Shotwell v. Zillow Group, Inc et al

Filing 46

ORDER granting Defendants' 36 Motion to Dismiss for Failure to State a Claim and granting in part and denying in part Defendants' request for judicial notice (Dkt. Nos. 38 , 43 ). Plaintiffs' Exchange Act claims as pled in counts I and II are DISMISSED without prejudice and with leave to amend. The second amended complaint shall be filed within forty- five (45) days of this order. Plaintiffs' Securities Act claims as alleged in counts III and IV are DISMISSED with prejudice. Signed by U.S. District Judge John C Coughenour. (TH)

THE HONORABLE JOHN C. COUGHENOUR

1
2
3
4
5
6

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE

7
8
9

In re Zillow Group, Inc.
Securities Litigation

10

CASE NO. C17-1387-JCC
ORDER

11
12
13
14
This matter comes before the Court on Defendants’ motion to dismiss (Dkt. No. 36) and

15
16

requests for judicial notice (Dkt. Nos. 38, 43). Having thoroughly considered the parties’ briefing

17

and the relevant record, the Court finds oral argument unnecessary and hereby GRANTS the

18

Defendants’ motion to dismiss (Dkt. No. 36) and GRANTS in part and DENIES in part

19

Defendants’ requests for judicial notice (Dkt. Nos. 38, 43) for the reasons explained herein.

20

I.

BACKGROUND
Plaintiffs bring this putative class action against Zillow Group, Inc., (“Zillow”) on behalf

21
22

of purchasers of Zillow securities, 1 alleging violations of Sections 10(b) and 20(a) of the

23

Securities Exchange Act of 1934 (“Exchange Act”), Securities and Exchange Commission

24
25
1

26

The alleged class includes all persons, excluding Defendants, who acquired or purchased Zillow
securities from November 17, 2014 to August 8, 2017. (Dkt. No. 35 at 2.)
ORDER
C17-1387-JCC
PAGE - 1

1

(“SEC”) Rule 10b–5, and Sections 11 and 15 of the Securities Act of 1933. 2 (Dkt. No. 35 at 2.)

2

Plaintiffs also name as defendants, Spencer Rascoff and Kathleen Phillips, Zillow’s Chief

3

Executive Officer and Chief Financial Officer/Chief Legal Officer, respectively (collectively

4

with Zillow “Defendants”) (Id. at 8.) Plaintiffs have filed a consolidated amended complaint

5

(Dkt. No. 35), which the Court will refer to in this order as the “amended complaint.”

6

Zillow is an online leader in real estate marketing. (Id. at 9.) Through its website and

7

online applications, the company provides users with information about homes, real estate

8

listings, and mortgages. (Id. at 10.) Zillow’s primary source of revenue comes from real estate

9

agents who pay to have their properties listed on Zillow’s digital platforms. (Id.) Agents pay

10

Zillow based on the amount of “impressions” they receive, which are generated each time a user

11

views an agent’s listing. (Id.) When users view a listing, they are given the opportunity to send

12

their contact information directly to the agent. (Id.) When a user does so, the agent receives what

13

is known as a “lead.” (Id.)

14

In 2013, Zillow created an advertising product known as the “co-marketing program.”

15

(Id.) Essentially, the program allows participating mortgage lenders to pay a percentage of a real

16

estate agent’s advertising costs directly to Zillow in exchange for appearing on the agent’s

17

listings and receiving some of the agent’s leads. (Id. at 10–15.) Participating lenders appear on

18

their co-marketing agent’s listings as “preferred lenders,” with their picture and contact

19

information. (Id. at 11.) In addition, when Zillow users choose to provide an agent with their

20

contact information—i.e. generate a lead—the information is automatically sent to the co-

21

marketing lender, unless the user opts out. 3 (Id. at 10–11.) Because users are able to opt out of

22
23
24
25
26

2

In their response to Defendants’ motion to dismiss, Plaintiffs withdrew their claims under the
Securities Act, as pled in Counts III and IV of the consolidated amended complaint. (Dkt. No. 39
at 5.) The Court DISMISSES those claims with prejudice. See Fed. R. Civ. P. 41(b).
3

Before Zillow users send their contact information to an agent, they are presented with a box
that states either “I would like to receive financing information” or “I want to be pre-approved.”
(Dkt. No. 35 at 3, 11.) The box is pre-checked, and unless the user unchecks the box, his or her
contact information is sent directly to the co-marketing lender. (Id.)
ORDER
C17-1387-JCC
PAGE - 2

1

sending their contact information, lenders receive, on average, 40% of the leads received by their

2

co-marketing agents. (Id. at 15.)

3

Prior to 2017, an individual lender could pay up to 50% of a co-marketing agent’s

4

advertising costs, while up to five lenders could collectively pay 90%. 4 (Id. at 15.) When a single

5

lender co-markets with an agent, that lender appears on all of the agent’s listings. (Id.) However,

6

when multiple lenders co-market with a single agent, each lender is randomly shown on the

7

agent’s listings in accordance with the lender’s pro-rata contribution of the agent’s overall

8

advertising spend. (Id.)

9

On April 1, 2015, Zillow received a subpoena from the Consumer Financial Protection

10

Bureau (“CFPB”) requesting information about some of the company’s products, including the

11

co-marketing program. (Id. at 19.) In February 2017, Zillow received a Notice and Opportunity

12

to Respond and Advise (“NORA”) letter from the CFPB, which stated that the agency was

13

considering whether to recommend legal action against Zillow for violation of Section 8 of the

14

Real Estate Settlement Procedures Act, 12 U.S.C. § 2601 et seq. (“RESPA”). (Id. at 21.) Zillow

15

responded to the NORA in March 2017, and the following month received another civil

16

investigative demand from the CFPB. (Id.)

17

On May 4, 2017, Zillow revealed in a quarterly filing with the SEC that it had received

18

the NORA and civil investigative demand from the CFPB. (Id. at 35.) On a conference call that

19

same day, Phillips informed investors that the CFPB had been investigating the co-marketing

20

program to ensure compliance with RESPA. (Id.) Phillips expressed her belief that the co-

21

marketing program allowed agents and lenders to comply with RESPA, and that the program

22

represented a small portion of Zillow’s overall revenue. (Id.) Shortly thereafter, Rascoff made

23

similar statements during an interview on an Internet television channel. (Id. at 32–33.)

24

On August 8, 2017, Zillow revealed the updated status of the CFPB’s investigation in a

25
4

26

Zillow changed the program in the beginning of 2017 so that multiple lenders cannot
collectively pay more than 50% of an agent’s advertising costs. (Dkt. No. 35 at 19.)
ORDER
C17-1387-JCC
PAGE - 3

1

filing with the SEC. (Id. at 37.) That filing disclosed the following:

2

Based on correspondence from the CFPB in August 2017, we understand that it has
concluded its investigation. The CFPB has invited us to discuss a possible
settlement and indicated that it intends to pursue further action if those discussions
do not result in further settlement. We continue to believe that our acts and practices
are lawful and that our comarketing program allows lenders and agents to comply
with RESPA, and we will vigorously defend against any allegations to the contrary.

3
4
5
6

(Id.) In the two trading days following Zillow’s update regarding the CFPB’s investigation into

7

the co-marketing program, the company’s Class A shares fell 15.7% and its Class C shares fell

8

15.5%. (Id.) Plaintiffs Harris, Offut, and Choy purchased Zillow shares between June 2017 and

9

August 8, 2017. (Dkt. Nos. 16-2, 35 at 7.) Plaintiffs allege that they purchased Zillow shares at

10

an artificially inflated price, and were damaged when Defendants’ material misrepresentations

11

regarding the co-marketing program and CFPB investigation were ultimately disclosed in

12

Zillow’s August 2017 SEC filing. (Dkt. No. 35 at 7, 38.)

13

II.

DISCUSSION

14

A.

15

Defendants ask the Court to consider several documents that they assert are either

16

judicially noticeable or that are incorporated by reference in the amended complaint. (Dkt. Nos.

17

38, 43.) Pursuant to Federal Rule of Evidence 201, a court may take judicial notice of relevant

18

facts that are “not subject to reasonable dispute.” Fed. R. Evid. 201(b). A district court “must

19

take judicial notice if a party requests it and the court is supplied with the necessary

20

information.” Fed. R. Evid. 201(c). Facts subject to judicial notice may be considered on a

21

motion to dismiss. In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1051 (9th Cir. 2014). District

22

courts may also consider documents incorporated by reference into a complaint. Knievel v.

23

ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005). A complaint incorporates a document by reference

24

when its claims rely on information contained in the document and the parties do not dispute its

25

authenticity. Id.

26

Materials Considered

Defendants ask the Court to consider the following documents: (1) Zillow’s Form 10-K

ORDER
C17-1387-JCC
PAGE - 4

1

filed February 7, 2014; (2) materials published by the Department of Housing and Urban

2

Development; (3) Zillow’s Form 10-K filed February 17, 2015; (4) Zillow’s Form 10-Q filed

3

May 4, 2017; (5) Zillow’s Form 10-Q filed August 8, 2017; (6) Zillow’s Form 10-Q filed

4

November 7, 2017; (7) a certified transcript from a Zillow webinar presented on March 23, 2015;

5

(8) a transcript of a May 4, 2017 earnings conference call; (9) Zillow’s Form 4 filed May 9, 2017

6

concerning Phillips’ sale of Zillow stock; (10) Zillow’s Schedule 14A Proxy Statement filed

7

April 26, 2017; (11) Zillow’s Form 4 filed February 17, 2015 concerning Phillips’ sale of Zillow

8

stock; and (13) excerpts from the Merger and Agreements between Zillow, Zebra Holdco, Inc.,

9

and Trulia, Inc., from July 28, 2014. (See generally Dkt. No. 37.)

10

Plaintiffs oppose Defendants’ request for judicial notice of the transcript of the 2015

11

webinar because the transcript contains a material error. (Dkt. No. 41 at 1.) The transcript labels

12

as “unintelligible” a word that Plaintiffs believe is clearly intelligible as “RESPA.” (Id.) The

13

Court has listened to the webinar and concludes that the word marked “[UNINTEL]” on

14

Defendants’ transcript is “RESPA.” 5 Since the amended complaint makes multiple references to

15

the webinar, the Court will consider it pursuant to the incorporation by reference doctrine.

16

Defendants separately request that the Court consider a Form 8-K filed by Zillow with

17

the SEC on June 25, 2018. (Dkt. No. 43.) The form, filed after briefing had closed on this

18

motion, states as follows:

19

As previously disclosed, the Consumer Financial Protection Bureau (“Bureau”)
issued Zillow Group, Inc. (the “Company”) a Notice and Opportunity to Respond
and Advise (“NORA”) letter in February 2017. The NORA letter notified the
Company that the CFPB’s Office of Enforcement was considering whether to
recommend that the Bureau take legal action against the Company, alleging that it
violated Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) and
Section 1036 of the Consumer Financial Protection Act (“CFPA”). The Company
responded to the NORA letter in March 2017 and thereafter engaged in discussions
with the Bureau. On June 22, 2018, the Company received a letter from the Bureau
stating that it had completed its investigation, that it did not intend to take

20
21
22
23
24
25
5

26

Grow Your Business Together with Lender Co-Marketing, YouTube (Mar. 23, 2015),
https://www.youtube.com/watch?v=lqk-PmKgcss. Last visited August 5, 2018.
ORDER
C17-1387-JCC
PAGE - 5

enforcement action, and that the Company was relieved from the documentretention obligations required by the Bureau’s investigation.

1
2

(Id.) The Court has confirmed that this Form 8-K was filed with the SEC. 6 Plaintiffs do not

3

object to the Court taking judicial notice that Zillow filed the Form 8-K; rather, they object to the

4

Court accepting the information in the filing as true for the purposes of deciding Defendants’

5

motion to dismiss. (Dkt. No. 44 at 2.)

6

While the Court can take judicial notice of the fact that a document was filed with the

7

SEC, and of the contents of such a filing, “[t]he truth of the content, and the inferences properly

8

drawn from them [] is not a proper subject of judicial notice under Rule 201.” Patel v. Parnes,

9

253 F.R.D. 531, 546 (C.D. Cal. 2008) (citation omitted). Defendants apparently want the Court

10

to take judicial notice of the fact that the CFPB has concluded its investigation and does not

11

intend to take enforcement action against Zillow. (See Dkt. Nos. 43, 45.) The Court will take

12

judicial notice of the fact that Zillow filed the June 2018 Form 8-K, as well as of that document’s

13

contents. (See Dkt. No. 43 at 6–9.) However, the Court will not accept the contents of the Form

14

8-K—i.e., the CFPB’s representations to Zillow about its future actions—as true for purposes of

15

resolving Defendants’ motion to dismiss. 7

16
17

For the above reasons, Defendants’ requests for judicial notice (Dkt. Nos. 38 and 43) are
GRANTED in part and DENIED in part.

18

B.

19

To state a claim for securities fraud under Section 10(b) and Rule 10b–5, a plaintiff must

Legal Standard for Motion to Dismiss Securities Fraud Claim

20

allege: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a

21

6

22
23
24
25
26

Zillow Grp., Inc., Current Report (Form 8-K) (June 22, 2018).
https://www.sec.gov/Archives/edgar/data/1617640/000161764018000010/otherevents.htm. Last
visited September 8, 2018.
7

If the Court were to accept Defendants’ offer to file the CFPB’s letter to Zillow regarding the
information disclosed in the June 2018 Form 8-K, the Court would have to convert Defendants’
motion to dismiss into a motion for summary judgment. See United States v. Ritchie, 342 F.3d
903, 908 (9th Cir. 2003) (“[I]f a district court considers evidence outside the pleadings, it must
normally convert the 12(b)(6) motion into a Rule 56 motion for summary judgment, and it must
give the nonmoving party an opportunity to respond.”).
ORDER
C17-1387-JCC
PAGE - 6

1

connection between the misrepresentation or omission and the purchase or sale of a security; (4)

2

reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”

3

Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1057 (9th Cir. 2014)

4

(quoting Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398, 2407 (2014)).

5

Normally, to survive a motion to dismiss, a complaint must contain sufficient factual

6

matter, accepted as true, to state a claim for relief that is plausible on its face. Ashcroft v. Iqbal,

7

556 U.S. 662, 677–78 (2009). Complaints alleging securities fraud claims under Section 10(b)

8

and Rule 10b–5 must additionally satisfy the dual pleading requirements of Federal Rule of Civil

9

Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). WPP Luxembourg

10

Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1047 (9th Cir. 2011) (citing Zucco

11

Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009)). Rule 9(b) requires that

12

claims alleging fraud or mistake must “state with particularity the circumstances constituting

13

fraud or mistake.” Fed. R. Civ. P. 9(b).

14

Pursuant to the PSLRA, a complaint alleging securities fraud must “specify each

15

statement alleged to have been misleading, the reason or reasons why the statement is

16

misleading, and if an allegation regarding the statement or omission is made on information and

17

belief, the complaint shall state with particularity all facts on which the belief is formed.” 15

18

U.S.C. § 78u-4(b)(1). In addition, the complaint must “state with particularity facts giving rise to

19

a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-

20

4(b)(2). The Ninth Circuit has described the PSLRA’s pleading standard as follows:

21
22
23
24
25
26

Because falsity and scienter in private securities fraud cases are generally strongly
inferred from the same set of facts, we have incorporated the dual pleading
requirements of 15 U.S.C. §§ 78u-4(b)(1) and (b)(2) into a single inquiry. In
considering whether a private securities fraud complaint can survive dismissal
under Rule 12(b)(6), we must determine whether “particular facts in the complaint,
taken as a whole, raise a strong inference that defendants intentionally or [with]
‘deliberate recklessness’ made false or misleading statements to investors.” Where
pleadings are not sufficiently particularized or where, taken as a whole, they do not
raise a “strong inference” that misleading statements were knowingly or [with]
deliberate recklessness made to investors, a private securities fraud complaint is
ORDER
C17-1387-JCC
PAGE - 7

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

properly dismissed under Rule 12(b)(6).
Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001) (citation omitted). While the Court must
accept as true all well-pleaded allegations in the complaint, it is not required to accept allegations
that are contradicted by extrinsic materials that are properly considered on a motion to dismiss.
See Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).
C.

Defendants argue that Plaintiffs fail to sufficiently allege the elements of material
misleading statements, scienter, and loss causation. (Dkt. No. 36 at 8.) There are essentially two
parts to Plaintiffs’ securities fraud claims. First, Plaintiffs allege that Zillow not only designed
the co-marketing program to allow agents and lenders to violate RESPA, but that the company
also encouraged and facilitated such violations. (See Dkt. Nos. 35 at 22, 39 at 5–6.) Having
asserted that the co-marketing program, and by extension Zillow, violated RESPA, Plaintiffs
allege that Defendants made various statements regarding Zillow’s legal compliance and the
CFPB’s investigation into the co-marketing program that were false and misleading. (Id.) Before
the Court can analyze the statements that Plaintiffs allege were false and misleading, it must first
assess Plaintiffs’ allegations regarding Zillow’s RESPA violations. If Plaintiffs have not
provided particularized facts to support their claims regarding these alleged violations, then
many of Defendants’ statements could not have been false or misleading. See Fed. R. Civ. P.
9(b) (“In alleging fraud or mistake, a party must state with particularity the circumstances
constituting fraud or mistake.”); 15 U.S.C. § 78u-4(b)(1) (Plaintiffs must allege with specificity
“the reason or reasons why the statement is misleading.”). After analyzing these issues, the Court
will evaluate Plaintiffs’ allegations regarding scienter and loss causation.
1.

23
24
25
26

Plaintiffs’ Securities Fraud Claims

RESPA Allegations

Passed by Congress in 1974, RESPA broadly regulates various aspects of real estate
transactions. 12 U.S.C. § 2601 et seq. One of the law’s stated purposes is “the elimination of
kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement

ORDER
C17-1387-JCC
PAGE - 8

1

services.” 12 U.S.C. § 2601(b)(2). To achieve that goal, RESPA’s Section 8(a) prohibits giving

2

or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding,

3

oral or otherwise, that business incident to or a part of a real estate settlement service involving a

4

federally related mortgage loan shall be referred to any person.” 12 U.S.C. § 2607(a).

5

“Courts commonly find a violation of § 2607(a) when (1) a payment or thing of value

6

was exchanged, (2) pursuant to an agreement to refer settlement business, and (3) there was an

7

actual referral.” Edwards v. First Am. Corp., 798 F.3d 1172, 1178 (9th Cir. 2015). “Thing of

8

value” includes “any payment” or “consideration.” 12 U.S.C. § 2602(2). “An agreement or

9

understanding for the referral of business incident to or part of a settlement service need not be

10

written or verbalized but may be established by a practice, pattern or course of conduct.” 12

11

C.F.R. § 1024.14(e). A referral includes “any oral or written action directed to a person which

12

has the effect of affirmatively influencing the selection by any person of a provider of a

13

settlement service” such as a mortgage lender. 12 C.F.R. § 1024.14(f)(1).

14

Notwithstanding the law’s prohibition on paying for referrals, RESPA’s Section 8(c)

15

contains a safe harbor provision that permits “[a] payment to any person of a bona fide salary or

16

compensation or other payment for goods or facilities actually furnished or for services actually

17

performed.” 12 U.S.C. § 2607(c); 12 C.F.R. § 1024.14(g)(iv). The Ninth Circuit has interpreted

18

the safe harbor to apply (1) where “goods or facilities were actually furnished or services were

19

actually performed for the compensation paid” and, (2) “the payments are reasonably related to

20

the value of the goods or facilities that were actually furnished or services that were actually

21

performed.” Geraci v. Homestreet Bank, 347 F.3d 749, 751 (9th Cir. 2003).

22

Plaintiffs allege that Zillow, through its design and operation of the co-marketing

23

program, facilitated RESPA violations in two overarching ways. First, Plaintiffs allege that the

24

co-marketing program acted as a vehicle to allow real estate agents to make illegal referrals to

25

lenders in exchange for the lenders paying a portion of the agents’ advertising costs to Zillow.

26

(Dkt. No. 35 at 24.) In addition to illegally paying for referrals, Plaintiffs allege that the coORDER
C17-1387-JCC
PAGE - 9

1

marketing program facilitated RESPA violations by allowing lenders to pay a portion of their

2

agents’ advertising costs that was in excess of the fair market value for the advertising services

3

they actually received. (Id.) As the Court explains below, Plaintiffs have failed to sufficiently

4

plead either theory of RESPA liability.

5

Plaintiffs allege that Defendants created the co-marketing program to allow real estate

6

agents to steer prospective home buyers to mortgage lenders, in exchange for the lenders paying

7

a portion of the agent’s advertising costs to Zillow. (Id. at 16.) According to Plaintiffs, referrals

8

occur when lenders receive leads from Zillow and thereafter work with their co-marketing agent

9

to secure the business of the prospective homebuyer. 8 (Id. at 12; Dkt. No. 39 at 11–12.)

10

(“Though Rascoff has analogized Zillow’s co-marketing program with earlier print co-marketing

11

programs, this comparison elides an important difference—Zillow directly provides leads to both

12

lenders and advertisers.”) Plaintiffs allege that when lenders pay a portion of the agent’s

13

advertising costs to Zillow, they are effectively paying to receive unlawful mortgage referrals.

14

(Dkt. No. 35 at 16.)

15

Plaintiffs support this theory of RESPA liability by citing previous enforcement actions

16

taken by the CFPB. Plaintiffs point to a case from 2015, in which the CFPB levied a $109

17

million disgorgement order against a mortgage lender that it alleged referred customers to

18

mortgage insurers in exchange for illegal payments. (Id. at 18.) That case involved a so-called

19

“tying arrangement,” wherein a mortgage lender refers its clients to certain mortgage insurance

20

companies, who in turn would purchase reinsurance from the referring lender’s subsidiary. See

21
8

22
23
24
25
26

Defendants argue that Plaintiffs cannot prove any RESPA violations because they do not allege
that Zillow directly provided referrals to lenders. (Dkt. No. 36 at 14–15) (“Zillow does not refer
consumers to lenders under the co-marketing program, but rather acts as an online “billboard”
providing consumers to lenders under the co-marketing program.”). Defendants relatedly argue
that Zillow cannot be held liable for encouraging and facilitating RESPA violations because that
statute does not provide for aiding and abetting liability. (Id. at 16) (citing Minter v. Wells Fargo
Bank, N.A., 924 F. Supp. 2d 627, 646 (D. Md. 2013). The Court need not reach these arguments
because Plaintiffs have failed to sufficiently allege any RESPA violations, whether by Zillow or
third party agents and lenders participating in the co-marketing program.
ORDER
C17-1387-JCC
PAGE - 10

1

PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 40 (D.C. Cir. 2016). The CFPB alleged

2

that the tying arrangement violated RESPA because the lender was referring homebuyers to the

3

mortgage insurers in exchange for its reinsurance subsidiary receiving business. Id. In this case,

4

Plaintiffs allege Zillow’s co-marketing program creates an analogous type of pay-for-referral

5

arrangement. (Dkt. No. 39 at 11.)

6

As Defendants note, however, the D.C. Circuit invalidated the CFPB’s broad theory of

7

RESPA liability. See PHH Corp., 839 F.3d at 40. The D.C. Circuit held that RESPA’s safe

8

harbor allows mortgage lenders to make referrals to third parties on the condition that they

9

purchase services from the lender’s affiliate, so long as the third party receives the services at a

10

“reasonable market value.” Id. The D.C. Circuit concluded that RESPA did not prohibit the tying

11

arrangement at issue because it involved “bona fide payments for services and not payments for

12

referrals.” Id. The D.C. Circuit’s application of the Section 8(c) safe harbor is consistent with the

13

Ninth Circuit’s interpretation of that provision requiring that “payments are reasonably related to

14

the value of . . . services that were actually performed.” Geraci, 347 F.3d 751.

15

Plaintiffs’ first theory of RESPA liability—that the co-marketing program is per se illegal

16

because it allowed agents to make referrals in exchange for lenders paying a portion of their

17

advertising costs—is neither factually nor legally viable. In contrast to the tying-arrangement at

18

issue in PHH Corp., which explicitly involved the referral of mortgage insurance business in

19

exchange for the purchase of re-insurance from the referring business, Zillow’s co-marketing

20

program, based on Plaintiffs’ allegations, allows agents and lenders to jointly advertise their

21

services without requiring agents to refer business to lenders. See PHH Corp., 839 F.3d at 40;

22

(See Dkt. No. 35 at 10–13.)

23

The amended complaint does not contain particularized facts demonstrating that co-

24

marketing agents were actually providing unlawful referrals to lenders. For example, the

25

amended complaint does not contain any allegations that a specific co-marketing agent referred

26

mortgage business to a specific lender in exchange for paying its advertising costs to Zillow. But
ORDER
C17-1387-JCC
PAGE - 11

1

even if the Court draws an inference that co-marketing agents were making mortgage referrals,

2

such referrals would fall under the Section 8(c) safe harbor because lenders received advertising

3

services in exchange for paying a portion of their agent’s advertising costs. See 12 U.S.C.

4

§ 2607(c); PHH Corp., 839 F.3d at 40. Therefore, the Court rejects Plaintiffs’ theory that the co-

5

marketing program, and by extension Zillow, violated RESPA by allowing lenders to pay a

6

portion of agent’s advertising costs.

7

Plaintiffs’ alternative theory of liability is that the co-marketing program facilitated

8

RESPA violations by allowing lenders to pay more than fair market value for the advertising

9

services they received from Zillow. (Dkt. No. 39 at 11.) In other words, Plaintiffs assert that the

10

amount lenders were paying above fair market value for the advertising was a form of quid pro

11

quo for receiving referrals from lenders. (Id.) (citing PHH Corp., 839 F.3d at 50).

12

Plaintiffs assert that the co-marketing program let lenders “pay a greater share of the

13

marketing budget than is justified by the number of leads generated by the program.” (Dkt. No.

14

35 at 17.) Plaintiffs allege that “[b]ecause a lender only receives 4 leads for every 10 received by

15

the broker, if a single lender paid 50% of the agent’s advertising costs, the lender is paying 2.5

16

times more per lead than the agent does.” (Id.) Plaintiffs suggest the situation is even worse when

17

multiple lenders collectively pay an agent’s costs because each lender receives even fewer leads.

18

(Id.) (“If as was permitted under the program, five lenders in total contributed 18% each to the

19

agent’s monthly budget, for a total of 90% of that budget, they would be paying 22.5 times more

20

per lead than the agent.”)

21

Plaintiffs additionally allege that certain lenders who participated in the co-marketing

22

program refused to pay more than 31% of an agent’s advertising costs because that percentage

23

represented the fair market value of the advertising based on the amount of leads received. (Id. at

24

16.) Plaintiffs further allege that Zillow “itself confirmed that a 30% contribution by the lender

25

corresponds to fair market value a lender receives for advertisement vs. the broker.” (Id.)

26

While Plaintiffs have explained in detail how the co-marketing program is structured,
ORDER
C17-1387-JCC
PAGE - 12

1

they have failed to provide particularized facts that demonstrate co-marketing lenders were

2

paying more than fair market value for the advertising services they received from Zillow. At the

3

outset, the Court notes that Plaintiffs’ claims regarding these RESPA violations are supported

4

almost entirely by circumstantial inferences—Plaintiffs have not alleged that Zillow has been

5

charged with, much less found to have violated Section 8(a) of RESPA. 9 The amended complaint

6

does not contain any particularized allegations that specific co-marketing lenders were paying

7

more than fair market value for the advertising services they received from participating in the

8

program. For example, the amended complaint does not allege that a specific co-marketing agent

9

provided a mortgage referral to a specific lender in exchange for that lender paying an amount to

10

Zillow that was above the market value of the advertising services received by the lender. While

11

Plaintiffs assert that a few participating lenders believed 31% of an agent’s advertising spend

12

represented the maximum amount a co-marketing lender should spend, they have not alleged that

13

any specific lenders were paying above that amount or, if they were, that such lender considered

14

the amount to be above fair market value. 10

15

Further, even if individual lenders were paying more than 31% of an agent’s advertising

16

spend, Plaintiffs have not provided particularized facts that support its allegation that the fair

17

market value of co-marketing advertising is roughly equivalent to the percentage of leads a

18
19
20
21
22

9

Plaintiffs assume that Zillow’s RESPA violations can be inferred from the company’s August
2017 disclosure that the CFPB had invited Zillow to discuss a possible settlement and indicated
that it intended to pursue further action if those discussions did not result in a settlement. (Dkt.
No. 35 at 37.) The Court does not agree that Zillow’s disclosure, even when accepted as true,
demonstrates that Zillow violated RESPA, as Plaintiffs repeatedly suggest throughout the
amended complaint. (See id.) (“Following the news that the CFPB had determined that the comarketing program had violated the law . . .”).
10

23
24
25
26

The Court also declines to accept as true Plaintiffs’ allegation that Zillow confirmed that 30%
of an agent’s advertising spend represented the fair market value of co-marketing services
because judicially noticeable materials contradict that assertion. (See Dkt. No. 37 at 78);
Sprewell, 266 F.3d at 988. While a Zillow representative stated in the 2015 webinar that paying
30% of agent’s advertising costs was “the sweet spot,” he also said “it can work for more, you
know, if a lender wants to contribute more and you guys have the right amount of exposure, it
does work.” (Id.)
ORDER
C17-1387-JCC
PAGE - 13

1

lender receives. Zillow charges agents for advertising based on the number of impressions

2

received, not on the number of leads received. (Dkt. No. 35 at 10.) That makes sense because

3

leads are not the only advertising benefit that agents and lenders receive from the co-marketing

4

program. Co-marketing lenders appear alongside their agents when Zillow users view an agent’s

5

listing. (Id. at 12) (image showing a co-marketing listing with lender’s picture and contact

6

information appearing below agent’s). Just as co-marketing lenders can solicit a prospective

7

buyer based on the receipt of a lead, prospective buyers can contact lenders based on seeing their

8

information on a listing. Certainly this form of advertising, which is entirely separate from the

9

receipt of leads or potential mortgage referrals, carries a monetary value for participating lenders.

10

Plaintiffs’ fair market value theory does not account for this exposure. Nor do Plaintiffs’

11

allegations account for the fact that lenders could place differing values on the advertising

12

provided by the co-marketing program—a consideration that is especially relevant given that

13

Plaintiffs have not alleged that specific lenders were paying above fair market value for co-

14

marketing services or how much that amount represented. Plaintiffs have not provided

15

particularized facts that support their claim that co-marketing lenders were paying more than fair

16

market value for the advertising services they received from Zillow in exchange for agents

17

providing mortgage referrals.

18

Having rejected both of Plaintiffs’ theories of RESPA liability, the Court concludes that

19

Plaintiffs’ other RESPA allegations against Zillow are similarly unsupported. Plaintiffs allege

20

that Zillow “actively encouraged” agents to make personal recommendations of their co-

21

marketing lenders—i.e., to make illegal referrals. (Id.) In support of this allegation, Plaintiffs

22

point to the 2015 webinar, in which a Zillow representative suggested that co-marketing agents

23

and lenders should “tag-team” prospective buyers in order for both to make a sale. (Id. at 15.)

24

The Zillow representative stated:

25
26

It’s best to have a conversation of when both of you get a contact, who’s going to
respond first? And then who’s going to do the follow-up? There’s no reason why
you can’t do a tag-team scenario and both working these contacts and being quick
ORDER
C17-1387-JCC
PAGE - 14

on the draw when to get them. And again, I can’t say it enough. If you guys are not
talking or if you’re not talking with the lender, the program will not work.

1
2

(Dkt. No. 37 at 82.) These are the only statements that Plaintiffs offer to suggest that Zillow

3

encouraged and instructed agents to refer lenders to homebuyers. (See generally Dkt. No. 35.)

4

The representative did not instruct agents to recommend lenders to potential homebuyers, nor

5

can the Court draw such an inference from the above statements. The reasonable inference that

6

the Court can draw from the above statement is that Zillow believed agents and lenders should

7

communicate with one another in order to maximize the chance that they secure a prospective

8

homebuyer’s business—that falls short of an instruction by Zillow for agents to refer lenders.

9

The amended complaint does not contain particularized facts that demonstrate Zillow or its

10

representatives actually instructed agents to make referrals, as Plaintiffs’ allege. 11

11

Plaintiffs’ allegation that Zillow designed the co-marketing program to conceal RESPA

12

violations is similarly unsupported by particularized facts. It is unclear to the Court what facts in

13

the amended complaint support this allegation because it seems to support an opposite

14

conclusion. The 2015 webinar, cited repeatedly in the amended complaint, was broadcast to the

15

public, explained how the co-marketing program worked, and provided answers to users’

16

questions. (Dkt. No. 37 at 63–88.) Zillow’s public dissemination of information regarding the co-

17

marketing program belies Plaintiffs’ allegation that the company was attempting to conceal

18

RESPA violations. It is also notable that this public webinar contains just about all of the

19

material facts that support Plaintiffs’ allegations that the co-marketing program violated RESPA.

20

Surely, such public disclosure speaks to Defendants’ belief—and the existence or lack of

21

scienter—that the co-marketing was legal. See infra Part II.C.3.

22

For the above reasons, the Court finds that the amended complaint does not contain

23
24
25
26

11

The amended complaint alleges that during the 2015 webinar Zillow encouraged agents to
provide lenders with leads even when users opted out of sending their information to comarketing lenders. (Dkt. No. 35 at 15.) That allegation is contradicted by the webinar, in which
the Zillow representative instructed agents to inform co-marketing lenders that they would only
receive about 40% of an agent’s leads. (Dkt. No. 37 at 71–72.)
ORDER
C17-1387-JCC
PAGE - 15

1

particularized facts that demonstrate Zillow designed the co-marketing program to violate

2

RESPA and to allow lenders and agents to conceal such violations. Nor does the amended

3

complaint sufficiently allege that the co-marketing program was facilitating RESPA violations.

4

2.

5

Misleading Statements

Having evaluated Plaintiffs’ RESPA allegations, the Court now turns to the specific

6

statements Plaintiffs assert were false or misleading. The alleged statements can generally be

7

classified as dealing with Zillow’s general legal compliance, the co-marketing program

8

specifically, and the CFPB’s investigation into the program. (See Dkt. No. 35 at 21–34.)

9

a.

10
11

Statements Regarding General Legal Compliance

On February 18, 2014, Zillow filed a Form 10-K with the SEC in which it stated the
following regarding the company’s compliance with government regulations:

12

16

[T]he real estate agents, mortgage brokers, banks, property managers, rental agents
and some of our other customers and advertisers on our mobile applications and
websites are subject to various state and federal laws and regulations relating to real
estate, rentals and mortgages. While we do not believe that we are currently subject
to these regulations, we intend to ensure that any content created by Zillow is
consistent with them by obtaining assurances of compliance from our advertisers
and customers for their activities through, and the content they provide on, our
mobile applications and websites.

17

(Dkt. No. 35 at 22.) 12 Zillow’s initial registration statement, which incorporated by reference the

18

February 2014 10-K, also included the merger agreement between Zillow and Trulia. (Id. at 23.)

19

The merger agreement included the following warranty: “[n]either Zillow nor any Zillow

20

Subsidiary is in conflict with, or in default, breach or violation of, (a) any Law applicable to

21

Zillow or any Zillow Subsidiary . . . .” (Id.)

13
14
15

22
23
24
25
26

On February 17, 2015, Zillow filed a Form 10-K that included nearly identical language
12

The February 18, 2014 10-K was incorporated by reference in Zillow’s initial registration
statement that was signed by Defendants Rascoff and Phillips. (Dkt. No. 35 at 21.) Plaintiffs
additionally allege that the following documents contained false and misleading statements
because they incorporated the February 2014 10-K by reference: a February 2015 Form S-8, an
April 2015 Form S-3, an August 17, 2015 Form S-8 Registration Statement, and an August 21,
2015 Form S-8 Registration Statement. (Id. at 25–26.)
ORDER
C17-1387-JCC
PAGE - 16

1

as the 2014 10-K regarding its compliance with government regulations. (Id.) In that filing,

2

Zillow stated that “[w]e endeavor to ensure that any content created by Zillow is consistent with

3

such laws and regulations by obtaining assurances of compliance from our advertisers and

4

consumers for their activities through, and the content they provide on, our mobile applications

5

and websites.” (Id. at 23–24.)

6

Plaintiffs allege that Defendants’ statements regarding Zillow’s legal compliance—that

7

the company “intended” or “endeavored” to comply with government regulations, and that it was

8

not in conflict, default, or breach of any laws—were misleading because the co-marketing

9

program was designed to allow real estate agents and lenders to violate RESPA, in the ways

10

previously detailed by the Court. (Dkt. No. 35 at 22–23.); see supra Part II.C.1. As the Court has

11

explained, however, the amended complaint does not include particularized facts that support

12

Plaintiffs’ RESPA allegations against Defendants. See supra Part II.C.1. The amended complaint

13

does not allege sufficient facts to demonstrate Defendants intended the co-marketing program to

14

violate RESPA, let alone that Zillow or third parties were actually violating the statute. See In re

15

LifeLock, Inc. Sec. Litig., 690 F. App’x 947, 951–52 (9th Cir. 2017) (holding that a corporate

16

defendant’s statement that it “endeavored” to comply with an FTC order was not misleading

17

where the complaint lacked particularized facts to show that the defendants knew that a certain

18

practice violated the order).

19
20

Therefore, Plaintiffs have failed to provide particularized facts to demonstrate that
Defendants’ statements regarding Zillow’s legal compliance were misleading. 13

21

b.

22
23
24
25
26

Non-Disclosure of CFPB Investigation

Plaintiffs allege that Defendants made misleading statements when failing to disclose
information regarding the CFPB’s investigation into the co-marketing program. (Dkt. No. 35 at
13

The Court’s ruling applies to all of the statements that Plaintiffs allege were misleading for
failing to disclose that Zillow’s co-marketing program was designed to violate RESPA, and
because Zillow allegedly encouraged and instructed agents to commit such violations. (See Dkt.
No. 35 at 22–33.)
ORDER
C17-1387-JCC
PAGE - 17

1

27–30.) As a general matter, federal securities laws do not require corporations to disclose the

2

initiation of a government investigation. See Basic v. Levinson, 485 U.S. 224, 234 (1988)

3

(“Silence, absent a duty to disclose, is not misleading under Rule 10b–5.”); Metzler, 540 F.3d at

4

1071; In re Lions Gate Entm’t Corp. Sec. Litig., 165 F. Supp. 3d 1, 12 (S.D.N.Y. 2016) (“[A]

5

government investigation, without more, does not trigger a generalized duty to disclose.”) While

6

there is no general duty to disclose investigations, corporations have “a duty to disclose material

7

facts that are necessary to make disclosed statements, whether mandatory or volunteered, not

8

misleading.” Hanon v. Dataproducts Corp., 976 F.2d 497, 504 (9th Cir. 1992). Failure to

9

disclose an investigation can be actionable if the corporation makes “some affirmative statement

10

or omission [] that suggested it was not under any regulatory scrutiny.” Metzler, 540 F.3d at

11

1071.

12
13
14
15
16
17
18
19
20
21

During a November 3, 2015 conference call with investors, Defendant Phillips was
involved in the following exchange with an analyst:
Analyst: Can you just give us a sense for how much the mortgage co-advertising
is contributing to agent revenue? And kind of what penetration is? Where you think
it can go? And is the RESPA or CFPB kind of investigations into this is – is this
something that should be a concern? Or something that you think is not really an
issue?
Phillips: Co-marketing with lenders and agents is a very small part of our business,
a small contributor to ARPA revenue. Importantly though, we are not seeing
lenders depart from this program notwithstanding all of the discussions in the
marketplace about the CFPB and the CFPB’s recent pronouncements and actions.
I can assure you that we work diligently to comply with all of the rules put forth by
government agencies and of course, we monitor the CFPB and the things that they
are saying and doing to make sure that we remain in compliance and to make sure
that we understand how their activities relate to our business.

22
(Dkt. No. 35 at 26.) Plaintiffs allege that Phillips’ statement was misleading “for failing to
23
disclose that the CFPB had issued a civil investigative demand attempting to determine whether
24
the co-marketing program violated RESPA.” (Id. at 27.) Plaintiffs support that allegation by
25
asserting that Zillow received a subpoena from the CFPB on April 1, 2015, that was “in
26
ORDER
C17-1387-JCC
PAGE - 18

1

connection with an investigation by the CFPB into potential violations of RESPA related to

2

Zillow’s co-marketing program.” 14 (Id. at 19.)

3

The Court concludes that Phillips’ statement was not misleading because it was neither

4

an affirmative statement nor omission that suggested Zillow was not under regulatory scrutiny.

5

In response to the analyst’s question regarding CFPB investigations into co-advertising programs

6

generally, Phillips stated that Zillow was monitoring the CFPB’s actions in order to remain in

7

regulatory compliance. (Id. at 26.) The analyst did not ask if the CFPB was investigating

8

Zillow’s co-marketing program, nor did Phillips suggest that the CFPB was not investigating

9

Zillow. Nothing that Phillips said or failed to say in response to the analyst’s question suggested

10

that Zillow had not received a civil investigative demand from the CFPB.

11

The non-binding authority cited by Plaintiffs does not warrant an opposite conclusion.

12

(See Dkt. No. 39 at 16–17) (citing In re BioScrip, Inc. Sec. Litig., 95 F. Supp. 2d 711, 729

13

(S.D.N.Y. 2015)). In BioScrip, the district court found that the Plaintiff had plausibly alleged a

14

material misstatement based on the defendant corporation’s failure to disclose that it had

15

received a civil investigative demand from a federal agency. 95 F. Supp. 2d at 728. The court

16

reasoned that the defendant’s nondisclosure was potentially misleading because of an earlier

17

statement by the corporation that it could give no assurance that it “will not receive subpoenas or

18

be requested to produce documents in pending investigations.” Id. In other words, the failure to

19

disclose the investigation rendered misleading a previously made statement dealing with the

20

corporation’s exposure to such investigations. Id. Here, Phillips’ failure to disclose the April

21

2015 subpoena did not render her statements to investors, or any previous statement by Zillow,

22
23
24
25
26

14

However, in another section of the amended complaint, Plaintiffs state that Zillow was not
notified “of the CFPB’s specific legal concerns regarding the co-marketing program” until it
received the NORA letter in early 2017. (Dkt. No. 35 at 5.) It appears clear from the amended
complaint that Plaintiffs have not seen the actual contents of the April 2015 subpoena, as their
allegations are based on “the CFPB Document Submission Standards provided to Plaintiffs in
response to a FOIA request,” and not the subpoena itself. (Id. at 19.)
ORDER
C17-1387-JCC
PAGE - 19

1

misleading. 15

2

c.

3

Non-Disclosure of Changes to Co-Marketing Program

Plaintiffs allege that Defendants made misleading statements when they failed to disclose

4

that the co-marketing program had been altered in response to the CFPB’s investigation. During

5

a May 4, 2017 conference call, Phillips made the following statement in response to a question

6

about whether Zillow had noticed if agents and lenders had changed their behavior in light of the

7

CFPB’s investigation:

8

In terms of changes in behavior, we haven’t observed anything specific, but I can
tell you that real estate agents and lenders are pretty keenly aware of the restrictions
that are placed upon their co-marketing efforts through RESPA and other regulatory
regimes. So they are intent on complying and pay close attention to their own
behavior, monitoring themselves. We think through the way we have put this
product together enabled agents and lenders to participate in full compliance with
the law.

9
10
11
12

(Dkt. No. 35 at 30–31.) Later that month, Defendant Rascoff gave an interview on an internet13
based television channel and said the following about the co-marketing program:
14
[T]wo years ago the CFPB started asking us questions about this [the co-marketing
program] and we’ve been talking with them literally for two years. We think the
way we’ve constructed the program is completely compliant and allows agents and
lenders to stay within the confines of the laws that govern this, but we’re still talking
to the CFPB about it so we’ll see.

15
16
17
18

(Id. at 32–33.) Plaintiffs allege that the above statements by Phillips and Rascoff were

19

misleading for “failing to disclose that Zillow had already altered the co-marketing program in

20

an attempt to remedy RESPA violations the CFPB had already identified to Zillow.” (Id. at 32–

21

34.) Plaintiffs allege that in the beginning of 2017, Zillow lowered the percentage of an agent’s

22
15

23
24
25
26

Plaintiffs additionally allege, and the Court rejects, that the following documents contained
misleading statements for failing to disclose the April 2015 subpoena: Zillow’s 2015 10-K, a
March 2016 Form S-8, an August 2016 Form S-8, Zillow’s 2016 10-K, a February 2017 Form S8. (Dkt. No. 35 at 27–32.) Even if Plaintiffs sufficiently alleged that Defendants’ non-disclosure
of the 2015 subpoena was misleading, they would be unable to establish loss causation regarding
those misstatements because Plaintiffs bought their Zillow securities following Defendants’
disclosure of the CFPB’s investigation in May 2017. See infra Part II.C.4.
ORDER
C17-1387-JCC
PAGE - 20

1

advertising costs lenders could collectively contribute based on the CFPB’s investigation into the

2

co-marketing program. (Id. at 19–20.) Plaintiffs also allege that Zillow concealed this change

3

from the public by not altering its website to reflect the change. (Id. at 19.)

4

Plaintiffs support this claim by providing the testimony of an anonymous witness who

5

allegedly had personal knowledge of Zillow’s reasons for changing the co-marketing program.

6

(Id. at 19–20.) A securities fraud complaint “relying on statements from confidential witnesses

7

must pass two hurdles to satisfy the PSLRA pleading requirements.” Zucco Partners, 552 F.3d at

8

995. First, the confidential witness must be described “with sufficient particularity to support the

9

probability that a person in the position occupied by the source would possess the information

10

alleged.” In re Daou Sys., Inc., 411 F.3d 1006, 1015 (9th Cir. 2005). Second, the complaint must

11

include “adequate corroborating details” of the confidential witness’ statements. Id.

12

In this case, the anonymous witness worked as a regional sales manager for Zillow,

13

responsible for “overseeing a team of sales reps that were tasked with upselling and cross-selling

14

to existing customers.” (Dkt. No. 35 at 20.) According to the anonymous witness, in early 2017

15

she and her colleagues “were instructed to explain to agents that Zillow was capping total lender

16

contributions at 50% of total advertising costs.” (Id.) The amended complaint further alleges that

17

the witness’ “understanding was that this change was in response to a government investigation.”

18

(Id.) The anonymous witness further states that Zillow did not immediately update its website to

19

reflect this change to the co-marketing program. (Id.)

20

The amended complaint sufficiently describes the anonymous witness as someone who

21

was in a position to possess the alleged information, and whose statements are corroborated by

22

other facts alleged in the complaint. The amended complaint demonstrates that the witness held a

23

position within Zillow that would provide her with working knowledge of the co-marketing

24

program. (Id. at 19–20.) The witness’ statement about the co-marketing program’s alteration in

25

early 2017 in response to a government investigation, is corroborated by allegations that the

26

CFPB was conducting such an inquiry during that time period. (Id. at 21, 37.)
ORDER
C17-1387-JCC
PAGE - 21

1

Notwithstanding the anonymous witness’ statements, the amended complaint does not

2

contain particularized factual allegations that demonstrate Phillips and Roscoff’s statements were

3

misleading for “failing to disclose that Zillow had already altered the co-marketing program in

4

an attempt to remedy RESPA violations identified by the CFPB.” (Id. at 34.) While the

5

confidential witness states that she believes the changes were implemented in response to a

6

government investigation, neither she, nor the amended complaint, contain particularized facts

7

that demonstrate the co-marketing program was altered to “remedy RESPA violations identified

8

by the CFPB.” (Id. at 34.) The amended complaint does not contain particularized factual

9

allegations that the CFPB informed Zillow that it violated RESPA, much less how such

10

violations occurred. (See generally Dkt. No. 35.) As the Court has previously explained,

11

Plaintiffs have not provided particularized facts that demonstrate that the co-marketing program,

12

and by extension Zillow, violated RESPA. See supra Part II.C.1.

13

Without additional particularized facts regarding the reasons Zillow altered the co-

14

marketing program, Plaintiffs have failed to allege that Phillips and Rascoff’s statements were

15

misleading or false.

16
17

3.

Scienter

In the context of a securities fraud claim, scienter is a mental state that is characterized by

18

an intent “to deceive, manipulate, or defraud.” Metzler, 540 F.3d at 1065–66 (citation omitted).

19

In the Ninth Circuit, scienter requires that a defendant make false or misleading statement

20

“intentionally or with deliberate recklessness.” Zucco Partners, 552 F.3d at 995.

21

To adequately plead scienter, the PSLRA requires that plaintiffs “state with particularity

22

facts giving rise to a strong inference that the defendant acted with the required state of mind.”

23

15 U.S.C. § 78u–4(b)(2). To plead a “strong inference” of scienter an inference must be “more

24

than merely plausible or reasonable—it must be cogent and at least as compelling as any

25

opposing inference of nonfraudulent intent.” WPP Luxembourg, 655 F.3d at 1051–52 (citing

26

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007)). Additionally, a court
ORDER
C17-1387-JCC
PAGE - 22

1

must consider whether “all of the facts alleged, taken collectively, give rise to a strong inference

2

of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.”

3

Tellabs, Inc., 551 U.S. at 322–23. The Ninth Circuit has established the following two-step

4

inquiry to determine whether a securities fraud complaint pleads a strong inference of scienter:

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

[F]irst, we will determine whether any of the plaintiff’s allegations, standing alone,
are sufficient to create a strong inference of scienter; second, if no individual
allegations are sufficient, we will conduct a “holistic” review of the same
allegations to determine whether the insufficient allegations combine to create a
strong inference of intentional conduct or deliberate recklessness.
Zucco Partners, 552 F.3d at 992. When assessing whether a plaintiff has adequately pled a
strong inference of scienter, courts must consider “all reasonable inferences to be drawn from the
allegations, including inferences unfavorable to the plaintiffs.” In re Daou Sys., Inc., 411 F.3d at
1022 (quoting Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002)).
As the Court has previously explained, the amended complaint does not contain
sufficiently particularized facts to adequately allege that Defendants made false or misleading
statements regarding Zillow’s legal compliance or the CFPB’s investigation into the comarketing program. See supra Parts II.C.1, II.C.2. Therefore, the facts pled in support of those
allegedly misleading statements neither individually nor collectively evince a strong inference
that the Defendants made statements with an intent to deceive shareholders. See id. The amended
complaint includes additional allegations in support of establishing Rascoff and Phillips’
scienter—the Court will evaluate each of these allegations individually, and then analyze
whether all of the allegations, when taken as a whole, support a strong inference of scienter.

21
22
23
24
25
26

a.

Additional Allegations Supporting Rascoff’s Scienter

Plaintiffs allege that Rascoff’s scienter can be inferred from the fact that he had been
made aware of a separate 2014 lawsuit that included an allegation that individuals were using the
co-marketing program to violate RESPA. (Dkt. No. 35 at 38–39.) In that lawsuit, the plaintiff
alleged that she informed Zillow executives that lenders were using the co-marketing program to
register fake agent accounts in violation of RESPA. (Id. at 39.) Plaintiffs further allege that
ORDER
C17-1387-JCC
PAGE - 23

1

Rascoff knew of the plaintiff’s allegations and was therefore “aware of red flags that the co-

2

marketing program could be used to evade RESPA.” (Id.)

3

Rascoff’s alleged knowledge of another lawsuit dealing with unrelated RESPA

4

allegations does not support a strong inference of scienter. First, the allegations made in the other

5

lawsuit—that lenders were registering fake accounts—bear no resemblance to Plaintiffs’

6

allegations this lawsuit—that co-marketing agents were making illegal referrals to lenders in

7

exchange for the lenders paying above market value for advertising services. (See generally Dkt.

8

No. 35.) Second, the complaint does not offer particularized facts to explain how the conduct in

9

the other lawsuit violated RESPA. These vague allegations do not allow the Court to conclude

10
11

that Rascoff made statements with the requisite scienter.
Plaintiffs additionally allege that Rascoff’s scienter can be inferred “from his

12

participation in investor conference calls where Defendants made false exculpatory statements,

13

and his thorough preparations for those conference calls.” (Id. at 39.) Plaintiffs describe in detail

14

how Rascoff thoroughly prepared for the relevant conference calls: that he reviewed emails

15

provided to him from each of Zillow’s departments and that he spent several days prior to the

16

calls preparing his remarks. (Id. at 39–40.) Given his preparation, Plaintiffs assert that Rascoff’s

17

statements on the calls “could not have been innocently made.” (Id. at 39.)

18

The Court has already determined that the amended complaint does not contain

19

particularized facts to demonstrate, as Plaintiffs allege, that Rascoff or Phillips made false

20

statements. See supra Part II.C.2.b. While Plaintiffs allege that Rascoff’s preparation before

21

conference calls demonstrates that he would have been aware that the co-marketing program

22

violates RESPA, the Court can draw a different, yet equally compelling inference from Rascoff’s

23

preparation: that he wanted to ensure that what he and other Zillow executives said on the call

24

was accurate. See In re Daou Sys., Inc., 411 F.3d at 1006 (the Court must consider “all

25

reasonable inferences to be drawn from the allegations, including inferences unfavorable to the

26

plaintiffs.”)
ORDER
C17-1387-JCC
PAGE - 24

1

Finally, Plaintiffs allege that Rascoff’s scienter can be inferred from several allegedly

2

misleading statements that he made during a May 2017 interview. (Dkt. No. 35 at 40.) In that

3

interview, Rascoff stated that:

4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23

We think the way we’ve constructed the program is completely compliant and
allows agents and lenders to stay within the confines of the laws that govern this,
but we’re still talking to the CFPB about it so we’ll see. We haven’t disclosed the
amount of revenue, we’ve said it’s small, but we haven’t disclosed it, and, you
know, it’s an ongoing conversation.
(Id. at 33–34.) When asked “if it’s a case where you had to alter the co-marketing program how
much of an impact would it be on the company,” Rascoff responded that “it’s really hard to
speculate hypothetically because we have no idea whether this ends up being blessed or not. It
could have no impact or it could have an impact.” (Id. at 34.)
Plaintiffs assert that Rascoff’s statements were intended to be misleading because the comarketing program did not provide Zillow with a “small” amount of revenue, the program was
not compliant with RESPA, and Zillow had already altered the program in response to the
CFPB’s investigation. (Id. at 40.) Plaintiffs assert that the co-marketing program did not provide
a small amount of revenue based on a 2017 independent analysis that concluded 10% of Zillow’s
revenue had exposure to the co-marketing program. (Id. at 36.) The analysis Plaintiffs cite does
not provide particularized facts that demonstrate Rascoff’s characterization of co-marketing
revenues as “small” was false. Nor does it allow the Court to draw a strong inference of scienter.
Moreover, the Court has already ruled that the amended complaint has not alleged sufficient
facts to demonstrate that the co-marketing program violated RESPA or that the program was
altered in order to remedy RESPA violations. See supra Parts II.C.1., II.C.2, II.C.3. Therefore,
the Court cannot conclude that Rascoff’s statements regarding the co-marketing program’s
compliance with RESPA evinced a strong inference of scienter.

24
25
26

b.

Additional Allegations Supporting Phillips’ Scienter

Plaintiffs allege that Phillips’ scienter can be inferred from: (1) her preparation for and
false statements during several conference calls; (2) suspicious sales of Zillow securities during
ORDER
C17-1387-JCC
PAGE - 25

1

the class period; (3) her dual position as Zillow’s Chief Financial Officer and Chief Legal

2

Officer and (4) her role in performing due diligence with respect to Zillow’s merger with Trulia.

3

(Dkt. No. 35 at 40–43.) As with Plaintiffs’ allegations against Rascoff, the Court concludes that

4

Phillips’ preparation for conference calls and her statements during those calls do not

5

demonstrate a strong inference of scienter. See supra Part II.C.3.a.

6

Suspicious stock sales can provide circumstantial evidence of scienter, so long as they are

7

“dramatically out of line with prior trading practices at times calculated to maximize the personal

8

benefit from undisclosed inside information.” In re Silicon Graphics Inc. Sec. Litig., 183 F.3d

9

970, 986 (9th Cir. 1999) (quoting In re Apple Comput. Sec. Litig., 886 F.2d 1109, 1117 (9th

10

Cir.1989)). Three factors are relevant to this inquiry: (1) the amount and percentage of the shares

11

sold; (2) the timing of the sales; and (3) whether the sales were consistent with the insider’s

12

trading history. Id.

13

Plaintiffs allege that on May 9, 2017, Phillips exercised options to purchase 28,203 shares

14

of Zillow Class A and Class C stock, and then immediately sold the stock for $1,206,866.41,

15

generating a profit of $916,418.50. (Dkt. No. 35 at 41.) Plaintiffs assert this stock sale is

16

indicative of Phillips’ scienter because they were not conducted pursuant to a pre-existing

17

trading plan, were her first sales in two years, and resulted in a profit of more than double her

18

annual salary. (Id. at 42.)

19

Judicially noticeable materials demonstrate that Phillips’ stock sales should not be

20

viewed as circumstantial evidence of scienter. The sales in question represented less than 10% of

21

Phillips’ Class A shares and less than 5% of her Class C shares. (Dkt. No. 37 at 112–24.) The

22

Ninth Circuit has held that significantly larger stock sales fail to demonstrate a strong inference

23

of scienter. See Metzler, 540 F.3d at 1067 (executive’s sale of 37% of shares during class period

24

did not raise strong inference of scienter).

25
26

The Court does not perceive, and Plaintiffs do not specify, how the timing of Phillips’
sale demonstrates her scienter. The sale immediately followed Zillow’s disclosure of the CFPB’s
ORDER
C17-1387-JCC
PAGE - 26

1

investigation into the co-marketing program, and a warning that the company could potentially

2

face future legal action stemming from the CFPB’s inquiry. (Compare Dkt. No. 35 at 35, with

3

Dkt. No. 37 at 118.) The Court would expect a suspicious stock sale to proceed, not follow such

4

a disclosure. Finally, the stock sales at issue were not dramatically out of line with Phillips’ prior

5

sales. In February 2015, which is part of the proposed class period, Phillips sold almost 20% of

6

her Zillow securities—a substantially larger percentage than the sales Plaintiffs allege are

7

suspicious. (See Dkt. No. 37 at 126–127.)

8
9

Plaintiffs next allege that Phillips’ scienter can be inferred from her position as Zillow’s
CFO and CLO. In those roles, Plaintiffs allege Phillips had knowledge of the CFPB’s

10

investigation into the co-marketing program. (Dkt. No. 35 at 42.) Plaintiffs similarly allege that

11

because Phillips “was responsible for conducting due diligence on the merger with Trulia with

12

respect to legal matters, [she was] therefore responsible for ensuring the truth of Zillow, Inc.’s

13

representation that none of Zillow’s operations were in breach or violation of any applicable

14

laws.” (Id.)

15

“Corporate management’s general awareness of the day-to-day workings of the

16

company’s business does not establish scienter—at least absent some additional allegation of

17

specific information conveyed to management and related to the fraud.” In re Vantive Corp. Sec.

18

Litig., 283 F.3d 1079, 1087–88 (9th Cir. 2002). Although Phillips’ role within Zillow almost

19

certainly made her privy to the CFPB’s investigation, the Court can only infer scienter from that

20

fact if Phillips made misleading statements about information gained through her position.

21

Plaintiffs’ scienter allegations presume that Phillips made false statements about the co-

22

marketing program and the CFPB investigation. (Dkt. No. 39 at 21) (“the Complaint provides

23

detailed allegations that demonstrate Defendant’s actual knowledge of the fraud.”). However, as

24

the Court has ruled, the amended complaint has not sufficiently alleged that Phillips made any

25

material misleading statements. See supra Part II.C.2.

26

Nor does the Court think a strong inference of scienter is demonstrated through Phillips’
ORDER
C17-1387-JCC
PAGE - 27

1

role in performing due diligence with respect to Zillow’s merger with Trulia. Plaintiffs allege

2

that the merger process “would have caused [Phillips] to pay close attention to the legality of the

3

co-marketing program.” (Dkt. No. 35 at 42.) Again, this allegation presumes that the co-

4

marketing program actually violated RESPA. Since the amended complaint does not contain

5

particularized facts that demonstrate Zillow violated RESPA, the Court cannot infer scienter

6

from Phillips’ representation during the merger that “[n]either Zillow nor any Zillow Subsidiary

7

is in conflict with, or in default, breach or violation, of (a) any Law applicable to Zillow or any

8

Zillow Subsidiary.” (Id. at 43.)

9
10

For those reasons, none of the above allegations, taken individually, support a strong
inference of Phillips’ scienter.

11

c.

Scienter Allegations Taken as a Whole

12

Plaintiffs allege that Defendants’ actions during the class period support a strong

13

inference of scienter because they evince an intent to mislead shareholders about the legality of

14

the co-marketing program. (See Dkt. No. 39 at 20–24.) The Court concludes that the allegations

15

in the amended complaint, taken collectively, support a contrary and more compelling

16

inference—that Defendants believed the co-marketing program did not violate RESPA. Because

17

the Court must consider all inferences, even those unfavorable to Plaintiffs, it finds that the

18

amended complaint does not support a strong inference of scienter.

19

As the Court has already explained, Plaintiffs’ scienter allegations are premised on the

20

idea that the co-marketing program violates RESPA, and that the CFPB informed Zillow of such

21

violations. (See Dkt. No. 35 at 38–44.) However, Plaintiffs have not provided particularized

22

allegations to support their theory of RESPA liability. Nor does the amended complaint contain

23

sufficient allegations to support that the CFPB determined that Zillow violated RESPA.

24

Further, the statements that Plaintiffs allege are misleading also evince a belief that the

25

program was legal. In its general legal compliance statements made prior to the CFPB’s

26

investigation, Zillow asserted that it did not believe it was subject to “federal laws and
ORDER
C17-1387-JCC
PAGE - 28

1

regulations relating to real estate, rentals and mortgages,” but that it also “intended” and

2

“endeavored” to ensure that content it created was compliant. (Dkt. No. 35 at 22, 24.) The

3

amended complaint notes that “[i]n 2015, the CFPB dramatically stepped up RESPA

4

enforcement.” (Id. at 17.) Prior to that time, however, prevailing federal regulations appeared to

5

allow for the type of joint-advertising that the co-marketing program facilitates. (See id. at 14.)

6

Moreover, Plaintiffs’ theories of RESPA liability are admittedly based on the CFPB’s

7

“expansive view” of the law, which it began espousing years after the co-marketing program was

8

introduced. (Id. at 13–14.) Therefore, Zillow’s representations prior to 2015 that it did not

9

believe it was subject to laws such as RESPA or that it endeavored to comply with such laws

10

does not demonstrate an intent to mislead the public about the co-marketing program’s legality.

11

Plaintiffs also point to the 2015 webinar as evidence that Zillow knew the co-marketing

12

program violated RESPA. (Dkt. No. 39 at 22.) The Court believes the more compelling and

13

cogent inference to be drawn from that presentation is that Zillow thought the co-marketing

14

program was above board. While acknowledging that the CFPB had begun to scrutinize products

15

such as the co-marketing program, Zillow’s representative expressed that the company, and

16

participating third parties, thought the arrangement was lawful. 16 (See Dkt. No. 37 at 63–89.)

17

The Court views the webinar as a demonstration that Zillow thought the co-marketing was

18

legal—not as a public announcement that the company and its users were breaking the law.

19

Even after Defendants disclosed the CFPB’s investigation, they consistently expressed a

20

belief that the co-marketing program was lawful. In response to Zillow receiving the CFPB’s

21

NORA letter, Phillips stated that “we believe our co-marketing program has, and continues to

22

allow agents and lenders to comply with the laws while using our product.” (Id. at 30.) Rascoff

23

similarly stated that “[w]e think the way we’ve constructed the program is completely compliant

24
25
26

16

The Court also notes that neither Phillips nor Rascoff are alleged to have been involved with
or aware of the 2015 webinar. Therefore, none of the representations made in that presentation
can be used to infer Phillips or Rascoffs’ scienter. See Glazer Capital Mgmt., LP v. Magistri, 549
F.3d 736, 745 (9th Cir. 2008).
ORDER
C17-1387-JCC
PAGE - 29

1

and allows agents and lenders to stay within the confines of the laws that govern this . . . .” (Id. at

2

32.) When Zillow disclosed that it had received the CFPB’s NORA letter, it stated in an SEC

3

filing “[w]e continue to believe that our acts and practices are lawful and that our co-marketing

4

program allows lenders and agents to comply with RESPA.” (Dkt. No. 37 at 34.) When Zillow

5

disclosed that the CFPB invited the company to enter settlement negotiations, it reiterated that

6

“[w]e continue to believe that our acts and practices are lawful and that our comarketing program

7

allows lenders and agents to comply with RESPA, and we will vigorously defend against any

8

allegations to the contrary.” (Id. at 37.) All of these statements, particularly in light of Plaintiffs’

9

failure to allege a RESPA violation, demonstrate that the allegations in the amended complaint

10

do not support a strong inference of scienter.

11
12

4.

Loss Causation

“Broadly speaking, loss causation refers to the causal relationship between a material

13

misrepresentation and the economic loss suffered by an investor.” Loos v. Immersion Corp., 762

14

F.3d 880, 887 (9th Cir. 2014) (citation omitted). To successively plead loss causation, a plaintiff

15

must plausibly allege that the decline in the defendant’s share price was proximately caused by a

16

revelation of fraudulent activity rather than by changing market conditions, changing investor

17

expectations, or other unrelated factors. Metzler, 540 F.3d at 1062. Put another way, the plaintiff

18

must plausibly allege that the defendant’s fraud was “revealed to the market and caused the

19

resulting losses.” Id. at 1063.

20

Plaintiffs have failed to allege loss causation because the amended complaint does not

21

adequately plead any material misleading statements by Defendants. See supra Part II.C.2. The

22

Court will decide, however, whether Plaintiffs could allege loss causation if they file an amended

23

complaint that adequately alleged a material false or misleading statement.

24

Plaintiffs purchased their Zillow securities after the company disclosed the CFPB’s

25

investigation into the co-marketing program, but before Zillow announced that the CFPB had

26

ended its investigation and invited it to participate in settlement negotiations. (See Dkt. Nos. 16ORDER
C17-1387-JCC
PAGE - 30

1

2, 35 at 7.) Plaintiffs assert that “the revelation of the CFPB’s intention to file charges was

2

corrective because, unlike the investigation, it was a conclusion by the CFPB that Zillow violated

3

the law.” (Dkt. No. 39 at 26.) Defendants counter that Plaintiffs bought their securities knowing

4

that there was potential risk of the CFPB taking an enforcement action based on Zillow’s initial

5

disclosures regarding the investigation. (Dkt. No. 36 at 24.)

6

It is clear that an announcement of an investigation into potentially fraudulent conduct,

7

without more, is insufficient to support loss causation. See Loos, 762 F.3d 880. On the other

8

hand, the findings of an investigation into a corporation’s fraudulent conduct are sufficient to

9

plausibly allege loss causation. See In re Montage Tech. Grp. Ltd. Sec. Litig., 78 F. Supp. 3d

10

1215, 1227 (N.D. Cal. 2015). The facts of this case fall somewhere in the middle—Zillow’s

11

August 2017 disclosure that the CFPB had invited it to enter settlement talks was neither the

12

initiation of an investigation, nor a finding of fraudulent conduct. Because loss causation does

13

not need to be alleged with factual particularity, the Court concludes that if Plaintiffs amend their

14

complaint and successfully plead that Defendants made a material misleading statement

15

regarding the co-marketing program’s compliance with RESPA, then they could plausibly allege

16

that Zillow’s August 2017 statements represented a “corrective disclosure” that would support

17

loss causation. See Metzler, 540 F.3d at 1063–64.

18
19

5.

Control Person Liability

Section 20(a) of the Exchange Act makes certain “controlling” individuals also liable for

20

violations of Section 10(b) and its underlying regulations. See 15 U.S.C. § 78t(a). “A defendant

21

employee of a corporation who has violated the securities laws will be jointly and severally

22

liable to the plaintiff, as long as the plaintiff demonstrates ‘a primary violation of federal

23

securities law’ and that ‘the defendant exercised actual power or control over the primary

24

violator.’” No. 84 Emp’r–Teamster Joint Council Pension Tr. Fund v. Am. W. Holding Corp.,

25

320 F.3d 920, 945 (9th Cir. 2003) (citation and internal quotation marks omitted). “Section 20(a)

26

claims may be dismissed summarily, however, if a plaintiff fails to adequately plead a primary
ORDER
C17-1387-JCC
PAGE - 31

1

violation of section 10(b).” See In re VeriFone Sec. Litig., 11 F.3d 865, 872 (9th Cir. 1993).

2

Because Plaintiffs have failed to adequately allege a violation under Section 10(b), their Section

3

20(a) claims as pled in Count II of the amended complaint are DISMISSED without prejudice

4

and with leave to amend.

5

III.

6

CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss (Dkt. No. 36) is GRANTED

7

and Defendants’ request for judicial notice (Dkt. Nos. 38, 43) is GRANTED in part and

8

DENIED in part. Plaintiffs’ Exchange Act claims as pled in counts I and II are DISMISSED

9

without prejudice and with leave to amend. In accordance with the Court’s rulings, if Plaintiffs

10

choose to file a second amended complaint, they must assert particularized facts that demonstrate

11

that Zillow designed the co-marketing program to violate RESPA, and that Zillow was

12

instructing and encouraging third-parties to commit such violations. Plaintiffs must additionally

13

allege with particularity that Defendants made material false or misleading statements regarding

14

the co-marketing program’s compliance with RESPA, that Defendants’ statements evinced a

15

strong inference of scienter, and that such statements caused the loss alleged by Plaintiffs. The

16

second amended complaint shall be filed within forty- five (45) days of this order. Plaintiffs’

17

Securities Act claims as alleged in counts III and IV are DISMISSED with prejudice.

18

DATED this 2nd day of October 2018.

A

19
20
21

John C. Coughenour
UNITED STATES DISTRICT JUDGE

22
23
24
25
26
ORDER
C17-1387-JCC
PAGE - 32