how Kogan was able to harvest the 6 data from 50 million people. Id. ¶ 106. And, this is the data that was later sold to Cambridge 7 Analytica. 8 9 Plaintiffs maintain that the above timeline resolves the issue of third-party consent. In their view, because Facebook announced in April 2014 that it would change its policy of allowing third-party consent, Defendant Zuckerberg falsely stated in 2018 that “everyone gave their 11 United States District Court Northern District of California 10 consent.” A closer look at the April 2014 announcement reveals a different story. According to 12 the April 2014 announcement, “existing apps [had] a full year to upgrade.” Ex. 30, Dkt. 126-31. 13 Importantly, GSR’s collection method relied on a “pre-existing application functioning under 14 Facebook’s old terms of service.” SAC ¶ 103. The “This Is Your Digital Life” app thus predated 15 the April 2014 announcement; indeed, as Plaintiffs admitted in their earlier complaint, the app was 16 developed in 2013. September 2019 Order at 4. So, when GSR collected user data in June 2014, 17 pursuant to the privacy policy in place, everyone did give their “consent.” Accordingly, it is 18 irrelevant that GSR harvested the data after the April 2014 announcement. The dispositive inquiry 19 is when was the application that allowed such data harvesting authorized. Pursuant to Plaintiffs’ 20 own pleadings, the app was authorized before the April 2014 announcement and thus third-party 21 consent was permissible until April 30, 2015. Ex. 30, Dkt. 126-31. For these reasons, Plaintiffs 22 still have not shown that Statement 34 was false when made and the Court GRANTS 23 Defendants’ motion to dismiss as to this statement. 24 Statement 35 discusses actions allegedly taken by Facebook to make the platform “safer.” 25 Specifically, in 2014, the platform was changed to “dramatically limit the data apps could access.” 26 SAC ¶ 383. Plaintiffs have plead falsity as to this statement. When Statement 35 was made, 27 Facebook allegedly continued to provide user data to “whitelisted” app developers, mobile device 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 47 1 makers, and others, often in contravention of users’ privacy settings. Id. ¶¶ 384, 387. 2 Accordingly, in light of the alleged secret whitelisting, it was not the case that Facebook had 3 “limit[ed[ the data apps could access” or that a Cambridge Analytica-type event would not occur 4 again, see supra III.C.1.b. For this reason, the Court DENIES Defendants’ motion to dismiss as 5 to this statement. 6 7 8 9 h. Statements About Compliance with FTC Consent Decree Statements 36–42 pertain to statements made by Defendants about Facebook’s compliance with the 2012 FTC consent decree. See id. ¶¶ 388–403. In the Ninth Circuit, “vague, generalized assertions of corporate optimism or statements of ‘mere puffing’ are not actionable material misrepresentations under federal securities laws” 11 United States District Court Northern District of California 10 because no reasonable investor would rely on such statements. In re Fusion-io, 2015 WL 661869, 12 at *14 (collecting cases). When valuing corporations, investors do not “rely on vague statements 13 of optimism like ‘good,’ ‘well-regarded,’ or other feel good monikers.” In re Cutera, 610 F.3d at 14 1111. Statements like “[w]e are very pleased with the learning from our pilot launch,” “so far 15 we’re getting really great feedback,” and “we are very pleased with our progress to date,” are 16 inactionable puffery. Wozniak v. Align Tech., Inc., 2012 WL 368366, at *4–5 (N.D. Cal. Feb. 3, 17 2012). Likewise, “statements projecting ‘excellent results,’ a ‘blowout winner’ product, 18 ‘significant sales gains,’ and ‘10% to 30% growth rate over the next several years’” have been 19 held not actionable as mere puffery. In re Fusion-io, 2015 WL 661869, at *14 (citing In re 20 Cornerstone Propane Partners, 355 F. Supp. 2d at 1087). 21 In Statement 39 Defendant Zuckerberg stated that Facebook “worked hard to make sure 22 that” it was in compliance with the FTC consent decree. SAC ¶ 39. Plaintiffs argue that this 23 statement was misleading because Defendants were violating the FTC consent decree by allowing 24 third-parties to access user data, in contravention of user privacy settings. Id. ¶ 396. Defendants 25 argue that this statement is too vague to be actionable. The Court previously held that this 26 statement was too vague to be actionable. That opinion has not changed. 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 48 1 First, courts often hold that statements regarding general compliance are too vague to be 2 actionable misrepresentations or omissions. See, e.g., Lomingkit v. Apollo Educ. Grp. Inc., 2017 3 WL 633148, at *23 (D. Ariz. Feb. 16, 2017). Plaintiffs argue that Statement 39 was not a 4 “general” statement of corporate compliance, but rather was a specific representation about a 5 specific consent decree. As support, Plaintiffs rely on Hefler v. Wells Fargo & Co., 2018 WL 6 1070116, at *8 (N.D. Cal. Feb. 27, 2018). There, the defendant (Wells Fargo) was under 7 investigation following improper sales activities. An executive stated that the company was 8 having a “terrific reaction from our regulators from a compliance standpoint.” Id. The court 9 determined that this was an actionable misrepresentation because a reasonable investor would not consider a regulatory investigation a “terrific reaction.” Plaintiffs argue that like Hefler, 11 United States District Court Northern District of California 10 Statement 39 is actionable because it creates a contrary impression of the existing state of affairs. 12 The Court disagrees. First, unlike in Hefler, there was no ongoing regulatory investigation. 13 Second, Defendant Zuckerberg did not value Facebook’s compliance efforts—that is, he did not 14 state that Facebook was doing a “terrific” job complying. He only stated that Facebook was 15 working “very hard” to ensure that they were compliant. This is the exact type of vague, 16 unverifiable statement that courts routinely hold inactionable. See Wozniak, 2012 WL 368366, at 17 *4–5. For this reason, the Court GRANTS Defendants’ motion to dismiss as to Statement 39. 18 In Statements 37–38 and 40–41, Defendants made representations about following and/or 19 trying to follow the 2012 FTC consent decree. In Statements 36 and 42, Defendants discuss the 20 risks of non-compliance. Plaintiffs maintain that Statements 36–38 and 40–42 are material 21 misrepresentations because, at the time the statements were made, Defendants knew that they were 22 violating aspects of the FTC consent decree and failed to disclose such violations and/or presented 23 violations as hypothetical risks. SAC ¶¶ 400, 402–03. Defendants, however, had no obligation to 24 tell investors that they might not be in compliance with the FTC consent decree. Indeed, 25 companies are not required to engage in “self-flagellation” by disclosing unproven allegations. 26 Haberland v. Bulkeley, 896 F. Supp. 2d 410, 426 (E.D.N.C. 2012); In re Paypal Holdings, Inc., 27 2018 WL 466527, at *3 (N.D. Cal. Jan. 18, 2018) (“Federal securities laws do not impose upon 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 49 1 companies a ‘duty to disclose uncharged, unadjudicated wrongdoing.’” (citing City of Pontiac 2 Policemen & Firemen Ret. Sys. v. UBS AG, 752 F.3d 173, 184 (2d Cir. 2014)). Defendants thus 3 had no duty to disclose unproven allegations. 4 Despite recognizing the absence of a duty to disclose alleged FTC-violations, Plaintiffs 5 argue that because Defendants “chose to speak on [the FTC consent decree],” they had an 6 obligation not to make material misrepresentations about it. This is of course true. See Hefler, 7 2018 WL 1070116, at *8. But, Plaintiffs invert this obligation and predicate the material 8 misrepresentations on Defendants’ failure to discuss the alleged FTC violations. This is 9 perplexing—the law is clear that Defendants had no duty to disclose unproven violations. 10 At the time Statements 36–38 and 40–42 were made, the FTC only stated an intent to United States District Court Northern District of California 11 investigate Facebook, but had not made any formal findings that Facebook violated the 2012 12 decree order. September 2019 Order at 27. Defendants had no obligation or requirement to 13 elaborate on any alleged non-compliance because they had not yet been found to be non- 14 compliant. Hence, at the time of these statements (specifically, at the time of the risk disclosures) 15 the risk of being found non-compliant was hypothetical. See In re Teledyne Defense Contracting 16 Deriv. Litig., 849 F. Supp. 1369, 1382 (C.D. Cal. 1993) (dismissing securities violation claim 17 because directors need not disclose alleged wrongdoing “when such charges have not yet been 18 brought, let alone proven”). For these reasons, the Court GRANTS Defendants’ motion to 19 dismiss as to Statements 36–38 and 40–42. 20 21 i. Statements About User Notification Statements 43 & 44 refer to statements made by Defendant Facebook in an April 2017 22 white paper. SAC ¶¶ 405–06. In the white paper, Defendants stated they would “notify specific 23 people” targeted by sophisticated attackers and “proactively” notify people they believed would be 24 targeted. Id. Plaintiffs argue that these statements are materially false and misleading because 25 Defendants did not “notify” Facebook users whose accounts were compromised or at risk of being 26 compromised; did not provide “notifications to specific people” whose accounts or data had been 27 targeted or compromised; and did not provide “proactive notifications to people” whose data may 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 50 1 be at risk. Id. ¶ 407. As support, Plaintiffs point to Defendant Zuckerberg’s Senate testimony, in 2 which he confirms that “there was a decision made” not to notify the tens of millions of users 3 whose data was compromised pursuant to the Cambridge Analytica data-scandal, see id. ¶ 408, 4 and to Defendant Sandberg’s admission that Facebook has “the responsibility to disclose to people 5 when problems occur, see id. ¶ 409. The Court previously considered these statements and found them not to be false. Again, 6 7 “Plaintiffs seem to ignore that these statements refer to ‘targeted data collection and theft.’” 8 September 2019 Order at 38; see also Ex. 28, Dkt. 126-29 (emphasis added). Specifically, this 9 page advised users about protecting their accounts from data collection by methods like “phishing11 with malware to infect a person’s computer and credential theft to gain access 11 United States District Court Northern District of California 10 to . . . online accounts.” Ex. 28, Dkt. 126-29. The portion of the white paper that Plaintiffs cite 12 expressly focuses on bad actors who “steal” user data using methods like phishing. Moreover, 13 notification is limited to persons targeted by “sophisticated attackers,” or persons “suspected of 14 working on behalf of a nation-state.” Id. at n.5. The SAC does not allege that Cambridge 15 Analytica or any of the whitelisted developers used methodologies like phishing to gain access to 16 user data or that such actors were suspected of working on behalf of a nation-state (the closest 17 allegation is about Huawei and Mail.Ru Group, but Plaintiffs only allege that Huawei has “deep 18 ties” to the Chinese government and that Mail.Ru is connected to the Kremlin). See SAC ¶ 16. 19 Thus, the factual background of this action does not render Statements 43 & 44 false because 20 Plaintiffs’ SAC focuses on situations where app developers had valid access to the Facebook 21 platform. See Hong v. Extreme Networks, Inc., 2017 WL 1508991, at *15 (N.D. Cal. Apr. 27, 22 2017) (holding that the plaintiffs’ allegations of falsity were insufficient because “the reasons 23 Plaintiffs offer as to why the statements are false or misleading bear no connection to the 24 25 26 27 28 11 As noted in the Court’s earlier order, phishing is “a cybercrime in which a target or targets are contacted by email, telephone, or text message by someone posing as a legitimate institution to lure individuals into providing sensitive data such as personally identifiable information, banking and credit card details, and passwords.” What Is Phishing?, PHISHING.ORG, https:// www.phishing.org/what-is-phishing (last visited July 27, 2020). Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 51 1 substance of the statements themselves”). 2 Defendant Sandberg and Zuckerberg’s 2018 statements do not change this analysis. Even 3 while Executive Defendants expressed that they “should have” informed users and that they “got 4 [it] wrong” by withholding notice from Cambridge Analytica victims, Defendants statements of 5 regret over how the Cambridge Analytica scandal was handled do not render unrelated statements 6 false. For these reasons, the Court GRANTS Defendants’ motion to dismiss as to Statements 43 7 and 44. 8 9 j. Statement About GDPR Compliance Statement 45 is about Defendant Facebook’s compliance with the GDPR. SAC ¶¶ 411– 13. During an October 2017 interview, Defendant Sandberg stated that “Europe[] has passed a 11 United States District Court Northern District of California 10 single privacy law [i.e., the GDPR] and we are adhering to that. But privacy is something we 12 take really seriously.” Id. ¶ 411. Plaintiffs maintain that this statement was materially false and 13 misleading because at the time of the statement Defendant Facebook was not “adhering to” the 14 GDPR, as demonstrated by Facebook overriding users’ privacy settings to allow whitelisted 15 developers access to user data. Id. ¶ 412. 16 The Court previously considered this statement and found that Plaintiffs failed to allege 17 falsity. That analysis has not changed. September 2019 Order at 43–44. As the Court previously 18 held, Statement 45 expressed an intention to adhere to the GDPR; it is not a profession of being 19 fully compliant. Indeed, GDPR did not become effective until May 25, 2018. SAC ¶ 229. Thus, 20 Statement 45 cannot be rendered false by Facebook’s alleged failure to fully comply with the 21 GDPR, which was not even in effect at the time the statement was made. For this reason, the 22 Court holds that Plaintiffs failed to plead falsity as required by the PSLRA for Statement 45 and 23 the Court thus GRANTS Defendants’ motion to dismiss as to this statement. 24 25 k. Statements About Use of Platform to Influence Elections Statements 46–48 pertain to statements made by Defendants about Russian interference in 26 the U.S. elections. Id. ¶¶ 414–19. Plaintiffs allege that it was false for Facebook’s then-general 27 counsel (Mr. Stretch) to state that the Company had provided “everything we have to date” 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 52 1 regarding Russian efforts to influence the 2016 election, and that it was false for Mr. Stretch to say 2 that Facebook had seen “only what appear[ed] to be insignificant overlap between the targeting 3 and content used by the [Russian Internet Research Agency] and that used by the Trump 4 campaign.” Id. ¶¶ 414–15. Plaintiffs argue that these statements were materially false and 5 misleading when made because the statements do not to include information about the results of 6 Facebook’s Cambridge Analytica investigation, which should have revealed that user data had 7 repeatedly been used to design effective political advertising for the 2016 Trump campaign. Id. 8 ¶¶ 416–18. 9 Plaintiffs, however, have failed to allege facts that show that Statements 46–48 were false when made. That is, Plaintiffs have not plead specific facts from which the Court can infer that 11 United States District Court Northern District of California 10 Facebook had not provided complete information about Russian efforts to influence the 2016 12 election or that Facebook had seen significant overlap between the targeting and content used by 13 the Russian IRA and the Trump campaign. See Brody, 280 F.3d at 1006 (statements are only 14 misleading if they “affirmatively create an impression of a state of affairs that differs in a material 15 way from the one that actually exists”). 16 Plaintiffs further argue that Statement 48 was misleading because there was a significant 17 risk that Kogan’s data (and thus Cambridge Analytica’s data) was similar to the Russian IRA’s 18 data since “Kogan had worked closely with Russian operatives in the past, giving rise to a 19 heightened risk that data provided to Cambridge Analytica had been obtained by Russian agents 20 either before or after the [Cambridge Analytica data scandal] was originally reported.” Id. ¶ 419. 21 But, this is mere speculation—the Court cannot infer that Facebook had seen “significant overlap” 22 between the user data used by Russian IRA and the Trump campaign based on Plaintiffs’ bare 23 allegation that “Kogan worked closely with Russian operatives.” See In re Stratosphere Corp. 24 Sec. Litig., 1997 WL 581032, at *13 (D. Nev. May 20, 1997) (circumstantial evidence to show 25 falsity must be plead with particularity). Accordingly, the Court cannot conclude that Statements 26 46–48 are false because Plaintiffs have not met their burden of showing particular facts from 27 which this Court can infer falsity. The Court thus GRANTS Defendants’ motion to dismiss as to 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 53 1 2 3 these statements. l. Statements About User Metrics Statements 49–62 pertain to statements by Defendants about Facebook’s Daily Active 4 User (“DAU”) and Monthly Active User (“MAU”) metrics. SAC ¶¶ 420–21. Plaintiffs argue that 5 these statements were misleading because at the time the DAU and MAU figures were collected in 6 2017, Facebook was using an “incorrect methodology to calculate duplicate accounts,” which 7 caused Facebook to overstate its user-figures. Id. ¶ 423 (“Facebook admitted to this reality on 8 November 1, 2017, when it implemented a ‘new methodology for duplicate accounts that included 9 improvements to the data signals we rely on to help identify such accounts.’”). Plaintiffs further argue that the statements are materially false and misleading because Defendants failed to account 11 United States District Court Northern District of California 10 for the number of fake accounts on Facebook. Id. ¶ 424 (“In May 15, 2018, Facebook announced 12 for the first time that it had deleted a total of 1.277 billion fake accounts during the period from 13 Q4 2017 to Q2 2018.”). Lastly, Plaintiffs argue that the statements are materially false and 14 misleading because Defendants omitted to include information about (1) their whitelisting privacy 15 practices and (2) how the active user engagement metrics were not reliable indicators of the health 16 or strength of Facebooks business. Id. ¶ 425. 17 As this Court noted in its earlier order, simply using a new methodology to count accounts 18 is not misleading. See Ironworkers Local 580—Joint Funds v. Linn Energy, LLC, 29 F. Supp. 3d 19 400, 426 (S.D.N.Y. 2014) (rejecting claim that changed formula for calculating financial metrics 20 amounted to “some sort of admission that statements made in prior reporting periods were false or 21 materially misleading”). There is no requirement that companies like Facebook use specific 22 methods to calculate user engagement (or at least Plaintiffs have not identified such a 23 requirement). Plaintiffs’ effort to transform Defendants’ business decision to change its 24 methodologies into some sort of admission that its prior statements were false and materially 25 misleading is misguided and rejected. 26 Likewise, Plaintiffs’ omission arguments are rejected. The necessary predicate to any 27 action under the securities laws is either (1) making a “misstatement” or (2) omitting to say 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 54 1 something that is needed in order for the full truth to be told. Id. at 426. Thus, in order for 2 Statements 49–62 to contain omissions, Plaintiffs must plead specific facts that tend to show that 3 the statement only told “half” the truth or that a defendant had a “duty to disclose” information but 4 failed to do so. Basic, 485 U.S. at 239 n.17; see also supra III.C.1.a. Plaintiffs have not met this 5 burden. First, Plaintiffs argue that Defendants omitted information about their whitelisting 6 practices. Yet, nowhere in Statements 49–62 do Defendants make any qualitative comment about 7 user growth. Rather, each statement is quantitative—Defendants thus cannot be said to have told a 8 “half-truth” by not discussing their whitelist policy because they never promised any results. 9 Perhaps if Defendants had made guarantees about continued user growth, this Court could find that they made a material omission by failing to include information about whitelisting (which, as 11 United States District Court Northern District of California 10 Plaintiffs note, would be likely to affect user engagement). But, that is not the case—simply 12 stating the relevant data and promising to “continue to monitor” user engagement makes no 13 promise about future results. 14 Second, Plaintiffs argue that Defendants omitted information about the reliability of their 15 user metrics. Again, nowhere in Statements 49–62 do Defendants make any promises about the 16 reliability of their metrics, nor is there any identifiable requirement for Defendants to do so. See 17 Basic, 485 U.S. at 239 n.17. It thus cannot be said that Defendants presented a “half” truth by 18 presenting their data. For these reasons, the Court holds that Plaintiffs have failed to plead falsity as required by 19 20 the PSLRA for Statements 49–62 and the Court GRANTS Defendants’ motion to dismiss as to 21 those statements. m. Statements About 1Q18 Results 22 Statements 65 and 6612 relate to statements made by Defendants during Facebook’s 1Q18 23 24 Earnings Call. SAC ¶¶ 427–43. In these statements, Defendants discussed Facebook’s 1Q18 25 26 27 28 12 For the reasons discussed in III.C.1.k, Statements 63 & 64 are not plead with sufficient falsity. These statements pertain to statements about DAU and MAU data. The Court GRANTS Defendants’ motion to dismiss as to those statements. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 55 1 financial results and the anticipated impact of GDPR on Facebook. Plaintiffs claim that these 2 statements were false or misleading because they were meant to “assure investors that the 3 Cambridge Analytica data scandal had not, and would not, have a meaningful financial impact on 4 the business” and that “data breaches like Cambridge Analytica scandal were behind the 5 company.” Id. ¶ 432. Under the PSLRA “Safe Harbor” Provision, “forward-looking statements are not 6 7 actionable as a matter of law if they are identified as such and accompanied by “meaningful 8 cautionary statements identifying important facts that could cause actual results to differ materially 9 from those in the forward looking statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i). A forward-looking statement is “any statement regarding (1) financial projections, (2) plans and objectives of 11 United States District Court Northern District of California 10 management for future operations, (3) future economic performance, or (4) the assumptions 12 ‘underlying or related to’ any of these issues.” No. 84 Emp’r Teamster Joint Council Pension 13 Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 936 (9th Cir. 2003) (citing 15 U.S.C. § 78u5 14 (i)). “[I]f a forward-looking statement is identified as such and accompanied by meaningful 15 cautionary statements, then the state of mind of the individual making the statement is irrelevant, 16 and the statement is not actionable regardless of the plaintiff's showing of scienter.” In re Cutera 17 Sec. Litig., 610 F.3d 1103, 1112 (9th Cir. 2010). Here, Defendants argue Statements 65 and 66 are forward-looking statements protected 18 19 by the PSLRA’s Safe Harbor.13 The Court agrees. Statement 65 is a statement about Facebook’s 20 intent to use GDPR to strengthen its privacy policies and its commitment to improving its ads 21 model. Management’s plans or objectives for future operations and predictions of future 22 economic performance are protected forward-looking statements. 15 U.S.C. § 78u–5(i)(1)(A)– 23 (C). At bottom, Statement 65 concerns Executive Defendants’ objectives for future Facebook 24 operations. See SAC ¶ 430 (“Going forward, we will continue to focus on [GDPR, ad 25 26 27 28 13 Importantly, at the start of the earnings call, Defendants reminded investors that the remarks may “include forward-looking statements” and that “[a]ctual results may differ.” Ex. 10, Dkt. 126-11. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 56 1 improvement, and choice].” (emphasis added)). Because Statement 65 is an inactionable 2 forward-looking statement accompanied by meaningful cautionary language, see n.11, the Court 3 GRANTS Defendants’ motion to dismiss as to this statement. 4 Statement 66 is also a forward looking statement; it concerns predictions of the impact of 5 the GDPR on ad revenue. See September 2019 Order at 26 (holding comparable statement 6 inactionable). Specifically, Defendant Wehner stated that he did not “expect [GDPR to] 7 significantly impact advertising revenue” and that Defendants believed any effect to be “relatively 8 minor.” SAC ¶ 431. This statement plainly concerns Facebook’s future economic performance in 9 light of GDPR. See 15 U.S.C. § 78u–5(i)(1)(A)–(C). The statement is accompanied by meaningful cautionary language. See supra n. 11; see also SAC ¶ 431 (Defendant Wehner 11 United States District Court Northern District of California 10 acknowledged that there was potential “for some impact”). Because Statement 66 is an 12 inactionable forward-looking statement accompanied by meaningful cautionary language, the 13 Court GRANTS Defendants’ motion to dismiss as to this statement. 14 In Statement 68, Defendant Zuckerberg stated that he believed the vast majority of people 15 “want their data used.” SAC ¶ 437. Plaintiffs claim that this statement was false and/or 16 misleading because it was meant to assure investors that GDPR would not cause (and had not 17 caused) a decline in active use of Facebook’s platform and portrayed Facebook as GDPR- 18 compliant. Id. ¶ 438. Plaintiffs further claim that the statement omitted information about 19 Defendants’ privacy misconduct. Plaintiffs have not sufficiently alleged falsity—they do not 20 allege facts tending to show that people did not want their data used. Moreover, the statement 21 says nothing about GDPR compliance or the costs associated with compliance. See Hong, 2017 22 WL 1508991, at *15. Moreover, Defendants’ alleged privacy misconduct has no bearing on this 23 statement. Plaintiffs allege no reason why users’ decision to opt-in to data sharing would be 24 effected by any alleged privacy misconduct. For these reasons, Plaintiffs have not alleged falsity 25 as to Statement 68 and the Court GRANTS Defendants’ motion to dismiss as to this statement. 26 Plaintiffs have plead sufficient falsity as to Statements 67 and 69. In Statement 67, 27 Defendant Zuckerberg stated that situations “like” the Cambridge Analytica scandal would not 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 57 1 occur again. Id. ¶ 434. But, accepting Plaintiffs’ whitelisting allegations as true, “Facebook had 2 not been protecting privacy” and so there was a risk that a Cambridge Analytica-type scandal 3 could occur again. Id. ¶ 435. Statement 69 is materially misleading for the same reason—the 4 statement assures users and investors that users’ control their data and that Facebook has “strong 5 protections” in place for user information. Id. ¶ 440. However, Plaintiffs’ whitelisting allegations 6 render this statement misleading. For these reasons, Defendants’ motion to dismiss Statements 7 67 and 69 on falsity grounds is DENIED. 8 n. Statements About the Sale of User Data Statements 70–83 concern comments made by Facebook that it does not “sell data.” SAC 10 ¶¶ 444–60. Plaintiffs maintain that these statements were materially misleading because Facebook 11 United States District Court Northern District of California 9 used user friend data “as consideration for a reciprocal exchange of value with third-party app 12 developers and other companies who were ‘whitelisted’ for secret access to user friend data.” Id. 13 However, Plaintiffs (as they admit in their Opposition) do not allege that Facebook did sell data. 14 To the contrary, Plaintiffs maintain that “selling” data includes data-bartering. Opp. at 27. Not so. 15 “Selling” user data contemplates a cash-for-data transaction. Indeed, this is the type of transaction 16 contemplated by Defendants when Statements 70–83 were made. See, e.g., SAC ¶ 448 (“[W]e 17 don’t buy and sell [data].” (emphasis added)). Plaintiffs do not allege any facts from which this 18 Court can plausibly infer that Defendants did sell (i.e., for cash) user data. The closest Plaintiffs 19 get is by pointing the court to a September 2013 email chain, which shows Facebook Directors 20 discussing the fact that Facebook was requiring third-party app developers to “spend on 21 [advertising at Facebook] at least $250,000 a year to maintain access to the data.” Id. ¶ 72. There 22 are no allegations, however, about which advertisers were required to do this, whether all 23 advertisers were required to do this, or if Facebook actually required such spending to maintain 24 data-access. See id. ¶ 459; see also Metzler, 540 F. 3d at 1070. Plaintiffs thus have not plead 25 specific facts showing that Defendants sold data and thus have not alleged falsity for Statements 26 70–81. The Court GRANTS Defendants’ motion to dismiss as to these statements. 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 58 1 Parts of Statements 82 & 83 are actionable. For the above reasons, the Court holds that 2 the portions of these statements that refer to selling of information are not actionable. However, 3 the portions of the statements that state Facebook does not “share” or “give” user information to 4 “third parties” are actionable. As discussed above, Plaintiffs have plead sufficient facts to show 5 falsity—Plaintiffs have demonstrated that, despite guarantees to the contrary, Facebook was 6 sharing user data (including user friend data) to third-parties via whitelisting. See SAC ¶¶ 16, 63– 7 80, 444–60. Accordingly, the portions of Statements 82 and 83 that refer to sharing—but not 8 selling—of data are actionable. 2. Scienter 9 10 Having determined that Statements 1–21, 35, 67, 69, and parts of Statements 82 and 83 United States District Court Northern District of California 11 are actionable, the next issue is whether Plaintiffs have adequately pled a strong inference of 12 scienter. 13 Scienter is required under the PSLRA and plaintiffs must plead “with particularity facts 14 giving rise to a strong inference that the defendant acted with the requisite state of mind” 15 regarding “each act or omission alleged.” 15 U.S.C. § 78u-4(b)(2)(A). It can be established by 16 intent, knowledge, or certain levels of recklessness. In re Verifone Holdings, Inc. Sec. Litig., 704 17 F.3d 694, 702 (9th Cir. 2012). Recklessness must be deliberate. Schueneman v. Arena Pharma., 18 Inc., 840 F.3d 698, 705 (9th Cir. 2016) (“[S]cienter—a mental state that not only covers ‘intent to 19 deceive, manipulate, or defraud,’ but also ‘deliberate recklessness.’” (citations omitted)). 20 Deliberate recklessness is an “extreme departure from the standards of ordinary care . . . which 21 presents a danger of misleading buyers or sellers that is either known to the defendant or is so 22 obvious that the actor must have been aware of it.” Id. Thus, recklessness only satisfies scienter 23 under § 10(b) to the extent it reflects some degree of intentional or conscious misconduct. In re 24 NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1053 (9th Cir. 2014). 25 A “strong inference” of scienter exists “only if a reasonable person would deem the 26 inference of scienter cogent and at least as compelling as any opposing inference one could draw 27 from the facts alleged.” Tellabs, 551 U.S. at 324. In reviewing a complaint under this standard, 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 59 1 the court must consider “all reasonable inferences to be drawn from the allegations, including 2 inferences unfavorable to the plaintiffs.” Metzler, 540 F.3d at 1061. To plead a strong inference 3 of scienter, plaintiffs must plead particularized facts demonstrating that the individual defendants 4 knew the supposedly false statements challenged by the plaintiffs were false or misleading when 5 made or had access to information demonstrating that the individual defendants were deliberately 6 reckless in allowing the false statements to be made. See id. at 1068. In Statements 1–21, Defendants claimed that users could “completely control” their data, 7 8 that users could use “privacy and application setting” to control their data, that the platform was 9 focused on “transparency and control,” and that Facebook “respected the privacy settings that people had in place.” The Court found above that Plaintiffs adequately alleged falsity as to these 11 United States District Court Northern District of California 10 statements because of Defendants’ “whitelisting” practices. To establish scienter for Executive Defendants Zuckerberg and Sandberg,14 Plaintiffs rely 12 13 on Facebook’s internal documents, which show that Defendants knowingly supplied user friend 14 data to whitelisted developers. SAC ¶ 70. An internal memo, from 2013/2014 states that “during 15 app review, we examine the APIs [Application Programming Interfaces] that the app uses in order 16 to determine what [is] the appropriate level of reciprocity.” Id. The guideline for review is “take 17 data, give data.” Id. Facebook emails dating from September 2013 note that “the capability will 18 remain to give access features which are publicly deprecated [i.e., discontinued] but available to 19 whitelisted apps.” Id. ¶ 71 (emphasis added) (alteration in original). Defendants Zuckerberg and Sandberg were involved in the decision to exchange user 20 21 friends’ data for reciprocal value from third parties. Id. ¶ 73. Internal Facebook documents show 22 that Defendants Zuckerberg and Sandberg were actively involved in discussions about whitelist 23 24 25 26 27 28 14 Defendants do not argue that Plaintiffs have failed to plead scienter as to Defendant Facebook. The Court finds that Plaintiffs have pled sufficient information to support a strong inference of scienter. A corporation can only act through its employees and agents, and can thus only have scienter through them. In re ChinaCast Educ. Corp. Sec. Litig., 809 F.3d 471, 475 (9th Cir. 2015). Thus, to show Defendant Facebook’s scienter, Plaintiffs must show scienter as to any of Facebook’s senior executives. See Cheung v. Keyuan Petrochemicals, Inc., 2012 WL 5834894, at *3 (C.D. Cal. Nov. 1, 2012). Plaintiffs have met that burden. See III.C.2. Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 60 1 access. See id. ¶¶ 74–79. Indeed, these documents demonstrate that Defendants Zuckerberg and 2 Sandberg were the original architects of Facebook’s “full reciprocity” business model, in which 3 Facebook gave access to user data and user friend data to certain whitelisted parties who, in a 4 reciprocal exchange, would give Facebook data, ad revenues, or access to new users. Id. ¶¶70–80 5 (“Facebook employees pointed to Zuckerberg as being intimately involved in the discussions and 6 decision-making around [whitelisting].”). These allegations show that Defendants Zuckerberg and 7 Sandberg were actively involved in the whitelisting process and thus support an inference that 8 Defendants Zuckerberg and Sandberg knew of Facebook’s illicit whitelisting practices. Cf. 9 Fleming v. Impax Labs. Inc., 2018 WL 4616291, at *4 (N.D. Cal. Sept. 7, 2018) (“Even when viewed as a whole, the factual allegations in the amended complaint do not plausibly suggest that 11 United States District Court Northern District of California 10 individual Defendants directly engaged in unlawful pricefixing . . . .” (emphasis added)). 12 Likewise, Plaintiffs have plead sufficient facts showing that Defendants knew that 13 Facebook had little control over the deletion of misappropriated data and that the risk of a 14 Cambridge Analytica type scandal could again occur due to its whitelisting practices. See Metzler, 15 540 F.3d at 1061. Because Statements 35, 67, 69, and the relevant portions of 82 and 83 rely 16 on the same theory of falsity, Plaintiffs have shown scienter as to these statements also. 17 For these reasons, the Court holds that Plaintiffs have plead scienter as to Statements 1–5, 18 7–21, 35, 67, 69, and the relevant portions of 82 and 83. The Court thus DENIES Defendants’ 19 motion to dismiss these statements on scienter grounds. 20 Statement 6 was made by Defendant Wehner. Plaintiffs do not allege that he knew of the 21 above emails or was involved in whitelisting. Instead, Plaintiffs argue that the Court can infer 22 scienter through Defendant Wehner’s stock sales. The Court disagrees. “Insider stock sales are 23 not inherently suspicious; they become so only when the level of trading is dramatically out of line 24 with prior trading practices at times calculated to maximize the personal benefit from undisclosed 25 information.” In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1093 (9th Cir. 2002), abrogated on 26 other grounds by Gebhart v. SEC, 595 F.3d 1034 (9th Cir. 2010) (quotation marks and citation 27 omitted). Absent from the SAC are allegations regarding Executive Defendants’ holdings of 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 61 1 Facebook stock before the sale. SAC ¶¶ 490–91, 496, 502–03; see also In re Vantive Corp. Sec. 2 Litig., 283 F.3d at 1093 (“[B]y themselves, large numbers do not necessarily create a strong 3 inference of fraud.”). Hence, Plaintiffs have not provided “sufficient context of insider trading” to 4 support an inference of fraud. Ronconi, 253 F.3d at 436. And, the Court cannot say that 5 Defendant Wehner’s sales are suspicious in light of his trading history. This is the only other 6 grounds for scienter alleged as to Defendant Wehner. Because Plaintiffs have provided no 7 particularized facts from which this Court can infer that Defendant Wehner consciously lied, the 8 Court finds that Plaintiffs fail to plead scienter as to Statement 6 as required by the PSLRA and 9 so this Court GRANTS Defendants’ motion to dismiss as to this statement. 10 United States District Court Northern District of California 11 3. Reliance Plaintiffs must plead facts showing that they relied on the allegedly false or misleading 12 statements in purchasing Facebook stock. See ScripsAmerica, Inc. v. Ironridge Glob. LLC, 119 F. 13 Supp. 3d 1213, 1252–53 (C.D. Cal. 2015); Matrixx Initiatives, Inc., 563 U.S. at 37–38. The 14 reliance element “ensures that there is a proper connection between a defendant’s 15 misrepresentation and a plaintiff’s injury.” Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 16 258, 268 (2014) (citation and quotation marks omitted). “The traditional (and most direct) way a 17 plaintiff can demonstrate reliance is by showing that he was aware of a company’s statement and 18 engaged in a relevant transaction—e.g., purchasing common stock—based on that specific 19 misrepresentation.” Id. (citation and quotation marks omitted). 20 In Basic, the Supreme Court recognized that requiring such direct proof of reliance “would 21 place an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded 22 on an impersonal market.” 485 U.S. at 245. To address this concern, Basic held that securities 23 fraud plaintiffs can, in certain circumstances, satisfy the reliance element of a Rule 10b-5 action 24 by invoking a rebuttable presumption of reliance, rather than proving direct reliance. Halliburton, 25 573 U.S. at 268. This “fraud-on-the-market” theory of reliance holds that “the market price of 26 shares traded on well-developed markets reflects all publicly available information, and, hence, 27 any material misrepresentations.” Basic, 485 U.S. at 246. Indeed, rather than scrutinize every 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 62 1 piece of public information about a company for himself, the typical “investor who buys or sells 2 stock at the price set by the market does so in reliance on the integrity of that price.” Id. at 247. 3 Thus, whenever the investor buys or sells stock at the market price, his “reliance on any public 4 material misrepresentations . . . may be presumed for purposes of a Rule 10b-5 action.” Id.; see 5 also In re Apple Computer Sec. Litig., 886 F.2d 1109, 1114 (9th Cir. 1989) (“In a fraud on the 6 market case, the plaintiff claims that he was induced to trade stock not by particular 7 representations made by corporate insiders, but by the artificial stock price set by the market in 8 light of statements made by the insiders as well as all other material public information.”). 9 A plaintiff relying on the fraud-on-the-market theory must make the following showings to demonstrate that the presumption of reliance applies: (1) that the alleged misrepresentations were 11 United States District Court Northern District of California 10 publicly known; (2) that they were material; (3) that the stock traded in an efficient market; and 12 (4) that the plaintiff traded the stock between the time the misrepresentations were made and when 13 the truth was revealed. Halliburton, 573 U.S. at 268. This showing establishes a presumptive— 14 not conclusive—showing of reliance. Hence, “[a]ny showing that severs the link between the 15 alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to 16 trade at a fair market price, will be sufficient to rebut the presumption of reliance.” Basic, 485 17 U.S. at 248. So, for example, if a defendant could show that the alleged misrepresentation did not, 18 for whatever reason, actually affect the market price, or that a plaintiff would have bought or sold 19 the stock even had he been aware that the stock’s price was tainted by fraud, then the presumption 20 of reliance would not apply. Id. at 248–49; see also id. at 284 (“[D]efendants must be afforded an 21 opportunity before class certification to defeat the presumption through evidence that an alleged 22 misrepresentation did not actually affect the market price of the stock.”); In re Kalobios Pharm., 23 Inc. Sec. Litig., 258 F. Supp. 3d 999, 1008 (N.D. Cal. 2017) (“[T]he presumption may be rebutted 24 where a defendant can show that the truth had actually been made available to the market through 25 a different source.” (emphasis added)); In re Convergent Techs. Sec. Litig., 948 F.2d 507, 513 (9th 26 Cir. 1991) (“[A]n omission is materially misleading only if the information has not already entered 27 the market.”). 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 63 1 Plaintiffs rely on the fraud-on-the-market theory to establish reliance. SAC ¶¶ 533–34. Defendants argue that Plaintiffs cannot rely on the fraud-on-the-market’s presumption of reliance 3 because the market was already aware of the core information that Plaintiffs claim was omitted— 4 namely, that Facebook “knowingly and recklessly allowed third-party app developers to harvest 5 and misuse user data without their knowledge and consent, including, for example, Cambridge 6 Analytica and its affiliated companies.” Mot. at 34 (citing SAC ¶ 471). Defendants are correct; as 7 the Court noted, in December 2015, The Guardian article disclosed that Kogan collected and sold 8 data to Cambridge Analytica and that Cambridge Analytica had used that data to create 9 psychological profiles of voters for the purpose of assisting political campaigns. SAC ¶¶ 5, 86– 10 92, 232, 280. Mainstream news sources reported additional details about Cambridge Analytica’s 11 United States District Court Northern District of California 2 misuse of Facebook user data. Id. ¶¶ 141, 146 (describing The Wall Street Journal and The 12 Washington Post articles). Based on the content of these articles, and the credibility and wide 13 circulation of the respective sources, the Court agrees that the market was aware of Cambridge 14 Analytica’s data misuse. See Kalobios, 258 F. Supp. 3d at 1009. 15 Of course, the market was not aware of Cambridge Analytica’s continued misuse until the 16 March 2018 The Guardian article. In March 2018, the market learned that Cambridge Analytica 17 had not deleted the misappropriated data and had used the data in connection with President 18 Donald Trump’s campaign. Importantly, Defendants had received assurances to the contrary from 19 Cambridge Analytica, and Plaintiffs have failed to plead facts showing that Defendants knew or 20 should have known that these assurances were false. Thus, this theory of reliance is not viable. 21 See supra III.C.1.a. 22 An alternative theory of reliance exists. On June 3, 2018, The New York Times revealed 23 that Facebook allowed whitelisted developers to access user data. See Gabriel J.X. Dance et al., 24 Facebook’s Device Partnerships Explained, The New York Times (June 4, 2018), 25 https://www.nytimes.com/2018/06/04/technology/facebook-device-partnerships.html (“Facebook 26 continued to allow that kind of access to dozens of the world’s biggest tech and hardware 27 companies—and only began shutting down the data-sharing partnerships after the Cambridge 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 64 1 Analytica scandal erupted in March [2018].”). Plaintiffs have shown that Defendants’ statements 2 about users “controlling” their data were false and made with scienter. See supra. Because these 3 alleged misrepresentations were publicly known; material; Facebook stock traded in an efficient 4 market; and Plaintiffs’ traded the stock between the time the misrepresentations were made and 5 when the truth was revealed, see Halliburton, 573 U.S. at 268, Plaintiffs have established a 6 presumption of reliance. Defendants have not presented evidence rebutting this presumption and 7 so the Court presumes investors relied on Statements 1–5, 7–21, 35, 67, 69, and the relevant 8 portions of 82 and 83. 9 4. Causation Even when deceptive conduct is properly plead, a securities fraud complaint must also 11 United States District Court Northern District of California 10 adequately allege “loss causation.” Lloyd v. Fin. Corp., 811 F.3d 1200, 1210 (9th Cir. 2016). 12 Loss causation is shorthand for the requirement that “investors must demonstrate that the 13 defendant's deceptive conduct caused their claimed economic loss.” Id. Thus, like a plaintiff 14 claiming deceit at common law, the plaintiff in a securities fraud action must demonstrate that an 15 economic loss was caused by the defendant's misrepresentations, rather than some intervening 16 event. Dura Pharm., 544 U.S. at 343–44. Loss causation is a “context-dependent” inquiry. 17 Miller v. Thane Int’, Inc., 615 F.3d 1095, 1102 (9th Cir. 2010). It is a variant of proximate cause; 18 and so, the ultimate issue is whether the defendant’s misstatement, as opposed to some other fact, 19 foreseeably caused the plaintiff’s loss. Lloyd, 811 F.3d at 1210. 20 Plaintiffs have not adequately plead loss causation. Having determined that the only viable 21 theory of falsity plead in the SAC is that Defendants mislead investors as to their privacy policies 22 based on their alleged whitelisting practices, the relevant timeframe is stock sales from February 3, 23 2017 to June 3, 2018 (which is when the whitelisting was revealed). Plaintiffs allege no facts from 24 which the Court can infer the stock price fell in June 2018. See SAC ¶ 512. The only point that 25 Plaintiffs’ identify after the June 2018 revelations is July 26, 2018 (i.e., following Defendants 26 2Q18 Earnings Release). While the Court could find that the whitelisting practices affected the 27 stock prices following the 2Q18 Earnings Release, it is unclear if this is the ultimate reason for the 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 65 1 drop. See, e.g., SAC ¶¶ 520, 522, 526–27 (noting that stock-drop was attributed to Cambridge 2 Analytica scandal, decline in user engagement, advertising revenues, and “related privacy 3 concerns,” including GDPR); see also supra I.A.2 (discussing 2Q18 earnings call). The Court 4 thus cannot conclude that information about whitelisting was the “ultimate reason” for a stock 5 decline. For this reason, the Court GRANTS Defendant’s motion to dismiss. 6 5. Plaintiffs’ Section 20(a) and 20(A) Claims Plaintiffs also bring claims for violations of Sections 20(a) and (A) of the Exchange Act. 7 Both these claims, however, depend on a primary violation of Section 10(b) or Rule 10b-5. Lipton 9 v. Pathogenesis Corp., 284 F.3d 1027, 1035 n.15 (9th Cir. 2002) (“[T]o prevail on their claims for 10 violations of § 20(a) and § 20A, plaintiffs must first allege a violation of § 10(b) or Rule 10b 5.”). 11 United States District Court Northern District of California 8 Because the Court determines Plaintiffs’ claim under Section 10(b) and Rule 10b-5 fail, 12 Defendants motion to dismiss these claims is also GRANTED. 6. Leave to Amend 13 14 When dismissing a complaint for failure to state a claim, a court should grant leave to 15 amend “unless it determines that the pleading could not possibly be cured by the allegation of 16 other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000). Although the Court has 17 determined that Plaintiffs fail to state a claim, it is possible Plaintiffs can cure their allegations by 18 alleging, among other things, that Facebook embedded employees in the 2016 Trump campaign 19 and thus knew that the deletion certifications were false and by alleging more facts about the stock 20 price following the June 3, 2018 whitelisting revelation. Accordingly, because Plaintiffs may 21 salvage their Complaint, the Court finds amendment would not be futile. Plaintiffs’ claims are 22 therefore dismissed with leave to amend. Plaintiffs are advised that this will be their final 23 opportunity to amend. 24 25 IV. CONCLUSION Defendants’ motion to dismiss Plaintiffs’ SAC in its entirety is GRANTED with leave to 26 amend. Should Plaintiffs choose to file an amended complaint, they must do so by September 23, 27 2020. Failure to do so, or failure to cure the deficiencies addressed in this Order, will result in 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 66 1 dismissal of Plaintiffs’ claims with prejudice. Plaintiffs may not add new claims or parties without 2 leave of the Court or stipulation by the parties pursuant to Federal Rule of Civil Procedure 15. 3 4 5 6 IT IS SO ORDERED. Dated: August 7, 2020 ______________________________________ EDWARD J. DAVILA United States District Judge 7 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Case No.: 5:18-cv-01725-EJD ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS WITH LEAVE TO AMEND 67

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