Case 4:18-cv-06245-JSW Document 82 Filed 02/05/20 Page 1 of 9
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`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF CALIFORNIA
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`In re ALPHABET, INC. SECURITIES
`LITIGATION
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`Master Case No. 18-cv-06245-JSW
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`ORDER GRANTING MOTION TO
`DISMISS
`Re: Dkt. No. 71
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`Now before the Court is the motion to dismiss filed by Defendants Alphabet, Inc., Google
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`LLC, Lawrence E. Page, Sundar Pichai, Keith P. Enright, and John Kent Walker, Jr. (collectively
`“Alphabet”). The Court has considered the parties’ papers, relevant legal authority, and the record
`in this case, and for the reasons set forth below, the Court HEREBY GRANTS Alphabet’s motion
`to dismiss, with leave to amend.
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`BACKGROUND
`Plaintiffs originally filed their complaint in this matter on October 11, 2018. Alphabet
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`then moved to dismiss. After consolidation of related cases and appointment of lead plaintiff and
`lead counsel, Plaintiffs filed a consolidated amended complaint on April 26, 2019. On May 31,
`2019, Alphabet again moved to dismiss for failure to state a claim under Federal Rules of Civil
`Procedure 9(b) and 12(b)(6).
`Plaintiffs allege that Alphabet made false or misleading statements and that those
`statements violated (i) Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15
`U.S.C. § 78j(b) and Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; and (ii)
`Section 20(a) of the Exchange Act, 15 U.S.C. § 78t.
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`ANALYSIS
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`A.
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`Applicable Legal Standard.
`A motion to dismiss is proper under Federal Rule of Civil Procedure 12(b)(6) where the
`pleadings fail to state a claim upon which relief can be granted. The Court’s “inquiry is limited to
`the allegations in the complaint, which are accepted as true and construed in the light most
`favorable to the plaintiff.” Lazy Y Ranch LTD v. Behrens, 546 F.3d 580, 588 (9th Cir. 2008).
`Even under the liberal pleading standard of Federal Rule of Civil Procedure 8(a)(2), “a plaintiff’s
`obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and
`conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell
`Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citing Papasan v. Allain, 478 U.S. 265, 286
`(1986)).
`Pursuant to Twombly, a plaintiff must not merely allege conduct that is conceivable but
`must instead allege “enough facts to state a claim to relief that is plausible on its face.” Id. at 570.
`“A claim has facial plausibility when the plaintiff pleads factual content that allows the court to
`draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v.
`Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). If the allegations are
`insufficient to state a claim, a court should grant leave to amend, unless amendment would be
`futile. See, e.g., Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th Cir. 1990); Cook, Perkiss &
`Liehe, Inc. v. N. Cal. Collection Serv., Inc., 911 F.2d 242, 246-47 (9th Cir. 1990).
`As a general rule, “a district court may not consider any material beyond the pleadings in
`ruling on a Rule 12(b)(6) motion.” Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994) (overruled
`on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir. 2002) (citation
`omitted)). However, documents subject to judicial notice may be considered on a motion to
`dismiss. In doing so, the Court does not convert a motion to dismiss to one for summary
`judgment. See Mack v. South Bay Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986) (overruled
`on other grounds by Astoria Fed. Sav. & Loan Ass’n v. Solimino, 501 U.S. 104 (1991)).
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`Federal Rule of Civil Procedure 8 requires plaintiffs to “plead a short and plain statement
`of the elements of his or her claim.” Bautista v. Los Angeles County, 216 F.3d 837, 840 (9th Cir.
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`2000). Rule 8 requires each allegation to be “simple, concise, and direct.” Fed. R. Civ. P. 8(d)(1).
`Where the allegations in a complaint are “argumentative, prolix, replete with redundancy and
`largely irrelevant,” the complaint is properly dismissed for failure to comply with Rule 8(a).
`McHenry v. Renne, 84 F.3d 1172, 1177, 1178-79 (9th Cir. 1996); see also Nevijel v. North Coast
`Life Ins. Co., 651 F.2d 671, 673-74 (9th Cir. 1981) (affirming dismissal of complaint that was
`“‘verbose, confusing and almost entirely conclusory’”).
`Where a plaintiff alleges fraud, however, Rule 9(b) requires the plaintiff to state with
`particularity the circumstances constituting fraud. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541,
`1547-49 (9th Cir. 1994) (en banc) (superseded by the Private Securities Litigation Reform Act
`(“PSLRA”) on other grounds). A plaintiff averring fraud must plead with particularity the
`circumstances constituting fraud. See Fed. R. Civ. P. 9(b). Particularity under Rule 9(b) requires
`the plaintiff to plead the “who, what, when, where, and how” of the misconduct alleged. See
`Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009). In the securities context, the
`pleading requirements are even more stringent and require that “the particular circumstances
`indicating falseness of the defendant’s statements to be pled, specifically, ‘an explanation as to
`why the statement or omission complained of was false or misleading.’” In re Intuitive Surgical
`Sec. Litig, 65 F. Supp. 3d 821, 830 (N.D. Cal. Aug. 21, 2014) (citing In re GlenFed, 42 F.3d at
`1548).
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`The Rule 9(b) requirement “has long been applied to securities complaints.” Zucco
`Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009). “At the pleading stage, a
`complaint stating claims under section 10(b) and Rule 10b-5 must satisfy the dual pleading
`requirements of . . . Rule 9(b) and the PSLRA.” Id. The PSLRA requires that “a complaint ‘plead
`with particularity both falsity and scienter.’” Id. (quoting Gompper v. VISX, 298 F.3d 893, 895
`(9th Cir. 2002)).
`Under the PSLRA, actions based on allegations of material misstatements or omissions
`must “specify each statement alleged to have been misleading, the reason or reasons why the
`statement is misleading, and, if an allegation regarding the statement or omission is made on
`information and belief, the complaint shall state with particularity all facts on which that belief is
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`formed.” 15 U.S.C. § 78u-4(b)(1). In order adequately to plead scienter, the PSLRA requires that
`the plaintiff “‘state with particularity facts giving rise to a strong inference that the defendant
`acted with the required state of mind.’” Zucco Partners, 522 F.3d at at 991 (quoting 15 U.S.C. §
`78u-4(b)(2)). If the allegations are insufficient to state a claim, a court should grant leave to
`amend, “unless it is clear that the complaint could not be saved by any amendment.” Id. at 989
`(quoting Livid Holdings Ltd. v. Solomon Smith Barney, Inc., 416 F.3d 940, 946 (9th Cir. 2005)).
`B.
`Section 10(b).
`Under Section 10(b) of the Exchange Act it is unlawful “to use or employ in connection
`with the purchase or sale of any security registered on a national securities exchange . . . any
`manipulative or deceptive device or contrivance in contravention of such rules and regulations as
`the [Securities and Exchange] Commission may prescribe.” 15 U.S.C. § 78j(b). Rule 10b-5,
`promulgated under the authority of Section 10(b), makes it unlawful for any person, engaged in
`interstate commerce, to: (i) employ any scheme to defraud; (ii) make any untrue statement of
`material fact or to omit to state a material fact necessary in order to make the statements made, in
`light of the circumstances under which they were made, not misleading; or (iii) engage in any act
`which operates or would operate as a fraud or deceit upon any person, in connection with the
`purchase or sale of any security. 17 C.F.R. § 240.10b-5.
`To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must allege: (i) a
`misrepresentation or omission; (ii) of material fact; (iii) made with scienter; (iv) on which the
`plaintiff justifiably relied; (v) that proximately caused the allege loss. See Binder v. Gillespie, 184
`F.3d 1059, 1063 (9th Cir. 1999).
`1. Material Misrepresentations or Omissions.
`Under Rule 9(b) and the PSLRA, a plaintiff must “identify[] the statements at issue and
`set[] forth what is false or misleading about the statement and why the statements were false or
`misleading at the time they were made.” In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 876
`(9th Cir. 2012). Notably, this requirement applies to each challenged representation or omission.
`See, e.g., Doll v. Stars Holding Co., No. 05-cv-01132-MMC, 2005 WL 2811767, at *3 (N.D. Cal.
`Oct. 27, 2005) (noting plaintiffs must “specify the reasons why each such statement or omission is
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`false or misleading”). For purposes of Rule 10b-5, a statement is misleading “if it would give a
`reasonable investor the impression of a state of affairs that differs in a material way from the one
`that actually exists.” In re Cutera Sec. Litig., 610 F.3d 1103, 1109 (9th Cir. 2010) (quoting
`Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2008)). While a statement is not
`misleading simply because it is incomplete, it is also the case that a “statement that is literally true
`can be misleading and thus actionable under the securities laws.” Brody v. Transitional Hospitals
`Corp., 280 F.3d 997, 1006 (9th Cir. 2002).
`Here, Plaintiffs challenge the statements and representations made in the Form 10-Qs filed
`by Alphabet on April 23, 2018 and July 23, 2018, which incorporated the risk factors in
`Alphabet’s Form 10-K for 2017 and stated that there were no material changes to those risk
`factors. Plaintiffs allege that Alphabet’s failure to disclose information about the Google+ bug
`rendered these statements misleading. (Complaint at ¶¶ 43-44, 49, 55.) Alphabet contends that
`the statements in its Form 10-Qs were not misleading because the software glitch had been
`remedied prior to the time the statements were made. The software bug had been identified as a
`problem in March 2018, and Google soon thereafter implemented a fix. (See WSJ Article, Ex. 1 at
`1, 2; Complaint at ¶ 73.) Because a statement of future risk does not necessarily have to warn
`about past problems, Alphabet contends, the representations it made in April and July of 2018
`were truthful and not misleading. There is no support for the position that a remediated
`technological problem which is no longer extant must be disclosed in the company’s future-
`looking disclosures.
`Second, Alphabet argues that the security measures that were included in their warnings
`were sufficiently specific to ensure that reasonable investors would be warned about inherent
`security risks in software that requires the sharing of data. Alphabet contends that its warnings
`were sufficient, that “security measures may also be breached due to employee error, [] system
`errors or vulnerabilities . . .,” and that “[p]rivacy concerns relating to our technology could
`damage out reputation and deter current and potential users or customers from using our products
`and services.” (Complaint at ¶ 27(a), (b).) Alphabet argues that these provisional warnings were
`sufficient to alert a reasonable investor that the technology involved privacy concerns which could
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`deter potential customers from using the product.
`Lastly, Alphabet argues that Plaintiffs’ contentions fail because the data that was made
`insecure by the bug was not inherently sensitive in nature and there was not a single, identified
`user whose information was actually misused. (See id. at ¶¶ 2, 37.) The data at issue included
`information such as birth dates, photos, occupations, relationship status, and emails; not inherently
`sensitive information such as social security numbers, medical records, or bank information. (See
`id. at ¶ 37.) See, e.g., In re Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833, 840 (N.D. Cal. 2000).
`Further, in this iteration of the complaint, Plaintiffs were not able to show that the alleged software
`defect affected Alphabet’s earnings. And Plaintiff likewise fails to allege that the bug was
`material to Alphabet’s overall business or that it materially affected its earnings. See Panther
`Partners, Inc. v. Ikanos Communications, Inc., 347 F. Appx. 617, 621 (2d. Cir. 2009).
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`Further, the additional factual allegations pled in the consolidated amended complaint do
`not add statements that are materially false or misleading. The amended complaint adds several
`paragraphs regarding statements from earnings calls and shareholder meetings, as well as the April
`27, 2018 Proxy Statement. (See, e.g., Complaint ¶¶ 45-53.) Having reviewed the additional
`allegations, the Court finds that all of these additional representations constitute generalized
`statements regarding the importance of privacy to users and Alphabet’s general commitment to
`transparency and protection of their users’ data. These statements are too vague and generalized
`to constitute the bases for misrepresentations; they are merely inactionable puffery. See Lloyd v.
`CVB Financial Corp., 811 F.3d 1200, 1207 (9th Cir. 2016) (statement that “strong credit culture
`and underwriting integrity remain paramount” constitutes vague and optimistic, inactionable
`puffery); see also Cement & Concrete Workers Dist. Council Pension Fund v. Hewlett Packard
`CO., 964 F. Supp. 2d 1128, 1138-39 (N.D. Cal. 2013) (holding that statements in standards of
`business code are immaterial, inactionable puffery, and “not capable of objective verification”).
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`Accordingly, the Court finds that Plaintiffs have inadequately pled factual allegations to
`constitute a cause of action under Section 10(b) and Rule 10b-5 as they have not stated a
`misrepresentation or omission of a material fact.
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`2. Scienter.
`Although without an actionable misrepresentation, Plaintiffs’ claims cannot proceed, the
`Court also finds that the allegations regarding scienter in the consolidated amended complaint fail
`as well. The PSLRA requires that a plaintiff “state with particularity facts giving rise to a strong
`inference that the defendant acted with the required state of mind” in making those statements. 15
`U.S.C. § 78u-4(b)(2)(A). The “required state of mind” is “a mental state that not only covers
`‘intent to deceive, manipulate, or defraud,’ but also ‘deliberate recklessness.’” In re Quality Sys.,
`Inc. Sec. Litig., 865 F.3d 1130, 1144 (9th Cir. 2017) (quoting Schueneman v. Arena Pharms., 840
`F.3d 698, 705 (9th Cir. 2016)). To determine whether Plaintiffs have adequately plead a “strong
`inference” of scienter, the Court must ask, accepting the allegations in the complaint as true and
`considering them collectively, “would a reasonable person deem the influence of scienter as least
`as strong as any opposing inference?” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
`324 (2007). This requires a dual inquiry. First, the Court must “determine whether any of the
`plaintiff’s allegations, standing alone, is sufficient to create a strong inference of scienter.” In re
`NVIDIA Corp. Securities Litig., 768 F.3d 1046, 1056 (9th Cir. 2014). Second, if no allegation is
`by itself sufficient, the Court then considers the allegations “holistically” to determine whether,
`taken together, the allegations create a strong inference of scienter. Id.
`Plaintiffs claim that the representations made by Alphabet were intentionally misleading
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`made in order for their officers to avoid having to present testimony before Congress at a time
`when Facebook was facing severe scrutiny for its privacy policies and flaws. However, as the
`Complaint alleges, Alphabet created a privacy task force consisting of “over 100 of Google’s best
`and brightest engineers, product managers, and lawyers” and that this task force discovered the
`bug during an audit. (Complaint ¶ 38.) Here, after discovering the bug, Alphabet remediated it
`thereby rendering the allegations in the current complaint insufficient to plead scienter. (See
`Complaint ¶ 73; Ex. 1 at 1-2, Ex. 2 at 2.)
`Examining the complaint holistically, the Court also finds that Plaintiffs fail to plead
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`scienter with the requisite particularity.1 See Tellabs, 551 U.S. at 323-23 (when evaluating
`scienter, the Court must determine “whether all of the facts alleged, taken collectively, give rise
`to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation,
`meets that standard.”). Scienter requires at least “deliberate recklessness” or “conscious
`recklessness” constituting “a form of intent rather than a greater degree of negligence.” Securities
`and Exchange Commission v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1092 (9th Cir. 2010).
`Even if, assuming arguendo that the Court could interpret certain of Alphabet’s statements as
`reckless, the complaint does not provide allegations “sufficient to establish a strong inference of
`deliberate recklessness.” Zucco Partners, 552 F.3d at 991 (citation omitted, emphasis in original).
`Plaintiffs have failed to demonstrate that the “malicious inference is at least as compelling as any
`opposing innocent inference.” Id. at 1006.2
`C.
`Because the Section 10(b) Claim Fails, the Section 20(a) Claim Also Fails.
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`Because Plaintiffs have failed to allege a violation of Section 10(b), the Section 20(a)
`claim necessarily fails. See, e.g., City of Dearborn Heights Act 345 Police & Fire Retirement
`System v. Align Tech., 856 F.3d 605, 623 (9th Cir. 2017) (“Plaintiff has not sufficiently alleged
`violations of Section 10(b) and Rule 10b-5. And, without ‘a primary violation of federal securities
`law,’ Plaintiff cannot establish control person liability.” (citation omitted)). Accordingly,
`Alphabet’s motion to dismiss the Section 20(a) claim is also granted.
`CONCLUSION
`For the reasons explained above, the Court grants Alphabet’s motion to dismiss. The
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`Court grants Plaintiffs leave to amend their complaint in order to cure the deficiencies identified
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`1 The Court is not persuaded by Plaintiffs’ reframing of their factual allegations in the opposition
`to the motion to dismiss. In their opposition, Plaintiffs recast the bug (referred to as the Three-
`Year Bug) as only one of three patterns of misleading behavior. They add the Privacy Bug as a
`separate event and Policy Pivot as a third event involving the alleged cover-up of the original bug.
`Plaintiffs’ attempt to separate out these three factual bases of the alleged misrepresentations not
`only does not appear in the complaint, but the three elements of the claims do not appear to make
`logical sense as a factual underpinning of either misrepresentation or scienter.
`2 Although not dispositive, the Court also finds that the lack of any confidential witness
`allegations or suspicious stock sales further undermines a finding of scienter. See, e.g., In re
`Rigel, 697 F.3d at 885 (holding that, unlike the circumstance where there are suspicious stock
`sales which can support an inference of scienter, the absence of stock sales “supports the opposite
`inference.”).
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`by this Order. Plaintiffs shall file an amended complaint by no later than March 13, 2020.
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`IT IS SO ORDERED.
`Dated: February 5, 2020
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`______________________________________
`JEFFREY S. WHITE
`United States District Judge
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