Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 1 of 28
`
`
`
`Orin Snyder (pro hac vice)
`osnyder@gibsondunn.com
`GIBSON, DUNN & CRUTCHER LLP
`200 Park Avenue
`New York, NY 10166-0193
`Telephone: 212.351.4000
`Facsimile: 212.351.4035
`
`Brian M. Lutz (SBN 255976)
`blutz@gibsondunn.com
`Kristin A. Linsley (SBN 154148)
` klinsley@gibsondunn.com
`GIBSON, DUNN & CRUTCHER LLP
`555 Mission Street, Suite 3000
`San Francisco, CA 94105-0921
`Telephone: 415.393.8200
`Facsimile: 415.393.8306
`
`Attorneys for Nominal Defendant Facebook, Inc.
`
`Joshua S. Lipshutz (SBN 242557)
`jlipshutz@gibsondunn.com
`GIBSON, DUNN & CRUTCHER LLP
`1050 Connecticut Avenue, N.W.
`Washington, D.C. 20036-5306
`Telephone: 202.955.8500
`Facsimile: 202.467.0539
`
`Paul J. Collins (SBN 187709)
`pcollins@gibsondunn.com
`GIBSON, DUNN & CRUTCHER LLP
`1881 Page Mill Road
`Palo Alto, CA 94304-1211
`Telephone: 650.849.5300
`Facsimile: 650.849.5333
`
`
`
`
`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF CALIFORNIA
`
`
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`ASSOCIATED CASES: NOS. 4:18-CV-
`01834-HSG, 4:18-CV-01893-HSG, 4:18-CV-
`01929-HSG, 4:18-CV-02011-HSG
`
`FACEBOOK, INC.’S NOTICE OF
`MOTION AND MOTION TO DISMISS
`PLAINTIFFS’ FIRST AMENDED
`CONSOLIDATED SHAREHOLDER
`DERIVATIVE COMPLAINT PURSUANT
`TO FED. R. CIV. P. 23.1 OR, IN THE
`ALTERNATIVE, TO STAY;
`MEMORANDUM OF POINTS AND
`AUTHORITIES IN SUPPORT THEREOF
`
`Hearing:
`Date: June 25, 2020
`Time: 2:00 P.M.
`Location: Courtroom 2, 4th Floor
`Judge: Hon. Haywood S. Gilliam, Jr.
`
`Date First Action Filed: March 22, 2018
`
`
`
`
`
`
`IN RE FACEBOOK, INC. SHAREHOLDER
`DERIVATIVE PRIVACY LITIGATION
`
`
`
`
`
`This Document Relates To:
`
`ALL ACTIONS
`
`
`
`
`
`
`
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 2 of 28
`
`
`
`TABLE OF CONTENTS
`
`III.
`IV.
`
`V.
`
`Page
`
`STATEMENT OF ISSUES TO BE DECIDED ................................................................................... 1
`I.
`PRELIMINARY STATEMENT ............................................................................................... 1
`II.
`SUMMARY OF PLAINTIFFS’ ALLEGATIONS ................................................................... 3
`A.
`The Relevant Agreements ............................................................................................. 4
`B.
`The Alleged Events Relevant To Plaintiffs’ Claims ..................................................... 5
`C.
`Facebook Enters Into Settlements With Regulators...................................................... 7
`D.
`Procedural History ........................................................................................................ 8
`LEGAL STANDARD FOR PLEADING DEMAND FUTILITY ........................................... 9
`PLAINTIFFS ONLY CAN PLEAD DEMAND FUTILITY BY ESTABLISHING A
`LACK OF INDEPENDENCE OR SUBSTANTIAL LIKELIHOOD OF LIABILITY ......... 11
`AS THIS COURT ALREADY HELD, PLAINTIFFS FAIL TO PLEAD FACTS
`SHOWING THAT ANY MEMBER OF THE BOARD LACKS INDEPENDENCE ........... 12
`A.
`Mr. Zuckerberg’s Control Of Facebook Does Not Excuse Demand. ......................... 12
`B.
`Mr. Zuckerberg Is Not Interested, And No Director Is Beholden To Him. ................ 13
`PLAINTIFFS FAIL TO DEMONSTRATE THAT A MAJORITY OF THE BOARD
`FACES A SUBSTANTIAL LIKELIHOOD OF PERSONAL LIABILITY .......................... 16
`A.
`The Section 10(b) Claims (Counts 2 and 3) Do Not Make Demand Futile. ............... 17
`1.
`The Challenged Statements Were Not Made By The Demand Board. ........... 17
`2.
`Plaintiffs Fail To Plead Scienter For A Majority Of The Demand
`Board. .............................................................................................................. 18
`The Insider Trading Claims Only Implicate A Minority Of The Demand
`Board. .......................................................................................................................... 19
`No Substantial Likelihood Of Liability For The Sections 14(a) And 20(a)
`Claims. ........................................................................................................................ 20
`VII. IN THE ALTERNATIVE, THIS ACTION SHOULD BE STAYED PENDING
`RESOLUTION OF THE RELATED ACTIONS ................................................................... 20
`VIII. CONCLUSION ....................................................................................................................... 23
`
`
`
`VI.
`
`B.
`
`C.
`
`
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`i
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 3 of 28
`
`TABLE OF AUTHORITIES
`
`
`
`Page(s)
`
`Cases
`
`Aronson v. Lewis,
`473 A.2d 805 (Del. 1984) ...................................................................................................10, 13, 14
`
`Beam v. Stewart,
`845 A.2d 1040 (Del. 2004) .......................................................................................................10, 13
`
`Breault v. Folino,
`2002 WL 31974381 (C.D. Cal. March 15, 2002) ...........................................................................21
`
`Brehm v. Eisner,
`746 A.2d 244 (Del. 2000) ...............................................................................................................10
`
`In re Citigroup Inc. S’holder Deriv. Litig.,
`964 A.2d 106 (Del. Ch. 2009) .........................................................................................................10
`
`CMAX, Inc. v. Hall,
`300 F.2d 265 (9th Cir. 1962) ...........................................................................................................20
`
`Desimone v. Barrows,
`924 A.2d 908 (Del. Ch. 2007) .........................................................................................................11
`
`In re Diamond Foods, Inc. Deriv. Litig.,
`2012 WL 1945814 (N.D. Cal. May 29, 2012) ................................................................................16
`
`In re Dow Chemical Deriv. Litig.,
`2010 WL 66769 (Del. Ch. Jan. 11, 2010) .......................................................................................13
`
`Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. ex rel. Fed. Nat. Mortg. Ass’n
`v. Raines,
`534 F.3d 779 (D.C. Cir. 2008) ........................................................................................................10
`
`In re Groupon Deriv. Litig.,
`882 F. Supp. 2d 1043 (N.D. Ill. 2012) ............................................................................................21
`
`Guttman v. Huang,
`823 A.2d 492 (Del. Ch. 2003) .........................................................................................................16
`
`Horman v. Abney,
`2017 WL 242571 (Del. Ch. Jan. 19, 2017) .................................................................................3, 18
`
`In re Impax Labs., Inc. S’holder Deriv. Litig.,
`2015 WL 5168777 (N.D. Cal. Sept. 3, 2015) .................................................................................10
`
`In re Insys Therapeutics Inc. Deriv. Litig.,
`2017 WL 5953515 (Del. Ch. Nov. 30, 2017) ...........................................................................21, 22
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`ii
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 4 of 28
`
`
`
`Janus Capital Grp., Inc. v. First Deriv. Traders,
`564 U.S. 135 (2011) ....................................................................................................................2, 17
`
`Kamen v. Kemper Fin. Servs., Inc.,
`500 U.S. 90 (1991) ............................................................................................................................9
`
`La. Mun. Police Emps.’ Ret. Sys. v. Wynn,
`829 F.3d 1048 (9th Cir. 2016) .....................................................................................................9, 15
`
`Markette v. XOMA Corp.,
`2017 WL 4310759 (N.D. Cal. Sept. 28, 2017) ...............................................................................17
`
`McElrath v. Kalanick,
`--A.3d--, 2020 WL 131371 (Del. Jan. 13, 2020) ............................................................................14
`
`In Re Ormat Techs., Inc.,
`2011 WL 3841089 (D. Nev. Aug. 29, 2011) ..................................................................................21
`
`In re Paypal Holdings., Inc. S’holder Deriv. Litig.,
`2018 WL 466527 (N.D. Cal. Jan. 18, 2018) .............................................................................10, 11
`
`Ponce v. SEC,
`345 F.3d 722 (9th Cir. 2003) .............................................................................................................8
`
`Potter v. Hughes,
`546 F.3d 1051 (9th Cir. 2008) .....................................................................................................9, 11
`
`Quinn v. Anvil Corp.,
`620 F.3d 1005 (9th Cir. 2010) ...........................................................................................................9
`
`Rales v. Blasband,
`634 A.2d 927 (Del. 1993) ...................................................................................................10, 11, 12
`
`Rok v. Identiv, Inc.,
`2017 WL 35496 (N.D. Cal. Jan. 4, 2017) .......................................................................................17
`
`Rosenbloom v. Pyott,
`765 F.3d 1137 (9th Cir. 2014) .........................................................................................................10
`
`Rosenblum v. Sharer,
`2008 WL 9396534 (N.D. Cal. Apr. 15, 2016) ................................................................................22
`
`Ryan v. Gifford,
`918 A.2d 341 (Del. Ch. 2007) .........................................................................................................16
`
`SEC v. Mercury Interactive, LLC,
`2011 WL 5871020 (N.D. Cal. Nov. 22, 2011) ................................................................................17
`
`SEC v. Dain Rauscher, Inc.,
`254 F.3d 852 (9th Cir. 2001) .............................................................................................................8
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`iii
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 5 of 28
`
`
`
`SEC v. Leslie,
`2008 WL 4183939 (N.D. Cal. Sept. 9, 2008) ...................................................................................8
`
`In re STEC, Inc. Deriv. Litig.,
`2012 WL 8978155 (C.D. Cal. Jan 11, 2012) ............................................................................21, 22
`
`Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera,
`119 A.3d 44 (Del. Ch. 2015) ...........................................................................................................15
`
`Tindall v. First Solar Inc.,
`892 F.3d 1043 (9th Cir. 2018) .....................................................................................................9, 10
`
`Towers v. Iger,
`912 F.3d 523 (9th Cir. 2018) ...............................................................................................11, 18, 19
`
`In re Tyson Foods, Inc.,
`919 A.2d 563 (Del. Ch. 2007) .........................................................................................................16
`
`United Specialty Ins. Co. v. Meridian Mgmt. Grp., Inc.,
`2016 WL 1534885 (N.D. Cal. Apr. 15, 2016) ................................................................................20
`
`In re Verifone Holdings., Inc. S’holder Deriv. Litig.,
`2009 WL 1458233 (N.D. Cal. May 26, 2009) ................................................................................19
`
`In re Verisign, Inc., Deriv. Litig.,
`531 F. Supp. 2d 1173 (N.D. Cal. 2007) ..........................................................................................16
`
`In re W. Nat’l Corp. S’holders Litig.,
`2000 WL 710192 (Del. Ch. May 22, 2000) ....................................................................................15
`
`Wood v. Baum,
`953 A.2d 136 (Del. 2008) ...............................................................................................................10
`
`Statutes
`
`15 U.S.C. § 78u-4 ..................................................................................................................................23
`
`
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`iv
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 6 of 28
`
`
`
`TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD:
`PLEASE TAKE NOTICE that on June 25, 2020 at 2:00 p.m., or as soon thereafter as the
`matter may be heard, in the United States District Court for the Northern District of California, Oakland
`Courthouse, Courtroom 2, located at 1301 Clay Street, Oakland, CA 94612, Nominal Defendant
`Facebook, Inc. (“Facebook” or the “Company”), through its undersigned counsel, will, and hereby
`does, move to dismiss the First Amended Consolidated Shareholder Derivative Complaint (the “FAC”)
`pursuant to Federal Rule of Civil Procedure 23.1 or, in the alternative, to stay this action (the “Motion”).
`Facebook seeks dismissal of the FAC with prejudice because Plaintiffs failed to make a pre-
`suit demand on Facebook’s Board of Directors (the “Board”) or to adequately plead demand futility.
`Alternatively, Facebook requests that the Court stay this action pending resolution of the related actions
`In re Facebook, Inc. Sec. Litig., Case No. 5:18-CV-01725-EJD (N.D. Cal.) (the “Securities Action”)
`and In re Facebook, Inc. Consumer Privacy User Profile Litig., Case No. 18-md-02843-VC (N.D. Cal.)
`(the “Consumer Action”). This Motion is based on this Notice, the supporting Memorandum of Points
`and Authorities, the Declaration of Brian M. Lutz filed concurrently herewith, the accompanying
`Request for Judicial Notice, the complete files and records in this action, and any additional material
`and arguments as may be considered in connection with the hearing.
`MEMORANDUM OF POINTS AND AUTHORITIES
`STATEMENT OF ISSUES TO BE DECIDED
`1.
`Whether the Court should dismiss the FAC with prejudice for failure to make a pre-suit
`demand on Facebook’s Board or to plead with particularity that such a demand would have been futile,
`as required by Rule 23.1 of the Federal Rules of Civil Procedure and Delaware law.
`2.
`Whether, in the alternative, the Court should stay this action pending resolution of the
`Securities Action and the Consumer Action.
`I. PRELIMINARY STATEMENT
`Plaintiffs’ amended derivative complaint should be dismissed with prejudice because it relies
`almost verbatim on the same allegations this Court already concluded fell short of pleading with
`particularity and “on a director-by-director basis, that demand [is] futile.” ECF No. 113 (“Order”) at
`25. In their prior complaint, Plaintiffs claimed they were excused from making a demand because Mr.
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`1
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 7 of 28
`
`
`
`Zuckerberg allegedly controls Facebook, and every other director on Facebook’s Board of Directors
`supposedly lacked independence from Mr. Zuckerberg because of his control of the Company. This
`Court rejected this conclusory demand futility theory, recognizing that “[t]he mere fact that Zuckerberg
`is a controlling shareholder is not enough to establish his lack of independence, because that would
`‘eviscerate’ the disinterested prong of the demand futility test ….” Order at 20. Plaintiffs’ “control”
`theory of demand futility in their amended complaint is unchanged, and they plead no new facts
`demonstrating that any director—let alone a majority of Facebook’s Board—is somehow “beholden”
`to Mr. Zuckerberg. Thus, there is no basis to alter this Court’s prior conclusion that Plaintiffs have
`failed to plead demand futility based on Mr. Zuckerberg’s control or any director’s relationship with
`him.
`
`Plaintiffs also fail to plead demand futility on the basis that a majority of Facebook’s seven-
`person Board faces a substantial likelihood of liability for the claims asserted in this action. Because
`this Court dismissed without leave to amend all of Plaintiffs’ state law claims, Plaintiffs are forced to
`plead only federal securities law claims, which make little sense in the context of a derivative
`case. Plaintiffs’ core theory is that Facebook’s directors caused Facebook to issue false statements,
`which Facebook then relied on when repurchasing Facebook shares at prices that were supposedly
`inflated by the alleged misstatements. Given the nonsensical nature of these claims, it is no surprise
`that Plaintiffs come nowhere close to demonstrating that any director—let alone a majority of the
`Board—faces a substantial likelihood of liability for violating these derivative securities law claims.
`Even if Plaintiffs’ securities law claims could be asserted derivatively, they provide no basis
`for excusing demand here. To begin with, Plaintiffs face a structural problem because the Board now
`has several directors who were not on the Board at the time of the Cambridge Analytica events.
`Plaintiffs’ claims also fail on the substance. The vast majority of the alleged misstatements sprinkled
`throughout the 706-paragraph complaint are not even alleged to have been “made” by a majority of
`Facebook’s directors, see Janus Capital Grp., Inc. v. First Deriv. Traders, 564 U.S. 135, 141 (2011),
`and thus claims based on these statements cannot excuse demand. Nor do Plaintiffs adequately plead
`that any of the handful of statements attributable to a majority of the Board were false when made. The
`claims also cannot give rise to a substantial likelihood of liability for any director because Plaintiffs
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`2
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 8 of 28
`
`
`
`plead only conclusory allegations of scienter—not the required particularized facts giving rise to a
`“strong inference” that any director, let alone a majority of the Board, knowingly or with deliberate
`recklessness made false statements to the market. Plaintiffs fare no better on their insider trading
`claims, which are asserted against only two of seven directors—far less than a majority—and lack any
`supporting facts. And Plaintiffs’ proxy claim fails for the same reason as last time: Plaintiffs fail to
`plead facts demonstrating that Facebook’s proxy statements contained any actionable misstatement or
`that any alleged misrepresentation in a proxy statement was an “essential link” to any harm suffered
`by Facebook.
`Because Plaintiffs once again fail to meet their strict burden under Rule 23.1 and Delaware law
`of pleading particularized facts demonstrating that they—rather than Facebook’s Board of Directors—
`should decide whether to bring claims on behalf of the Company, this action should be dismissed with
`prejudice.
`
`II. SUMMARY OF PLAINTIFFS’ ALLEGATIONS1
`Facebook is a Delaware corporation, headquartered in Menlo Park, California. ¶¶ 26, 32.
`Facebook was founded in 2004 by Mark Zuckerberg, who is also the Company’s CEO and Chairman
`of its Board of Directors (the “Board”). ¶¶ 1, 33, 46. Facebook gives its more than two billion active
`users the power to stay connected and share information through its various products and platforms.
`¶¶ 1, 46-47. Facebook also enables independent third-party developers’ applications or websites
`(collectively, “apps”) to interact with Facebook’s Platform so that users can share experiences with
`their Facebook friends—for example, by playing a game together. E.g., ¶ 47.
`The FAC names as defendants the seven directors as of the date of the FAC (the “Demand
`Board”), ¶¶ 33-34, 37-41, four former directors, ¶¶ 36, 42-44, and Facebook’s Chief Financial Officer,
`¶ 35, (together, the “Individual Defendants”). All but two of Facebook’s directors are independent, in
`
`
` 1 To resolve this Motion, the Court assumes the truth of Plaintiffs’ allegations. Horman v. Abney,
`2017 WL 242571, at *2 (Del. Ch. Jan. 19, 2017). By summarizing those allegations here, Facebook
`does not concede that the allegations are true. The Court may refer to documents incorporated in
`the FAC by reference. See id. Citations in the form of “¶ _” or “¶¶ _” refer to the paragraphs of
`the FAC (ECF No. 142). Citations to “Lutz Ex.” refer to the exhibits to the Declaration of Brian
`M. Lutz (“Lutz Decl.”), filed concurrently herewith. Unless otherwise noted, all emphasis is added,
`and all internal quotation marks and citations are omitted.
`3
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 9 of 28
`
`
`
`the sense that they are not also members of the Company’s management. ¶¶ 33-34, 36-44; see also
`Order at 15.
`A.
`The Relevant Agreements.
`Facebook’s agreements with users. The use and sharing of information on Facebook are
`governed by agreements between Facebook and its users, including Facebook’s Data Policy
`(previously referred to as the “Data Use Policy” and the “Privacy Policy”) and Terms of Service
`(previously referred to as the “Statement of Rights and Responsibilities”). E.g., ¶¶ 70, 72, 225, 173.
`These policies explain how users can control whether and how their information is shared with their
`Facebook friends, other Facebook users, and third parties. ¶ 173; Lutz Exs. 15-17. For example, the
`Data Policy informs users of the categories of information third-party apps may access if users choose
`to allow (or “authorize”) apps to do so. Lutz Ex. 17 at 2. The policies also inform users how to control
`access to their information by adjusting their privacy and application settings, and caution users about
`sharing information with third parties, including the “information that others have shared” with them.
`See id.; Lutz Exs. 15-16.
`Before 2015, Facebook’s policies allowed users to share content their friends had shared with
`them with third-party apps they used. ¶¶ 127, 173-75. The Data Policy in place in 2013 stated that app
`developers could ask for certain information about users’ friends, alerted users that their friends might
`choose to share some of their information with apps, and explained the social benefits of connecting
`with their friends using apps. E.g., Lutz Ex. 15. For example, the policy advised users that when using
`a music app, “[y]our friend might … want to share the music you ‘like’ on Facebook.” Id. at 4. “[I]f
`you’ve shared your likes with just your friends, the application could ask your friend for permission to
`share them.” Id. Thus, as disclosed in the Data Policy, a user’s friend could re-share the user’s likes
`with an app that the friend had downloaded, so long as the original user (whose likes were at issue) had
`consented to such sharing by their friends. However, if a user chose to turn off all Platform apps, that
`user’s friends could not share the user’s information with apps. Id.
`In 2014, as part of Facebook’s ongoing commitment to user privacy, Facebook announced that
`it would implement changes to its Platform that “dramatically limit[ed] the Facebook information apps
`could access,” including shutting down third-parties’ ability to request content shared by a user’s
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`4
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 10 of 28
`
`
`
`friends to ensure that “everyone has to choose to share their own data with an app themselves.” ¶¶ 203,
`269; see also Lutz Ex. 18 (disclosing that platform changes would be finalized one year later).
`Facebook informed users that it would continue to share information with “service providers” like
`mobile device manufacturers, telling users that it would “give [their] information to the people and
`companies that help us provide, understand and improve the services we offer.” Lutz Ex. 15 at 8;
`accord Lutz Ex. 16 at 2 (“We transfer information to vendors, service providers, and other partners
`who globally support our business ….”).
`Facebook’s agreements with application developers. To develop an app on the Facebook
`Platform, third-party app developers must agree to Facebook’s Platform Policy. ¶ 73. This policy, in
`place at all times relevant to the allegations in the FAC, limits the extent to which developers can collect
`and use Facebook user data, and requires developers to explain to users the categories of information
`they will collect and how it will be used. ¶¶ 94, 191, 258, 268-270, 435. The Platform Policy prohibits
`developers from selling or transferring user data, and from using their customers’ friend data outside
`of customer use of the app. ¶¶ 77-78, 82, 85, 92-94, 226, 235, 266.
`The FTC consent decree. In 2011, Facebook entered into a consent decree with the Federal
`Trade Commission (“FTC”) that requires Facebook to maintain a comprehensive privacy program and
`certain security controls to protect user data, subject to regular assessments by a third-party firm. ¶¶ 3,
`61, 64, 69. Plaintiffs allege that the third-party firm (PriceWaterhouseCoopers or “PwC”) has certified
`the “adequacy of Facebook’s privacy program and related internal control and procedures,” and found
`that “Facebook has implemented technical, physical, and administrative security controls designed to
`protect user data from unauthorized access, as well as to prevent, detect, and respond to security threats
`and vulnerabilities.” ¶¶ 290, 294; see also ¶ 288.
`B.
`The Alleged Events Relevant To Plaintiffs’ Claims.
`Cambridge Analytica’s misappropriation of Facebook user data. In 2013, Aleksandr Kogan,
`a professor and data researcher at Cambridge University, developed a personality quiz app called “This
`is Your Digital Life.” ¶¶ 8, 15, 73. The app appeared on the Facebook Platform in 2014 and told users
`that the results of the quiz would be used for academic purposes. ¶¶ 15, 73. Approximately 270,000
`people installed the app and consented to sharing their data, including some information about their
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`5
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 11 of 28
`
`
`
`Facebook friends, which at that time was permitted under Facebook’s policies, subject to the friends’
`privacy and application settings. ¶ 77; Lutz Ex. 15.
`The December 2015 Guardian article and Facebook’s response. In December 2015, The
`Guardian reported that Kogan sold some of the information collected through the “This Is Your Digital
`Life” app to Cambridge Analytica, in violation of Facebook’s policies. ¶¶ 9, 78. According to the
`article, Cambridge Analytica used Kogan’s data on tens of millions of Facebook users to create
`psychological profiles of U.S. voters, which were then used to support Ted Cruz’s presidential
`campaign. ¶¶ 9, 80; Lutz Ex. 1. After the article was published, Facebook investigated the issue,
`removed Kogan’s app from Facebook, and obtained certifications and confirmations from Kogan,
`GSR, Cambridge Analytica, and its parent company that all user data had been destroyed. ¶¶ 9, 82-84,
`94. By that time, Facebook already had implemented changes to its Platform that restricted third-party
`apps from requesting information about users’ friends. ¶¶ 71-72, 203-204.
`The Cambridge Analytica story resurfaces in 2018. On March 17, 2018, articles published by
`The New York Times and The Guardian again reported that, in 2015, Cambridge Analytica had
`misappropriated Facebook user data via Kogan’s app. ¶¶ 14, 88-89, 101, 157. This time, however, the
`articles reported that Cambridge Analytica had lied when it represented to Facebook in 2016 that it had
`deleted all user data, and in fact had retained the data and used it in connection with Donald Trump’s
`presidential campaign. ¶¶ 14-15; Lutz Ex. 3 at 2. Facebook immediately suspended Cambridge
`Analytica, its parent company, and certain related employees from the Facebook Platform. E.g., ¶¶ 95,
`98. Several regulators, including the Securities and Exchange Commission (“SEC”) and the FTC,
`initiated investigations into the Cambridge Analytica incident. E.g., ¶ 166.
`Facebook’s first quarter 2018 earnings report. On April 25, 2018, Facebook reported earnings
`for the first quarter of 2018 (“Q1 2018”), with quarterly revenue, earnings, and daily and monthly
`active user growth meeting or exceeding analyst expectations. ¶¶ 114-119. Although a “handful” of
`advertisers had “paused spend” with Facebook after the Cambridge Analytica news, Facebook reported
`that this did not appear to reflect a “meaningful trend.” Lutz Ex. 13. Facebook also reported that its
`expenses were expected to increase, driven by investments Facebook was making in data security
`programs and the 48% increase in the number of Facebook employees from the prior year. Id. at 7-8.
`
`1 2 3 4 5 6 7 8 9
`
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Gibson, Dunn &
`Crutcher LLP
`
`6
`MOTION TO DISMISS PURSUANT TO FRCP 23.1 OR STAY
`LEAD CASE NO. 4:18-CV-01792-HSG
`
`

`

`Case 4:18-cv-01792-HSG Document 144 Filed 02/18/20 Page 12 of 28
`
`
`
`Facebook also addressed the possible impact of the General Data Protection Regulation
`(“GDPR”)—the European Union’s (“EU”) new privacy legislation governing the collection and use of
`personal data of EU citizens—which would take effect the following month. Id. at 8, 11, 15-16, 18,
`23. Facebook noted that while it was “early and difficult to know … in advance” the business
`implications of Facebook’s implementation of the GDPR, the Company anticipated that Facebook’s
`European daily and monthly user base could “be flat to slightly down.” Id. at 8, 23. And while the
`Company did not anticipate the GDPR would “significantly impact advertising revenue,” it noted that
`“there is certainly the potential for some impact, and we will be monitoring this closely.” Id. at 8, 18.
`Facebook’s second quarter 2018 earnings report. On July 25, 2018, Facebook announced its
`second quarter of 2018 (“Q2 2018”) earnings, reporting lower than expected revenue growth,
`profitability, and user growth. ¶¶ 138-140. Facebook attributed the user growth slowdown to the
`effects of “the GDPR rollout, consistent with the outlook we gave on the Q1 call,” but noted that “the
`vast majority of people [had continued] opting in to … third-party data use.” ¶¶ 140-141; Lutz Ex. 14
`at 7, 18. One analyst remarked during the earnings call that Facebook had given an “accurate read into
`the June quarter” on the likely impact of the GDPR. Lutz Ex. 14 at 15; see also id. (“We had indicated
`in the … first quarter that we would expect to see a decline [in daily active users and monthly active
`users in Europe following implementation of the GDPR].”). Facebook also reported that expenses
`were “up 50%” year-over-year, in line with estimates made in the prior quarter. Id. at 8. And Facebook
`reported a decline in revenue growth as a result of “currency … headwind[s],” and “impacts that could
`be ongoing from things like GDPR as well as other product options that we’re providing that could
`have an impact on revenue growth.” Id. at 8, 12. The Q2 2018 earnings announcement did not mentio