Pokoik v. Netflix, Inc. et al, No. 3:2012cv00439 - Document 10 (N.D. Cal. 2013)
Court Description: ORDER GRANTING MOTION TO DISMISS in consolidated case C12-0225 SC. Signed by Judge Samuel Conti on 08/20/2013. (tmi, COURT STAFF) (Filed on 8/21/2013)
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Pokoik v. Netflix, Inc. et al Doc. 10 1 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE NORTHERN DISTRICT OF CALIFORNIA 8 9 United States District Court For the Northern District of California 10 11 ) Case No. 12-00225 SC ) In re NETFLIX, INC., SECURITIES ) ORDER GRANTING MOTION TO LITIGATION ) DISMISS ) 12 13 I. INTRODUCTION Plaintiffs Arkansas Teacher Retirement System and State-Boston 14 15 Retirement System ("Plaintiffs") bring this putative securities 16 class action against Netflix, Inc. ("Netflix"); Netflix Co-Founder, 17 Chairman of the Board, and CEO Reed Hastings ("Hastings"); current 18 Netflix CFO David Wells ("Wells"); and Barry McCarthy ("McCarthy"), 19 Netflix's CFO until December 10, 2010 (collectively "Defendants"). 20 Now before the Court is Defendants' Motion to Dismiss 21 Plaintiffs' First Amended Consolidated Class Action Complaint. 22 Nos. 105 ("FAC"), 108 ("Mot"). 23 Nos. 110 ("Opp'n"), 111 ("Reply"), and is suitable for 24 determination without oral argument, Civ. L.R. 7-1(b). 25 reasons set forth below, the Court GRANTS Defendants' Motion to 26 Dismiss and DISMISSES the CCAC with prejudice. 27 /// 28 /// The motion is fully briefed, ECF ECF For the Dockets.Justia.com 1 II. BACKGROUND 2 A. 3 Netflix is a public corporation that purports to be the 4 leading Internet subscription service for viewing movies and 5 television shows (collectively "movies"). 6 currently allows consumers to watch movies either by streaming them 7 over the Internet directly to their televisions, computers, or 8 mobile devices, or by receiving DVDs sent to their homes. Factual Overview FAC ¶ 3. Netflix Id. Netflix provided no streaming services -- only DVDs by mail -- 9 United States District Court For the Northern District of California 10 from 1999 to 2007. Id. ¶¶ 38-49. In 2007 Netflix began to allow 11 its subscribers to stream movies via the "hybrid plan," the only 12 plan it offered at the time, which allowed subscribers both to 13 stream movies and to receive DVDs. Id. ¶ 41. In November 2010, as part of its plan to develop its streaming 14 15 services further, Netflix decided to offer its subscribers a 16 standalone streaming plan in addition to the hybrid plan. 17 57. 18 only plan cost $7.99 per month. 19 in October 2010, Defendants explained that the expansion of 20 Netflix's streaming business would depend partly on its continually 21 adding customers who wanted streaming content. 22 Those customers' subscription payments would fuel the acquisition 23 of more streaming content, attracting still more streaming-focused 24 customers. 25 increasing content costs by decreasing DVD-related expenditures. 26 See id. ¶¶ 51-53. 27 partly driven by its conclusion that more people were joining 28 Netflix and subscribing to the hybrid plan to use streaming, but Id. ¶ The hybrid plan cost $9.99 per month, and the new streaming- Id. Id. Shortly before this change, Id. ¶¶ 51-52. Netflix also planned to offset some of the Netflix's increasing focus on streaming was 2 1 not renting any DVDs. Id. During the Class Period, Netflix's subscriber count steadily 2 3 increased each quarter. Id. ¶ 54; cf. 199-200. 4 followed suit, rising from a closing price of $153.15 on October 5 20, 2010 to a high of $298.73 on July 13, 2011. 6 On July 12, 2011, however, Netflix announced that effective 7 September 1, 2011 for existing subscribers and immediately for new 8 ones, it would no longer offer its hybrid plan. 9 Instead, it would offer separate DVD-only and streaming-only plans, Id. ¶¶ 12, 55, 64. Id. ¶ 122. United States District Court For the Northern District of California 10 both for $7.99 per month. 11 access to both DVD and streaming services for $9.99 per month under 12 the hybrid plan would now have to pay $15.98 to subscribe to the 13 new, separate plans. 14 Netflix experienced a net loss in customers for the first time in 15 years. Id. Id. Its stock price Subscribers who previously had Netflix's subscribers were unhappy, and See id. ¶ 143. Netflix's fortunes fell further in September 2011. 16 First, on 17 September 2, the cable channel Starz announced that it would not 18 renew its streaming contract with Netflix effective February 28, 19 2012. 20 Id. ¶ 129. Second, on September 15, Netflix reported that it expected to 21 lose one million subscribers during the third quarter of 2011 -- 22 the first quarter in years that would close with a net loss in 23 subscribers. 24 Netflix's stock price dropped by $39.46 to close at $169.25. 25 ¶¶ 136-37. 26 right choice." Id. ¶¶ 136, 199-200. After the announcement, Id. Nevertheless, Netflix stood behind its decision as "the Id. ¶ 380. 27 Third, on September 19, 2011, Netflix announced that it 28 planned to spin off its DVD services into a new subsidiary called 3 1 "Qwikster." Id. ¶ 125. Netflix planned to continue to provide 2 streaming services via its own subscription plans and website, 3 separately from the Qwikster subsidiary. 4 again recoiled from this change, and Netflix lost still more 5 subscribers. 6 Netflix soon abandoned the Qwikster idea, but continued its planned 7 separation of the DVD-only and streaming-only plans, thereby doing 8 away with the hybrid plan altogether. Id. Netflix's customers See id. ¶¶ 136-37; see also Def.'s RJN Ex. 3, at 15.1 See FAC ¶¶ 122, 127. Shortly thereafter, on October 24, 2011, in documents related 9 United States District Court For the Northern District of California 10 to the fourth quarter of 2011 ("4Q11"), Netflix began to report 11 discrete financial information for the now-entirely-separate DVD- 12 only and streaming-only plans -- information that had previously 13 been unavailable. 14 announced that its "contribution margin for domestic streaming 15 [would] be low in 4Q11 at around 8% . . . due to [its] increasing 16 content spend," whereas Netflix's DVD business had a contribution 17 profit of 50-52%. 18 decision to offer the DVD and streaming subscription plans as 19 separate services with separate prices, but admitted that it had 20 made the change too quickly, compounding the problem "with [a] lack 21 of explanation about the rising cost of the expansion of streaming Id. ¶ 141. Id. ¶ 142. In its 4Q11 reports, Netflix Netflix continued to stand by its 22 23 When ruling on a motion to dismiss, a court may consider documents whose contents are incorporated by reference in a complaint or upon which a complaint necessarily relies when authenticity is not contested, and matters subject to judicial notice. Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1061 (9th Cir. 2008) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)). The Court grants the parties' requests for judicial notice since the relevant documents are incorporated by reference into Plaintiffs' FAC. ECF No. 92 ("Def.'s RJN"). 1 24 25 26 27 28 4 1 content, and steady DVD costs." 2 that more long-term members canceled their subscriptions in 3 response to the pricing changes than expected, thereby making 4 Netflix's 4Q11 profits and revenues lower than predicted, though 5 Netflix would remain profitable overall. 6 announcement, Netflix's stock price fell $41.47 per share to close 7 at $77.37 per share on October 25, 2011. 8 9 Id. ¶ 210. Netflix also stated Id. After this Id. ¶ 211. Plaintiffs, Netflix shareholders, now sue Defendants for alleged violations of the federal securities laws. Their claims United States District Court For the Northern District of California 10 are all based on the theory that, between October 20, 2010 and 11 October 24, 2011 (the "Class Period"), Defendants misled investors 12 about the prospects of the new streaming-focused model, thereby 13 artificially inflating Netflix's stock price and leading to a stock 14 drop of almost 67 percent after the alleged falsity of those 15 statements was revealed. 16 Plaintiffs allege that all Defendants violated Section 10(b) 17 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and 18 Securities Exchange Commission ("SEC") Rule 10b-5; that the 19 individual Defendants violated Section 20(a) of the Act; and that 20 Hastings violated Section 20A of the Act. Id. ¶¶ 330-55. 21 B. 22 The previous pleading in this case, Plaintiffs' Consolidated Procedural Summary 23 Class Action Complaint, was the subject of a motion to dismiss 24 decided on February 13, 2013. 25 The CCAC asserted the same causes of action as the FAC, though 26 Plaintiffs' underlying theories then were based on their 27 allegations that Defendants made false and misleading statements 28 about: (1) Netflix's accounting practices, which Plaintiffs ECF Nos. 89 ("CCAC"), 102 ("Order"). 5 1 asserted were in violation of Generally Accepted Accounting 2 Principles ("GAAP") and SEC disclosure rules; (2) the virtuous 3 cycle, which was Netflix's name for its business model of acquiring 4 streaming content and consequently increasing and retaining 5 streaming-focused customers; (3) streaming's profitability relative 6 to that of the DVD business; (4) Netflix's pricing changes; and (5) 7 disclosures to the SEC. The Court dismissed Plaintiffs' CCAC because it found that (1) 8 9 Plaintiffs' accounting arguments were not plausible; (2) United States District Court For the Northern District of California 10 Defendants' statements about the virtuous cycle were not false or 11 misleading; (3) Defendants did not mislead their customers about 12 streaming's profitability; (4) none of Defendants' statements about 13 the pricing changes were false or misleading; and (5) Defendants' 14 correspondence with the SEC was not actionable. 15 Plaintiffs leave to amend their complaint to plead new facts 16 supporting their allegation that Defendants made false or 17 misleading statements during the Class Period. 18 the FAC on March 22, 2013, and the motion at bar ensued. The Court gave Plaintiffs filed 19 20 III. LEGAL STANDARDS 21 A. 22 A motion to dismiss under Federal Rule of Civil Procedure Motion to Dismiss 23 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. 24 Block, 250 F.3d 729, 732 (9th Cir. 2001). 25 on the lack of a cognizable legal theory or the absence of 26 sufficient facts alleged under a cognizable legal theory." 27 Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 28 1988). "Dismissal can be based "When there are well-pleaded factual allegations, a court 6 1 should assume their veracity and then determine whether they 2 plausibly give rise to an entitlement to relief." 3 Iqbal, 556 U.S. 662, 679 (2009). 4 must accept as true all of the allegations contained in a complaint 5 is inapplicable to legal conclusions. 6 elements of a cause of action, supported by mere conclusory 7 statements, do not suffice." 8 Twombly, 550 U.S. 544, 555 (2007)). 9 "limited to the complaint, materials incorporated into the Ashcroft v. However, "the tenet that a court Threadbare recitals of the Id. (citing Bell Atl. Corp. v. A court's review is generally United States District Court For the Northern District of California 10 complaint by reference, and matters of which the court may take 11 judicial notice." 12 U.S. at 322). 13 B. 14 Section 10(b) of the Exchange Act makes it unlawful "[t]o use 15 or employ, in connection with the purchase or sale of any security 16 registered on a national securities exchange . . . any manipulative 17 or deceptive device or contrivance in contravention of such rules 18 and regulations as the [Securities and Exchange] Commission may 19 prescribe . . . ." 20 by the Commission is Rule 10b–5, which states that "[i]t shall be 21 unlawful for any person . . . [t]o engage in any act, practice, or 22 course of business which operates or would operate as a fraud or 23 deceit upon any person, in connection with the purchase or sale of 24 any security." 25 five elements to establish a violation of Rule 10b–5: "(1) a 26 material misrepresentation or omission of fact, (2) scienter, (3) a 27 connection with the purchase or sale of a security, (4) transaction Metzler, 540 F.3d at 1061 (citing Tellabs, 551 Section 10(b) 15 U.S.C. § 78j(b). One such rule prescribed 17 C.F.R. § 240.10b–5(c). 28 7 Plaintiffs must plead 1 and loss causation, and (5) economic loss."2 2 F.3d 1006, 1014 (9th Cir. 2005). In re Daou Sys., 411 Plaintiffs must also meet the heightened pleading standards of 3 4 Federal Rule of Civil Procedure 9(b) and the Private Securities 5 Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4. 6 PSLRA requires plaintiffs to "specify each statement alleged to 7 have been misleading [and] the reason or reasons why the statement 8 is misleading." 9 complaint must "state with particularity facts giving rise to a 15 U.S.C. § 78u-4(b)(1). The Additionally, the United States District Court For the Northern District of California 10 strong inference that the defendant acted with the required state 11 of mind." 12 establishing securities fraud is the knowing, intentional, or 13 deliberately reckless disclosure of false or misleading statements. 14 See Daou, 411 F.3d at 1014–15. 15 scienter naturally results in a stricter standard for pleading 16 falsity, because falsity and scienter in private securities fraud 17 cases are generally strongly inferred from the same set of facts, 18 and the two requirements may be combined into a unitary inquiry 19 under the PSLRA." Id. § 78u-4(b)(2). The "required state of mind" for "The stricter standard for pleading Id. at 1015 (internal quotation marks omitted). 20 21 IV. DISCUSSION 22 A. 23 Plaintiffs' theory of Defendants' liability is essentially Plaintiffs' Section 10(b) Claim 24 that Defendants knew streaming would be relatively less profitable 25 than DVD offerings, but decided to tell the public that Netflix's 26 27 28 2 The Court need not reach the issue of scienter, because the Court finds Plaintiffs' claims about false or misleading statements to be implausible. 8 1 shift to streaming would be a good thing for the company. 2 Opp'n at 11-17. 3 Period, Defendants sold stock at prices their own statements 4 artificially inflated, despite knowing that the truth would sink 5 the company's stock price. 6 Defendants' statements and omissions led to Netflix's stock crash 7 after the disparate contribution margins of DVD and streaming 8 became public in October 2011. 9 See Plaintiffs allege that throughout the Class Id. According to Plaintiffs, See Opp'n at 6. Defendants argue that they were never required to disclose any United States District Court For the Northern District of California 10 information about streaming's profitability before they actually 11 did so; that they never made any affirmative statements about the 12 profitability of streaming; that they disclosed the risks of their 13 business's focus on streaming; and that Defendants had no knowledge 14 that contradicted what they told the public. 15 See MTD at 1-3. The same cases the Court discussed in its previous Order, 16 namely Matrixx Initiatives, Inc. v. Siricusano, 131 S. Ct. 1309, 17 1321-22 (2011), and Brody v. Transitional Hospitals Corp., 280 F.3d 18 997, 1006 (9th Cir. 2002), control here. 19 establish the rules that companies can control what they disclose 20 publicly, and that Section 10(b) and Rule 10b-5(b) do not create 21 affirmative duties to disclose "any and all material information": 22 they need only disclose what is necessary to render statements, in 23 the light of the circumstances under which they were made, not 24 misleading. 25 sensitive rule, and the additional case Plaintiffs now cite, Berson 26 v. Applied Signal Technology, Inc., 527 F.3d 982, 986-87 (9th Cir. 27 2008), did not change that. 28 Matrixx and Brody Matrixx, 131 S. Ct. at 1321-22. This is a context- Berson concerned a defendant company that had specifically 9 1 touted its backlog of anticipated revenues from uncompleted but 2 still-extant contracts. 3 some of those backlogged contracts were, at the time defendant made 4 its disclosures, subject to stop-work orders that would not result 5 in any value for the company. 6 different from what the defendant had led its investors to believe: 7 the defendant touted its backlogged contracts as a source of value, 8 when in fact those contracts were valueless. 9 defendant touted those contracts anyway, it had a duty to disclose See id. The company did not disclose that Id. The truth was therefore very Id. Since the United States District Court For the Northern District of California 10 the truth about the stop-work orders even though it could have 11 avoided such a duty by refusing to mention either the backlogs or 12 the stop-work orders. 13 Id. at 987. Berson is inapposite. Plaintiffs' argument is essentially 14 that as soon as Netflix began to discuss its focus on streaming, it 15 had a duty to disclose all manner of information about streaming's 16 margins relative to DVD's, even if that information simply did not 17 exist. 18 concerned a discrete statement that hid the truth behind what the 19 defendants had said. 20 See Opp'n at 14-15. But this takes Berson too far. Berson See 527 F.3d at 987. In this case, as explained more fully below, Plaintiffs fail 21 to plead that Defendants made such a statement. The closest they 22 come is to allege that Defendants discussed the risks of their 23 shift to streaming in context of many other factors, including 24 overall margins, and Berson specifically treats these kinds of 25 candid statements of risk differently from companies' boasts about 26 certainties. 27 risk, the other a certainty. 28 would treat the two differently."). 527 F.3d at 987 ("[One type of statement] indicates a It goes without saying that investors 10 Moreover, Berson's rule on 1 discrete statements does not map to a factual situation in which 2 plaintiffs have not shown -- as discussed below -- that defendants 3 possess actual knowledge that a statement was false. 4 accordingly does not change the general rules the Court must apply 5 in cases like this one. Berson To prove that Defendants' statements were false and 6 7 misleading, Plaintiffs have to show that Defendants both knew of 8 streaming's disparate profitability as compared to DVD's and had a 9 duty to disclose that in tandem with the public statements that United States District Court For the Northern District of California 10 Plaintiffs cite. See Matrixx, 131 S. Ct. at 1321. 11 also plausibly allege that Defendants' statements would have been 12 misleading to a reasonable investor, either on their own or as a 13 result of an omission. 14 Plaintiffs' new pleadings first, then considers the pleadings that 15 are essentially unchanged from the CCAC. See id. at 1322-23. Plaintiffs must The Court addresses 16 All of Plaintiffs' substantive allegations of falsity are 17 based on their contentions that Defendants misrepresented or failed 18 to disclose these general facts: "(i) the shift to streaming 19 presented significant financial challenges to Netflix because it 20 was far more expensive and far less profitable than DVD; (ii) 21 streaming's relative profitability as compared to DVD was minimal; 22 [] (iii) the soaring costs of the Streaming Business were not 23 offset by the decreased costs of mailing in the DVD Business"; and 24 (iv) giving "the impression that streaming is consistent with a 30- 25 35% contribution margin, when, as later revealed, it was only at 26 8%." 27 92. 28 /// FAC ¶¶ 153-56, 160-61, 164-65, 168-70, 176-79, 183-86, 188- 11 1 1. Plaintiffs' New Allegations As noted above, Plaintiffs' FAC is almost the same as their 2 3 CCAC. 4 their agents, and expand on several more statements. 5 statements concern Defendants' alleged knowledge of the truth about 6 Netflix's streaming component's profitability and effect on 7 Netflix's margins. 8 "CW3," who discusses the same matter. 9 Plaintiffs cite three new statements from Defendants or All of these Plaintiffs also add a new Confidential Witness, June 2, 2011 Statement: Plaintiffs quote part of a Nomura United States District Court For the Northern District of California 10 Securities US Media Summit Call, on which Netflix was allegedly 11 represented by non-defendant Ted Sarandos. 12 Sarandos answered an analyst's questions about what has changed to 13 increase Netflix's flow of content, what the biggest changes in 14 physical rental were, and what the biggest changes or drop-offs in 15 terms of usage were. 16 not run its business with Netflix's mentality, which is "willing to 17 kill our existing business to move on to the next one"; (2) people 18 were mostly joining Netflix for streaming, so Netflix had been 19 focusing on streaming while DVD ran "calmly on its own"; and (3) 20 while DVD was still profitable and would be for a long time, "in 21 markets where the streaming business is doing really well the DVD 22 business is flattening out more." 23 Id. FAC ¶ 185. Mr. Mr. Sarandos said that (1) Hollywood did Id. The June 2, 2011 statements from Mr. Sarandos do not support 24 Plaintiffs' allegations. Plaintiffs cited Mr. Sarandos's 25 quotations somewhat selectively to make it seem as if he was 26 actually saying that Netflix was prepared and willing to kill their 27 DVD business to move on to the next one, i.e., streaming, thereby 28 suggesting that the streaming component had completely supplanted 12 1 the DVD component. See Opp'n at 2, 5, 12, 14. The Court finds 2 that this is not the case. 3 philosophy of Hollywood versus Silicon Valley, characterizing the 4 former as a "relationship town" that focuses on preserving the 5 status quo and the latter as a place philosophically more prepared 6 to make drastic business shifts. 7 Defendants' other statements make clear that, while they were 8 planning to shift the business's focus to streaming, DVD would 9 remain part of Netflix's business plan. Mr. Sarandos was talking about the See FAC ¶ 185. Moreover, all of See id. ¶ 180. Mr. United States District Court For the Northern District of California 10 Sarandos himself said, during the same conversation Plaintiffs 11 cite, "The value proposition of the DVD business is going to be 12 very good for a very long time." 13 these statements are not plausibly false or misleading. 14 therefore insufficient to support Plaintiffs' claims. Id. ¶ 185. The Court finds that They are 15 July 25, 2011 Statement: Plaintiffs refer to a shareholder 16 letter filed on July 26, 2011, and an earnings call held on the 17 same day. 18 streaming-only plan gained in popularity during Second Quarter 19 2011, that DVD shipments had "likely peaked" with the "rapid 20 adoption of streaming," and that Defendants had "spoken frequently" 21 of how they were "directing savings generated from declining DVD 22 demand into additional streaming content and marketing." 23 188. 24 Id. ¶¶ 188-89. The letter indicated that Netflix's Id. ¶ Defendants Hastings and Wells said during the July 25 earnings 25 call that they were gaining confidence over the last two years 26 about "the viability and strength of a pure streaming plan," 27 especially since 75 percent of subscribers had chosen streaming- 28 only plans even though DVD plans were only two dollars more 13 1 expensive. Id. ¶ 189. 2 pricing change, Netflix could strengthen its streaming plan with 3 more content. 4 DVD business would continue to be a smart choice, and that even if 5 it did not grow it would at least shrink slowly instead of rapidly. 6 ECF No. 112-1 ("Decl. ISO Reply") Ex. E ("July 25 Tr.") at 3. 7 Defendant Hastings said that Netflix would "figure out" these 8 growth prospects over "the next couple of quarters." 9 Court finds these statements insufficient to support Plaintiffs' Id. Defendant Hastings stated that with the Defendant Hastings added that investing in its Id. The United States District Court For the Northern District of California 10 claim: they are, in context, optimistic statements about streaming 11 among candid statements of risk. 12 Plaintiffs also point to Defendant Hastings' response to an 13 analyst's question about how separating the DVD and streaming 14 components of its business would impact its content partnerships. 15 FAC ¶¶ 190-91; July 25 Tr. at 3. 16 movie studios have had different DVD and streaming divisions "for a 17 while," leading Defendants not to see "any significant effect 18 coming out of the separation of the plans." 19 in response to separate question about whether DVD would become 20 more or less of a priority after being decoupled from streaming, 21 Defendant Hastings stated that the DVD business would be "less 22 important to those people at Netflix working on streaming, and much 23 more important to those people in the dedicated DVD division. 24 that's the purpose of putting it in a separate group, so they can 25 focus on that." 26 are false or misleading. 27 partnerships, not profitability or financial information. 28 Id. Defendant Hastings stated that July 25 Tr. at 3. And And The Court finds that none of these statements The questions concerned content Plaintiffs then point to Defendant Hastings' statement that, 14 1 by having DVD "as a division within Netflix, [Netflix had] a way to 2 measure the P&L [profit and loss]." 3 that this reflects Defendants' capability of measuring the P&L for 4 Netflix's DVD component while it was part of the hybrid plan, 5 leading Plaintiffs to conclude that Netflix "necessarily also had 6 the capability of measuring the P&L for streaming." 7 (At this point, Netflix had separate streaming and DVD plans for 8 new users, but existing users' hybrid plans would not be phased out 9 until September 2011.) Id. ¶ 191. Plaintiffs state Id. ¶ 190. These statements are implausible as bases United States District Court For the Northern District of California 10 for Plaintiffs' allegations of securities fraud. 11 clear that Defendant Hastings was stating that Defendants would 12 have P&L information for the DVD component in the future -- he said 13 nothing about the streaming component and, as noted above, did not 14 have to, either as a matter of duty or in response to the analyst's 15 question about Netflix's DVD-only business alone. 16 at 3.; see also supra Section IV.A.1. 17 Defendant Hastings' statement, taken alone or alongside Plaintiffs' 18 other allegations, suggests that Defendants knew it was false or 19 misleading, or that it rendered other statements actionable. 20 Court finds that these statements are not plausible bases for 21 Defendants' claims. 22 In context, it is See July 25 Tr. The Court does not find that The September 21, 2011 Statement: Plaintiffs add a quotation from 23 a Goldman Sachs Communacopia Conference Call in which Netflix 24 participated. 25 a "narrative" of Netflix's focus and a query about why investors 26 should own Netflix shares, Defendant Wells said this: "I think the 27 core message I'll deliver is that we feel strongly that the core 28 thesis is intact. Id. ¶ 204. In response to an analyst's request for The size and the opportunity of the domestic and 15 1 the international streaming market or electronic, entertainment 2 market is intact. 3 positioned to take advantage of that and to grow into a large 4 share." 5 mathematical models to predict streaming content's value in 6 negotiations. 7 continue to analyze the now-separate DVD division's revenue 8 streams. 9 Id. And we're well positioned. We're still well Defendant Wells also stated that Netflix used FAC ¶ 94. Finally, he added that Netflix would Id. ¶ 95. Defendant Wells's September 21, 2011 statements do not provide United States District Court For the Northern District of California 10 plausible support for Plaintiffs' claims. 11 general to plausibly show that Defendants had knowledge of the 12 disparities in DVD's and streaming's contribution margins. 13 also do not make false or misleading representations about such 14 margins. 15 Plaintiffs' contention that Defendants were analyzing streaming's 16 profitability. 17 They are too vague and They The Court also finds that these statements do not support Expansion of December 8, 2010 Statement: Plaintiffs expand on 18 December 8, 2010 statements referenced in the CCAC. 19 statements were made on a Barclays Capital Global Technology 20 Conference Call. 21 call rather selectively. 22 Decl.") Ex. A ("Barclays Tr.") at 5. 23 analyst's question as being about "the impact of streaming content 24 costs on margins." 25 and pay-TV networks with whom Netflix was negotiating for content. 26 The analyst asked about those parties' future plans; whether, in 27 the long term, it was "the right thing" for them to license content 28 to Netflix; and "whether [doing so] potentially hurts their seat at Id. ¶ 160. Id. These Plaintiffs quote sections of this Compare id. with ECF No. 109 ("Liss Plaintiffs characterize the But the actual question concerned studios 16 1 2 3 the table a few years down the line." Plaintiffs quote Defendant Hastings as responding to that question by saying: [T]here is no risk of a big negative thing happening to Netflix. And, in general, investors ask us questions like, well, if the cost of content is X, won’t that tank your margins? And we are always surprised when we get that question because we are like no, we manage the margins . . . the margins would be preserved . . . [s]o it is not going to ever manifest itself as margin risk. 4 5 6 7 8 9 United States District Court For the Northern District of California 10 11 Id. FAC ¶ 160. However, having carefully read the transcript, the Court finds 12 that Defendant Hastings is referring to the risk of having a 13 majority of its streaming content tied to a single provider, which 14 he calls a "concentration risk." 15 Hastings states that because Netflix had "added a lot of content," 16 even since the prior year's statement that "no content provider was 17 more than 20% of [Netflix's] viewing." 18 thing" refers to the risk of a single content provider pulling 19 content, and Defendants' disclosure and explanation of such a risk 20 is to be treated differently from statements about certainties. 21 See Berson, 527 F.3d at 987. 22 Barclays Tr. at 5. Id. Defendant The "big negative Further, Defendant Hastings' statement that "[Netflix's] 23 margins would be preserved" as it continued to invest in content is 24 tucked between two ellipses in Plaintiffs' FAC, but in context on 25 the call's full transcript, the Court finds that Defendant Hastings 26 was referring to Netflix's management of margins in terms of its 27 not overspending in its content purchases. 28 about specific streaming margins, nor is it actionable in general. 17 This is not a statement Similarly, the statement that purchasing content for streaming 1 2 was "not going to ever manifest itself as margin risk" comes 3 several sentences after Defendant Hastings hedges his statements on 4 the benefits of content spending and the importance of management 5 discipline. 6 content were ever more expensive than Netflix thought, they would 7 not purchase it, a decision that could lead to Netflix's having 8 less total content, being less exciting to consumers, and resulting 9 in less growth, but preserving Netflix's margins. Before he refers to "margin risk," he says that if Id. The Court United States District Court For the Northern District of California 10 finds that this statement, like those above, is a statement about 11 risk, not certainty -- it is not actionable. 12 987. Berson, 527 F.3d at Expansion of December 20, 2010 Statement: Plaintiffs add more 13 14 quotations from an article by Defendant Hastings. 15 Defendant Hastings responded to an investment advisor's suggestion 16 that investors should short Netflix because of rising content costs 17 and a more competitive streaming landscape. 18 Hastings stated that Netflix's subscriber base was growing fast 19 enough, with DVD shipments slowing down enough, for Netflix both to 20 pay for existing streaming content and to add more content to its 21 library. 22 overspending relative to [its] margin structure, and there is no 23 specific content that [Netflix] 'must have' at nearly any cost." 24 Id. 25 revenue on Cost of Goods Sold (which is mostly content and postage) 26 in its domestic business, 27 than we expected, then in practice we'd have less content than 28 otherwise, rather than less margin. Id. ¶ 164. In the article, FAC ¶ 163. Defendant He added that Netflix had "no intention of He concluded by saying that Netflix spends 65-70 percent of and that "if content costs rose faster 18 This would ultimately show up 1 in less subscriber growth than we wanted from a not-as-good-as-it- 2 would-otherwise-be service; it would not likely show up as a sudden 3 hit to margins." Id. 4 The Court finds that Plaintiffs' expanded discussions of 5 Defendants' December 8 and 20, 2010, statements do not render 6 Plaintiffs' claims plausible. 7 that these statements were "specific representations concerning 8 Netflix's streaming profit margins" and that the statements did not 9 refer "explicitly to streaming's profitability." Plaintiffs attempt to argue both Opp'n at 15, 17 United States District Court For the Northern District of California 10 n.14. 11 refer to Netflix's overall margins, just as the Court found in its 12 previous Order. 13 months before Defendants could have evaluated different components' 14 profit margins, according to Plaintiffs' measurements. 15 at 5; see also FAC ¶¶ 157, 160-62, 164-65. 16 Hastings' statements both make clear that Netflix planned to be 17 cautious in its content investments, and that presenting less 18 content to its subscribers could result in less subscriber growth. 19 See FAC ¶¶ 160, 64. 20 plausible bases for Plaintiffs' claims. 21 In context, the Court finds it clear that the statements See Order at 15-16. The statements issued several See Ex. A Moreover, Defendant The Court finds that these statements are not CW3: CW3 was a Manager of Content Planning and Analysis at 22 Netflix from June 2011 to July 2012. 23 that CW3 "confirms that Netflix had the capability to: (i) track 24 the profitability of streaming; (ii) determine a profit margin for 25 the purposes of determining separate streaming pricing; and (iii) 26 calculate what the streaming profit margin needed to be." 27 Plaintiffs allege that CW3 confirmed that Netflix's decision to 28 split streaming and DVD was made before June 2011, and that 19 Id. ¶ 224. Plaintiffs state Id. 1 streaming was a fixed-cost business with profit based almost 2 entirely on the fixed cost of content. 3 assert that according to CW3, Netflix was performing ROI analyses 4 to determine different streaming packages' profitability, and that 5 these analyses helped them to determine that Starz's requested 6 dollar amount for its content exceeded that content's 7 profitability. 8 9 Id. ¶ 224. Plaintiffs also Id. ¶ 226. Plaintiffs claim that on a September 21, 2011 conference call, Defendants corroborated CW3's allegations. Id. ¶ 227. On that United States District Court For the Northern District of California 10 call, Defendant Wells stated that in negotiations for groups of 11 television or movie titles, Netflix would use hours viewed by its 12 streaming subscribers as a proxy for value, and "to the extent that 13 [Netflix uses] regression and other math valuation models" to 14 predict a group of titles' relative value, Netflix could estimate a 15 reservation price for its deals. 16 during the same call, Defendants revealed that they had segmented 17 operating profits for its DVD division, pointing to another of 18 Defendant Wells' statements -- devoid of context here and not 19 explained elsewhere -- about "the long-term earnings stream from a 20 DVD division" and the notion that Netflix would continue to 21 "segment that out" while "looking at operating profit." 22 Id. Plaintiffs also state that Id. ¶ 228. The parties dispute the relevance of CW3's statements to 23 Plaintiff's theory that Defendants knew of actual profit 24 information about streaming. 25 learned that CW3 had signed a declaration prepared by Netflix's 26 counsel, clarifying that "[t]erms like 'profitability' or 'return 27 on investment,' to the extent used by [CW3] or in [CW3's] group, 28 referred to whether the cost of content would be justified by the Plaintiffs say that they recently 20 1 anticipated consumption (viewing hours) of that content" and did 2 not mean "financial profitability," i.e., revenue minus costs. 3 Opp'n at 1 n.2. 4 Plaintiffs apparently wanted to stipulate to amend their FAC 5 to add this clarifying statement, but the parties never agreed to 6 do so. 7 about the procedural aspects of this declaration at this point in 8 litigation, see id.; Reply at 4 n.4. 9 is that Plaintiffs concede that CW3's statements refer not to Id. The parties engage in some footnoted back-and-forth However, the important point United States District Court For the Northern District of California 10 financial profitability (revenue minus costs) but to estimates of 11 anticipated content consumption. 12 statements do not indicate that Defendants had actual knowledge of 13 streaming's relative profitability at any point before they 14 actually declared it. 15 Opp'n at 1 n.1. Thus, CW3's None of Plaintiffs' CWs, even CW3, make Plaintiffs' claims any 16 more plausible than they were last time. 17 supra, Plaintiffs clarify that CW3 actually uses the word 18 "profitability" to mean "cost efficiency," which is not the same as 19 profitability. 20 show that Defendants hid the real state of their business affairs 21 from their investors. 22 have extrapolated complicated financial data from estimated values 23 derived for purposes of negotiation do not render that claim any 24 more plausible: forecasting and estimating are not the same as 25 knowing the present value of an interrelated business component. 26 Further, the fact that Defendants later began tracking information 27 about DVDs still does not indicate that they knew the same 28 information about streaming until that product was separated from Opp'n at 1 n.2. As noted in Section II.B, Moreover, CW3's statements do not Conclusory assertions that Defendants could 21 1 2 Defendants' other plans. CW1 and CW2, as discussed in the Court's previous Order, also 3 do not support Plaintiffs' claims or render them plausible, because 4 those CWs did not possess discrete profitability data and were not 5 employed by Netflix at a relevant time. 6 therefore finds that Plaintiffs' CWs' statements do not plausibly 7 support Plaintiffs' claims. 8 9 Order at 16. The Court In general, all of Plaintiffs' allegations -- new and old -depend on the tenuous theory that Defendants withheld discrete and United States District Court For the Northern District of California 10 accurate financial information about streaming while also touting 11 streaming's profitability. 12 case for any statement Plaintiffs cite. 13 of vague, sometimes conclusory, statements to support a theory that 14 requires much more by virtue of its being narrow and fact- 15 sensitive. 16 17 The Court has not found this to be the Plaintiffs supply an array This is not enough to state a claim under the PSLRA. 1. Plaintiffs' Re-pled Claims Plaintiffs allege numerous facts that mirror what they pled 18 about profitability in their CCAC. As for the statements the Court 19 addressed in its prior Order, and to the application of Plaintiffs' 20 newly cited cases more generally, Plaintiffs have not shown that 21 Defendants touted the independent profitability of streaming such 22 that they would have a duty to disclose any of the negative aspects 23 of their streaming business. 24 to discuss the independent profitability of streaming. 25 RJN Ex. 7 ("Q3 Earnings Call") (in which Defendant Hastings says, 26 in response to a question about what Netflix's US streaming margins 27 would be, that Defendants did not know what the margins were or 28 would be in the future). Indeed, Defendants explicitly refused 22 See Def.'s The Court finds that Plaintiffs' claims based on Defendants' 1 2 statements and other facts that Plaintiffs also pled in their CCAC 3 are implausible now for the same reasons they were when the Court 4 dismissed Plaintiffs' CCAC. 5 parts of Plaintiffs' CCAC that remain essentially unchanged in the 6 FAC). 7 following paragraph briefly summarizes the factual problems with 8 Plaintiffs' restated pleadings. 9 See Order at 11-18 (considering the The Court will not rewrite its previous Order here, so the Plaintiffs do not plead plausible facts indicating that United States District Court For the Northern District of California 10 Defendants touted the streaming business's profitability as opposed 11 to the projected or hoped-for strength of the interrelated DVD and 12 streaming business. 13 Class Period that the success of a streaming-focused business model 14 was contingent on other factors, primarily the growth and retention 15 of Netflix's subscriber base, suggesting that Defendants did not 16 omit any information or warnings in a way that would be misleading 17 under Rule 10b-5. 18 that Defendants made any false or misleading statements about the 19 profitability of the streaming business. Moreover, Defendants made clear throughout the None of what Plaintiffs plead therefore shows 20 B. Plaintiffs' Remaining Claims 21 Absent an underlying violation of the Exchange Act, there can 22 be no control person liability under Section 20(a). Paracor Fin., 23 Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir. 24 1996). 25 10(b), their control person claim is also DISMISSED. 26 v. Golden State Vintners, Inc., 471 F. Supp. 2d 998, 1027 (N.D. 27 Cal. 2006). 28 under Section 20A without an underlying violation of Section 10(b). Because Plaintiffs have not pled a violation of Section See Shurkin Likewise, there can be no insider trading liability 23 1 See In re VeriFone, 11 F.3d at 872. 2 Plaintiffs' Section 20A claim is therefore DISMISSED. 3 C. 4 The Court is aware that the heightened pleading standards of Leave to Amend 5 the PSLRA serve as a higher bar for plaintiffs in securities fraud 6 class actions. 7 in the Ninth Circuit -- is often viewed favorably in many PSLRA 8 cases. 9 claims based on their failure to plead false or misleading Granting leave to amend -- already liberally given However, in this case, the Court dismisses Plaintiffs' United States District Court For the Northern District of California 10 statements. Falsity, unlike scienter, generally does not require 11 the same depth of investigation. 12 two opportunities to plead false statements, but in both cases they 13 have failed to do so. 14 Plaintiffs leave to amend their FAC. In this case, Plaintiffs have had Therefore the Court declines to grant 15 16 17 V. CONCLUSION For the foregoing reasons, the Court GRANTS Defendants Reed 18 Hastings, David Wells, Barry McCarthy, and Netflix, Inc.'s Motion 19 to Dismiss. 20 State-Boston Retirement System's First Amended Consolidated Class 21 Action Complaint is DISMISSED WITH PREJUDICE. Plaintiffs Arkansas Teacher Retirement System and 22 23 IT IS SO ORDERED. 24 25 26 Dated: August 20, 2013 UNITED STATES DISTRICT JUDGE 27 28 24
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