On March 23, 2022, the Ninth Circuit affirmed an order from the Northern District of California dismissing securities fraud claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5 against Twitter and two Twitter officers, and under Section 20(a) of the Securities Exchange Act against the two officers. The alleged fraudulent statements concerned bugs in certain privacy features of Twitter’s lucrative Mobile App Promotion (“MAP”) product, and Twitter’s statements that it had “fixed” the “issues.” Reviewing the dismissal de novo, the Ninth Circuit found that plaintiffs failed to plausibly allege a claim under Section 10(b) and Rule 10b-5 given that the challenged statements were not materially false or misleading when made. Instead, reasonably construed, the statements indicated only that Twitter had stopped the sharing of user data for MAP, not that it had fixed the underlying bugs. Because a Section 20(a) claim is derivative of the Section 10(b) and Rule 10b-5 claims, the Section 20(a) control person liability claims were also dismissed.
Background: On October 24, 2019, Twitter’s quarterly earnings report disclosed software bugs affecting its MAP advertising system and reported a $25 million revenue shortfall. Some analysts downgraded Twitter stock, and the share price dropped over 20%. Five days after the earnings report, on October 29, investors filed a putative class action against Twitter and two Twitter officers in the Northern District of California alleging that Twitter and the officers violated the Securities Exchange Act through statements and omissions about Twitter’s MAP system between July and September of 2019. The MAP product, which allows advertisers to prompt users to download apps, is most effective when the advertisers have access to user data. The bugs at issue resulted in disclosure of data for users who had opted out of this data-sharing. The allegedly false or misleading statements included:
- Statements in a July 26, 2019 shareholder letter and Twitter’s July 31, 2019 Form 10-Q that the company was “continuing [its] work to increase the stability, performance, and flexibility of [its] ads platform and [MAP],” but that it is “not there yet” and that this work will “take place over multiple quarters, with a gradual impact on revenue.”
- Individual Defendant Segal’s statements that the company was “still in the middle of that work” [relating to MAP improvements], and that it is “still at the state where [he] believe[s] that you would see its impact be gradual in nature.”
- An August 6, 2019 tweet that “We recently discovered and fixed issues related to your settings choices for the way we deliver personalized ads, and when we share certain data with trusted management and advertising partners,” and Twitter’s Help Center’s claim that it “fixed these issues on August 5, 2019.”
- Statements at a September 4, 2019 investor conference that the “MAP work is ongoing” and that Twitter “continued to sell the existing MAP product.”
On December 10, 2020, the Northern District of California dismissed the claims with leave to amend by January 15, 2021. Rather than amending their complaint, plaintiffs appealed.
The Ninth Circuit’s Decision: In Weston Family Partnership LLLP v. Twitter, Inc. 29 F.4th 611 (9th Cir. 2022), the Ninth Circuit affirmed that plaintiffs failed to adequately state a claim.
To begin, the Ninth Circuit acknowledged Twitter’s particular role in society, observing that the fact “society may have become accustomed to being instantly in the loop about the latest news (thanks in part to Twitter)” does not mean that the securities laws require instantaneous updates. In rejecting plaintiffs’ suggestion that Twitter had an obligation to immediately notify the investing public about setbacks from software bugs in the MAP program, the court noted that creating such an obligation would itself wreak havoc. As the court explained, “companies do not have an obligation to offer an instantaneous update of every internal development, especially when it involves the oft-tortuous path of product development . . . Indeed, to do so would inject instability into the securities market, as stocks may wildly gyrate based on even fleeting developments.” Twitter would, however, have been obligated to disclose the software bugs if the failure to do so made other statements materially misleading.
Plaintiffs attempted to plead an obligation to disclose by asserting that the July 2019 statements left the mistaken impression that development was “on track.” The court considered the company’s and the officers’ actual statements, including that the company was “still in the middle” of the work relating to MAP and that the “MAP work is ongoing,” and held that the statements did not suggest that the program was “on track.” Rather, they conveyed a “vaguely optimistic assessment” that the MAP development – like almost all product developments – “had its ups and downs” while the company continued to make progress. The court also found that the July statements were “so imprecise and noncommittal that they are incapable of objective verification.” Twitter therefore had no legal duty to immediately disclose the software bugs, particularly where its earlier statements were “qualified and vague.”
Plaintiffs also failed to adequately allege that defendants knew of the software bugs at the time of the July 2019 statements concerning MAP’s progress. Plaintiffs relied upon Twitter’s August 6, 2019 tweet that it had “recently discovered and fixed issues,” to assert that Twitter must have known of the bugs in July. However, the Ninth Circuit has held that “temporal proximity alone” does not satisfy the requirements for pleading with particularity. Further, to assert that the August 6 statement indicated that defendants must have known about the issues in July, plaintiffs interpreted the August 6 tweet and related blog post to mean that the “issues” that had been fixed were the software bugs. The court again reviewed the challenged statements in context, and found that the August tweet and blog post both addressed users’ privacy concerns. Thus, the issues that were “fixed” related to privacy leaks, not bug fixes, and the timing of the fixes did not inform defendants’ knowledge about the bugs in July.
Finally, plaintiffs’ claims failed for the independent reason that the challenged statements – many of which referred to “ongoing” work – were forward-looking and fell within the safe harbor of the Securities Exchange Act.