Kelly v. Electronic Arts, Inc. et al, No. 3:2013cv05837 - Document 73 (N.D. Cal. 2015)

Court Description: ORDER GRANTING DEFENDANTS' MOTION TO DISMISS PLAINTIFFS' AMENDED CONSOLIDATED COMPLAINT WITHOUT LEAVE TO AMEND 53 (Illston, Susan) (Filed on 4/30/2015)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 RYAN KELLY, et al., Case No. 13-cv-05837-SI Plaintiffs, 8 v. 9 10 ELECTRONIC ARTS, INC., et al., Defendants. 11 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS PLAINTIFFS’ AMENDED CONSOLIDATED COMPLAINT WITHOUT LEAVE TO AMEND United States District Court Northern District of California Re: Dkt. No. 53 12 13 14 15 On April 24, 2015, the Court held a hearing on defendants’ motion to dismiss plaintiffs’ Amended Consolidated Complaint (“Amended Complaint” or “ACC”). Dkt. No. 53. For the reasons set forth below, the Court GRANTS defendants’ motion to dismiss without leave to 16 amend. 17 18 19 20 BACKGROUND1 This is a securities fraud class action against defendant Electronic Arts, Inc. (“EA”) and certain of its officers and executives2 under Sections 10(b) and 20(a) of the Securities Exchange 21 Act of 1934 and corresponding SEC Rule 10b-5. ACC ¶¶ 1, 147, 150. Lead plaintiffs Ryan Kelly 22 and Louis Mastro bring suit on behalf of all persons who purchased EA common stock between 23 24 25 26 27 28 1 The following background facts are taken from the allegations in the Amended Complaint and documents incorporated therein by reference, which for purposes of this motion, must be taken as true. 2 The individual defendants are: Chief Executive Officer Andrew Wilson; Chief Financial Officer and Executive Vice President Blake J. Jorgensen; Chief Operating Officer Peter Robert Moore; and President of EA Labels Frank D. Gibeau. ACC ¶ 1. Plaintiffs no longer assert claims against Chairman Lawrence F. Probst III or Executive Vice President of EA Studios Patrick Söderlund. Compare Consolidated Class Action Complaint (“Compl.”) ¶ 1, with ACC ¶ 1. 1 May 8, 2013 and December 5, 2013 (“class period”). Id. ¶¶ 1, 27. 2 3 I. EA’s Battlefield 4 (“BF4”) EA is a multinational developer, marketer, and distributor of video games. Id. ¶ 35. EA is 5 currently the world’s third-largest gaming company after Nintendo and Activision. Id. Since its 6 founding, EA has released a diverse portfolio of successful video games, including FIFA, Madden, 7 NBA Live, and Battlefield. Id. ¶¶ 36-37; Defendants’ Second Request for Judicial Notice (“Defs.’ 8 SRJN”), Dkt. No. 55, Ex. E, at 6.3 FIFA and Battlefield are two of EA’s “blockbuster” and most 9 “lucrative” video game franchises. ACC ¶¶ 39-40. During the class period, EA planned to 10 release approximately twenty-six games, including several which would be available on next- 11 United States District Court Northern District of California 4 generation gaming consoles. Defs.’ SRJN Ex. B, at 7-8.4 Battlefield 4 (“BF4”), one of the video 12 games central to this action, launched in October and November 2013. ACC ¶¶ 15-16. 13 EA owns and operates several video game development studios, including DICE studios. 14 Id. ¶ 36. DICE developed Battlefield 4 using a technology platform known as Frostbite 3, which 15 the studio also developed. Id. Frostbite 3 underlies the versions of BF4 available for both existing 16 and next-generation gaming consoles. Id. ¶ 89. 17 EA expected BF4 to generate a significant portion of EA’s total revenue in 2013 and 2014. 18 Id. ¶¶ 39-41. The prior version of BF4, Battlefield 3, accounted for approximately 11 percent of 19 EA’s total revenue in fiscal year 2012. See Defs.’ SRJN Ex. U, at 5. On January 30, 2013, EA’s 20 former CEO acknowledged that FIFA and Battlefield are “vitally important” to EA. ACC ¶¶ 40. 21 3 22 23 24 25 26 Plaintiffs do not object to judicial notice of Exhibits A-R. See Pls.' Response to Request for Judicial Notice at 2-4. The plaintiffs do, however, object to judicial notice of Exhibits S-W (excerpts of EA's Form 10-K and several Forms 8-A filed with the SEC between January and October of 2014) and Exhibit X (Yahoo! Finance report of EA’s stock prices between May 7, 2013, and December 5, 2014). Id. at 4-5. “In a securities fraud action, the court may take judicial notice of public records outside the pleadings, including SEC filings.” In re Nuko Info. Sys., Inc. Sec. Litig., 199 F.R.D. 338, 341 (N.D. Cal. 2000) (citation omitted). Accordingly, the Court takes judicial notice of Exhibits A-W. However, the Court will not take judicial notice of Exhibit X because it is irrelevant to the disposition of this case. 4 27 28 Plaintiffs assert that EA planned to release only eleven games. Pl.’s Opp. to Mot. to Dismiss (“Pls.’ Opp.”) at 8 n.11. However, EA planned to release an additional fifteen titles for mobile devices, and thus it appears that plaintiffs refer to the eleven major titles that EA planned to release. See Defs.’ SRJN Ex. B, at 6. 2 1 Similarly, a January 2013 report noted that “[w]ith a portfolio of strong franchises and key 2 upcoming catalysts that include next-gen consoles and Battlefield 4, we anticipate strong 3 profitable growth for [EA] in [fiscal year] 2014.” Id. ¶ 41. 4 Key to BF4’s importance was its role in facilitating EA’s transition to next-generation 5 gaming consoles. Id. ¶¶ 42, 63. On May 21, 2013, EA confirmed that BF4 would be available on 6 two next-generation gaming consoles, Sony PlayStation 4 and Microsoft Xbox One, as soon as 7 those consoles became available. Id. ¶ 71. However, EA investors were skeptical about EA’s 8 ability to launch BF4 without significant problems in light of EA’s history of “disastrous” game- 9 launch and console-transition failures. Id. ¶¶ 45, 63. 10 United States District Court Northern District of California 11 II. BF4’s Launch 12 Before its official launch, BF4 received positive reviews during EA’s live demonstrations 13 at video gaming conferences. Id. ¶ 74. For example, on March 26, 2013, one reviewer “lauded” 14 EA’s live demonstration of BF4 and characterized BF4 as “so important that it could make a 15 difference for EA’s valuation in the stock market.” 16 demonstration of BF4 on Microsoft’s Xbox One next-generation gaming console at the Electronic 17 Entertainment Expo (“E3”) received twenty-one awards. Id. ¶ 74. On July 23, 2013, defendant 18 Moore confirmed that preorders for BF4 had exceeded those for the game’s prior iteration. Id. ¶ 19 75. Id. ¶ 60. In June 2013, EA’s live 20 EA officially launched BF4 in a series of three rollouts: (1) BF4 launched on three existing 21 gaming consoles on October 29, 2013 (ACC ¶ 15); (2) BF4 launched on Sony’s PlayStation 4 22 next-generation gaming console on November 15, 2013 (Id. ¶ 16); and (3) BF4 launched on 23 Microsoft’s Xbox One next-generation gaming console on November 22, 2013 (Id. ¶ 97). BF4’s launch was met by a deluge of customer complaints regarding game-breaking 24 Id. ¶¶ 90-91. On or about October 29, 2013, customers complained about BF4’s 25 issues. 26 performance on existing consoles, stating that the “[g]ame won’t even start” and “[t]he random 27 freezing/crashing is making [BF4] unplayable.” Id. ¶ 90. On October 30, 2013, one game 28 reviewer, who had early access to the next-generation version of BF4, published a review in which 3 1 he described a “game-crashing” error. Id. ¶ 88. Similarly, after the next-generation launches on 2 November 15, 2013 and November 22, 2013, customers described multiple defects. Id. ¶¶ 94-97. 3 For instance, customers complained that “I can’t play at all” and noted “[l]ots of crashes when 4 trying to load the game.” Id. ¶ 94. On December 4, 2013, a reporter stated that he found it “hard 5 to believe that the issues facing Battlefield 4 were a surprise to EA and DICE.” Id. ¶ 106. 6 In response, on December 4, 2013, EA announced that DICE would cease development on 7 any future projects until it had fixed BF4’s defects, which took approximately three months. Id. 8 ¶¶ 103, 114. 9 Tracker,” which listed BF4’s defects as of that day. Id. ¶¶ 109-110. On December 10, 2013, DICE publicly released its “Battlefield 4 Top Issues Beginning in Fall 2013, EA employees discussed some of the challenges facing BF4’s 11 United States District Court Northern District of California 10 development. In a November 6, 2013 email, a DICE developer who worked on BF4 explained 12 that EA “always wants more and more in the game until the very end of the project which puts an 13 enormous strain on QA to test everything. . . . We do test EVERYTHING we really do. . . .” Id. 14 ¶ 92; Defs.’ SRJN Ex I, at 2. He also indicated that testing for defects took a long time and 15 suggested that DICE might not test BF4 after every programming update. Defs.’ SRJN Ex I, at 2. 16 On December 20, 2013, another BF4 game developer provided further details of the development 17 challenges. ACC ¶ 111. The employee noted that EA wanted to “squeez[e] out the maximum 18 capacity” of the next-generation gaming consoles by allowing code to run on multiple processors, 19 instead of the past practice of running code on a single processor. Defs.’ SRJN Ex. J, at 2. The 20 new development technique made the code “timing-dependent,” which created a risk that the game 21 might crash. Id. at 3. The employee acknowledged that DICE tested the game on largely similar 22 machines, which made it difficult to account for variances in timing. Id. at 2-3. Although DICE 23 was “not prepared for all the issues with [BF4],” the employee stated that “no one [at] EA or 24 DICE has ever said ‘F*ck [sic] it, let's release it anyway.’” Id. at 3. 25 On June 20, 2014, defendant Wilson discussed BF4’s problematic launch during an 26 interview with Eurogamer magazine. Id. ¶ 117. Wilson denied that DICE had insufficient time to 27 test the game prior to launch, and instead pointed to the challenges of developing a game for the 28 launch of a next-generation gaming console. Defs.’ SRJN Ex. P, at 3. Wilson explained, “Not to 4 1 abdicate responsibility whatsoever . . . but when you are building a game on an unfinished 2 platform with unfinished software, there are some things that can’t get done until the very last 3 minute because the platform wasn't ready to get done.” Id.; ACC ¶ 117. 4 5 6 7 III. Purported Misstatements The Amended Complaint alleges that during the class period, defendants Gibeau, Moore, and Wilson made the following five5 materially false or misleading statements: 8 (1) During a May 7, 2013 earnings conference call with analysts and investors, defendant Gibeau responded to a question about EA’s prior gaming console transitions by stating: “. . . in comparison to last transition, we’re in a much better state as a company in terms of our development. . . . [O]ur investment in Frostbite and EA SPORTS over the last year has really put us in a position where the technology side or the engine side of this transition has largely been de-risked.” ACC ¶ 64, 66. 9 10 United States District Court Northern District of California 11 12 13 (2) During a June 12, 2013 investor breakfast, defendant Moore responded to a question about EA’s prior gaming console transitions by stating: “. . . we learned from [the last transition], and for this cycle, we have started early on Ignite and on Frostbite 3, and derisk [sic] the technology engine component of making the transition. So from the standpoint of picking the wrong platforms, I think we did a good job there but we’ve mismanaged the technology. That’s not happening this time around.” Id. ¶ 73.6 14 15 16 17 (3) In an interview published on July 23, 2013, defendant Gibeau responded to a question about Frostbite by stating: “We created two technology paths [Frostbite and Ignite] and invested early and got them to the point where we were able to ship games on them. We weren’t fighting the engines as we were developing. . . . [W]e wanted to de-risk the technology piece as much as possible. That was the key learning. . . . I was not going to repeat that mistake. . . . Frostbite has been the core difference. . . . [I]it makes for efficient and low-risk development.” Id. ¶¶ 76-77. 18 19 20 21 22 (4) During an October 29, 2013 earnings conference call, defendant Wilson responded to a question about the impact of next-generation gaming consoles on EA’s vision for the future by stating: “. . . coming out of the last transition, we were resolute in our desire to 23 24 25 5 26 27 The Court previously held these five purported misstatements, in addition to three others that have been omitted from the Amended Complaint, inactionable as a matter of law. See First Dismissal Order, Dkt. No. 45, at 5-6. 6 28 The transcript of the investor breakfast attributes this statement to defendant Gibeau, rather than Moore. Defs.’ SRJN Ex. C, at 11-12. 5 1 2 3 4 5 6 7 8 ensure we didn’t have that kind of challenge again. So as we approach this transition, I would say we started work earlier than we ever had done before, and we worked more closely with both Microsoft and Sony throughout the entire process, and the end result is, we have a launch slate of games that are the best transition games that I’ve ever seen come out of this Company. . . .” Id. ¶¶ 84-85. (5) During the same October 29, 2013 earnings conference call, defendant Wilson responded to a question about the impact of nextgeneration gaming consoles on upcoming EA games by stating: “[W]hen you look at the success of a console generation, it’s the combination of two things. Great consoles and great software. And as I talked about earlier, I think that our launch software this time is head and shoulders above where we were last time . . . . [W]e are certainly bullish as we come into this platform generation, particularly as well as we have executed.” Id. ¶¶ 84, 86. The Amended Complaint alleges that the May 7, 2013, June 12, 2013, and July 23, 2013 10 statements “perpetuat[ed] the false impression that EA had successfully addressed the issues that 11 United States District Court Northern District of California 9 plagued the launch of games like Medal of Honor, The Simpson and SimCity by de-risking [BF4’s] 12 development platform.” Id. ¶ 82. In fact, according to the Amended Complaint, “neither [BF4] 13 nor its technology platform Frostbite 3 were de-risked, largely or at all, and . . . the game's 14 development was high, not low, risk.” Id. The Amended Complaint further alleges that the 15 October 29, 2013 statements created the false impression that “EA’s close work with Microsoft 16 and Sony had ensured the success of [BF4] and the Company’s solid execution led to launch 17 software for [BF4] and other transition games [that were] ready for launch.” Id. ¶ 89. Plaintiffs 18 allege that defendants were aware of the numerous complaints detailing game-crashing defects, 19 which customers posted to online forums in the hours between BF4’s launch and the defendants’ 20 October 29th statements. Id. Plaintiffs also allege that the common use of Frostbite 3 for all 21 platforms made the defects certain to occur in the launch of the next-generation games. Id. 22 Further, the Amended Complaint alleges that “EA’s assurance that its close work with Microsoft 23 and Sony had led to the best transition games was shown to be false by the revelation that next- 24 generation build requirements took longer than expected to develop,” and that the close work was 25 necessitated by the fact that the next-generation consoles were unfinished during BF4’s 26 development. Id. As to all statements, the Amended Complaint alleges that defendants “tacitly 27 admitted falsity” when they announced that DICE would focus exclusively on fixing BF4, that 28 industry analysts understood EA's announcement as an admission that EA was not surprised by 6 1 BF4's defects, and that defendant Wilson admitted that the game had been unfinished at launch. 2 Id. 3 Defendants allegedly misrepresented facts about BF4 in order to drive BF4 pre-sales, beat 4 Activision’s Call of Duty to market, and launch with the next-generation gaming consoles in time 5 for the holiday season. Id. ¶¶ 6, 67, 92. In a December 4, 2013 Forbes article, the article’s author 6 stated, “I suspect that EA didn’t want to hand victory over to Activision and Call of Duty: Ghosts 7 by delaying the game. . . .” Id. ¶ 105. Further, a November 6, 2013 email from a DICE developer 8 stated that “EA . . . wants us to release 2 weeks before [Activision’s Call of Duty] to avoid 9 competition.” Id. ¶ 92. In addition, defendants allegedly made these statements in order to sell their EA stock at 11 United States District Court Northern District of California 10 artificially inflated prices. Id. ¶ 13-14. The purported misstatements allegedly caused EA’s stock 12 to trade at artificially high levels, reaching a class period high of $27.99 per share during the class 13 period. Id. ¶ 13. After EA launched BF4 on the two next-generation gaming consoles, EA’s stock 14 price dropped to $21.01 per share on December 5, 2013, thus removing the artificial inflation. Id. 15 ¶¶ 20, 107, 135. During the class period, defendants Wilson, Moore, and Gibeau sold 701,959 16 shares of EA stock for a total of $17,059,848. Id. ¶ 119. Individually, these defendants’ class 17 period stock sales represented 74%, 74%, 85%, respectively, of their total individual EA stock 18 sold between January 1, 2008 and December 5, 2013. ACC ¶ 122. 19 20 IV. Procedural Background 21 In late 2013 and early 2014, plaintiffs instituted two actions against defendants: Kelly v. 22 Electronic Arts, Inc., No. 13-05837, and Mastro v. Electronic Arts, Inc., No. 14-00188. See Dkt. 23 No. 16. By order dated January 22, 2014, the Court consolidated these actions. See Dkt. No. 13. 24 On February 25, 2014, the Court designated Ryan Kelly and Louis Mastro as lead plaintiffs and 25 appointed lead class counsel. See Dkt. No. 16. 26 On June 9, 2014, defendants filed a motion to dismiss plaintiffs’ complaint under Federal 27 Rule of Civil Procedure 12(b)(6). Dkt. No. 27. This Court granted defendants’ motion on 28 October 20, 2014, finding that the alleged misstatements were vague statements of corporate 7 1 optimism that were inactionable as a matter of law. Dkt. No. 45. The Court granted plaintiffs 2 leave to amend their complaint to allege actionable misstatements. Id. Plaintiffs filed their 3 Amended Complaint on November 18, 2014. Dkt. No. 49. As stated above, the Amended 4 Complaint alleges no new misstatements, but instead presents additional facts purporting to 5 demonstrate that the alleged misstatements are in fact actionable. The significant additions are the 6 following: The Amended Complaint alleges that the term “de-risk,” which forms the basis of a majority of the defendants’ alleged misstatements, has a commonly understood meaning within the video game industry. Id. ¶ 80. Specifically, the complaint states that the term means “to make something safer by reducing the possibility that something bad will happen and that money will be lost.” Id. ¶ 80 n.10. Plaintiffs point to a number of articles allegedly demonstrating a common understanding of the term within the video game industry. Id. ¶ 80. 7 8 9 10 United States District Court Northern District of California 11 The Amended Complaint provides details of EA’s past game launches. The Simpsons, released in 2012, suffered from technical issues that led EA to halt sales of the game for several months. ACC ¶ 49. The 2013 launch of SimCity saw Amazon.com pull the game from its website over technical issues. Id. ¶ 52. Medal of Honor was another 2013 game launch that was described as a “miss.” Id. ¶ 46. 12 13 14 15 19 The Amended Complaint quotes from defendant Wilson’s interview of June 20, 2014, in which he stated that EA could not get many things done until the last minute because “[EA was] building [BF4] on an unfinished platform with unfinished software . . . .” Id. ¶ 117. Plaintiffs describe this statement as an admission that Frostbite 3 was unfinished as EA developed BF4. Id. ¶ 2. 20 Presently before the Court is defendants’ motion to dismiss the Amended Complaint. 16 17 18 21 LEGAL STANDARDS 22 23 I. Federal Rule of Civil Procedure 12(b)(6) 24 To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a plaintiff 25 must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. 26 Twombly, 550 U.S. 544, 570 (2007). This “facial plausibility” standard requires the plaintiff to 27 allege facts that add up to “more than a sheer possibility that a defendant has acted unlawfully.” 28 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A plaintiff must allege facts sufficient to “raise a 8 1 right to relief above the speculative level.” Twombly, 550 U.S. at 555. 2 In deciding whether a plaintiff has stated a claim upon which relief can be granted, the 3 Court must assume that the plaintiff’s allegations are true and must draw all reasonable inferences 4 in the plaintiff’s favor. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). 5 However, the court is not required to accept as true “allegations that contradict exhibits attached to 6 the Complaint or matters properly subject to judicial notice, or allegations that are merely 7 conclusory, unwarranted deductions of fact, or unreasonable inferences.” Daniels-Hall v. Nat’l 8 Educ. Ass’n, 629 F.3d 992, 998 (9th Cir. 2010). If the court dismisses a complaint, it must then decide whether to grant leave to amend. 10 The Ninth Circuit has “repeatedly held that a district court should grant leave to amend even if no 11 United States District Court Northern District of California 9 request to amend the pleading was made, unless it determines that the pleading could not possibly 12 be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) 13 (citations and internal quotation marks omitted). 14 15 II. The Securities Exchange Act of 1934 16 Section 10(b) of the Securities Exchange Act of 1934 declares it unlawful to “use or 17 employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive 18 device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as 19 necessary. . . .” 15 U.S.C. § 78j(b). SEC Rule 10b-5 implements Section 10(b) by making it 20 unlawful to make any untrue statement of material fact necessary in order to make the statements 21 made not misleading. 17 C.F.R. § 240.10b-5. 22 A plaintiff asserting a claim under Section 10(b) or Rule 10b-5 must adequately allege six 23 elements: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a 24 connection between the misrepresentation or omission and the purchase or sale of a security; (4) 25 reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. 26 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008) (citation 27 omitted); In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1052 (9th Cir. 2014). 28 The Private Securities Litigation Reform Act of 1995 (“PSLRA”) requires that a Section 9 1 10(b) complaint plead with particularity both falsity and scienter. Zucco Partners, LLC v. 2 Digimarc Corp., 552 F.3d 981, 990-91 (9th Cir. 2009) (citation omitted). As to falsity, the 3 complaint must state with particularity each statement alleged to have been misleading, the reason 4 or reasons why the statement is misleading, and all facts on which that belief is formed. 15 U.S.C. 5 § 78u-4(b)(1); In re Daou Sys., 411 F.3d 1006, 1014 (9th Cir. 2005) (citation omitted). As to 6 scienter, the complaint must state with particularity facts giving rise to a strong inference that the 7 defendant made false or misleading statements either intentionally or with deliberate recklessness. 8 15 U.S.C. § 78u-4(b)(2); In re Daou Sys., 411 F.3d at 1015. Section 20(a) of the Securities Exchange Act of 1934 imposes liability on “control 10 persons.” 15 U.S.C. § 78t(a). To establish liability under Section 20(a), a plaintiff must first 11 United States District Court Northern District of California 9 prove a primary violation of Section 10(b) or Rule 10b-5. Lipton v. Pathogenesis Corp., 284 F.3d 12 1027, 1035 n.15 (9th Cir. 2002). 13 DISCUSSION 14 15 Defendants move to dismiss plaintiffs’ Section 10(b) and Rule 10b-5 claim on the basis 16 that the ACC violates the law of the case by alleging the same misstatements that this Court has 17 previously held inactionable as a matter of law. Additionally, defendants renew their argument 18 that plaintiffs have failed to state a fraud claim, and that the ACC fails to plead with particularity 19 both falsity and scienter.7 As to plaintiffs’ Section 20(a) claim, defendants again move to dismiss 20 on the ground that the complaint fails to adequately allege a primary violation under Section 10(b) 21 or Rule 10b-5. 22 Because plaintiffs reallege the same statements that this Court previously held inactionable 23 as a matter of law, the issue before the Court is whether plaintiffs' factual additions to their 24 Amended Complaint demonstrate that the defendants’ statements were sufficiently definite to be 25 actionable, or otherwise pull the statements into the exception to the general rule that vague 26 statements of corporate optimism are inactionable. For the reasons that follow, the Court finds 27 7 28 Here, as in their prior motion to dismiss, defendants do not contest plaintiffs’ allegations regarding certain other elements of a Section 10(b) claim, including loss causation. 10 1 that the additional facts do not justify revision of the Court's prior determination.8 2 3 I. The Meaning of the Term “De-Risk” 4 In its prior dismissal order, this Court held that the term “de-risk” is a non-actionable 5 vague expression of corporate optimism and puffery. See First Dismissal Order, Dkt. No. 45, at 6 12. In their Amended Complaint, plaintiffs provide additional facts purporting to demonstrate that 7 the word “de-risk” has a specific and commonly understood meaning, in this case associated with 8 the reduction of the risk of “deficiencies that caused technical problems with prior game 9 launches.” ACC ¶ 2. The new allegations do not demonstrate such a precise meaning. 10 The definition plaintiffs provide adds no clarity to the term “de-risk.” The Amended United States District Court Northern District of California 11 Complaint points to the Cambridge Dictionaries Online definition of the term: “to make 12 something safer by reducing the possibility that something bad will happen and that money will be 13 lost.” ACC ¶ 80 n.10.9 The Court previously likened this term to the word “improved,” which 14 also signifies making a product better or safer, and is a statement of corporate optimism and a 15 vague assessment of past results. See First Dismissal Order at 12 (citing In re Splash Tech. 16 Holdings, Inc. Sec. Litig., 160 F. Supp. 2d 1059, 1076-77 (N.D. Cal. 2001) (statement that product 17 line “improved” held inactionable as vague assessment of past results)) 18 Further, the articles plaintiffs cite in support of their definition contradict the assertion that 19 the term “de-risk” has a precise meaning with regard to a reduction of the risk of technological 20 defects. See generally Defs.’ SRJN Ex. L (discussing ways to minimize risks to investments in 21 video game production); id. Ex. M (discussing the author’s emphasis on taking “smart risks” by 22 reducing costs and taking a cautious approach to production); id. Ex. N (discussing how a video 23 8 24 25 26 27 28 Defendants argue that the law-of-the-case doctrine precludes reconsideration of the misstatements which the Court has already held inactionable. Defs.’ Mot. to Dismiss at 6-7. Because the Court considers the allegations of the amended complaint as a whole, the Court finds it unnecessary to reach this question. 9 In some instances, plaintiffs use the term to signify a reduction of risks. At other times, however, plaintiffs use the term to signify a complete elimination of risks. Compare Pls.’ Opp. at 2 (stating that the term has a precise meaning of alleviating risks), and id. at 10 (disputing that their allegations are premised on statements promising a problem-free launch), with id. at 14, 15 (stating that defendants’ message was that EA had eliminated risks associated with the transition). 11 1 game production company reduces risks by minimizing costs); id. Ex. O (using the term “de-risk” 2 as distinct from the process of creating games). The articles use the term “de-risk” in relation to 3 concepts such as cost, efficiency, and investments, but none uses the term in relation to 4 technological defects. Defendants’ consistent use of “de-risk,” when viewed in context, also demonstrates the 6 term’s continued vagueness. See ACC ¶¶ 64, 66; Defs.’ SRJN Ex B, at 9, 15 (defendant Gibeau 7 using “de-risk” with reference to previous statements that Frostbite 3 reduces costs and promotes 8 efficiency); ACC ¶ 73, Defs.’ SRJN Ex. C, at 11-12 (defendant Moore using the term “de-risk” in 9 response to an investor's question about the risks of gearing production toward particular 10 consoles); ACC ¶¶ 77-78; Defs.’ SRJN Ex. F, at 3, 5 (defendant Gibeau using “risk” and “de-risk” 11 United States District Court Northern District of California 5 in discussions of early investments in Frostbite 3, reduced costs, and increased efficiency 12 associated with using a common technology engine across platforms). No use of the term came in 13 the context of discussing the game-breaking glitches plaintiffs use to establish falsity, and two 14 uses came after explicit references to EA’s SEC filings which made clear the risk of technological 15 glitches notwithstanding EA’s quality controls. Defs.’ SRJN Ex. B, at 4; id. Ex. C, at 12; id. Ex. 16 Q, at 3; id. Ex. R, at 3. Thus, instead of presenting Frostbite 3 as a panacea for technological 17 glitches, defendants used the term “de-risk” to signify reduced operating costs, increased 18 efficiency, and higher profit margins stemming from the use of a common technology engine 19 across current and next-generation platforms. 20 “[Frostbite 3 and Ignite] provide an enduring common technology that saves cost, fosters 21 efficiency, and provides spectacular physics and graphics for our games.”). See, e.g., Defs.’ SRJN Ex. B, at 9 (Gibeau: 22 Thus, the allegations do not demonstrate that the term “de-risk” has any precise meaning. 23 Moreover, the inference that defendants used the term to promise the elimination of technological 24 risks is contradicted by the documents which plaintiffs incorporate into their complaint by 25 reference and is therefore entitled to no presumption of truth. See Daniels-Hall, 629 F.3d at 998. 26 Given that plaintiffs rely on the materialization of technological defects to establish that the 27 defendants lacked basis for their “de-risking” statements, neither the added context nor the 28 previously alleged facts pull defendants' statements within the actionable exception to corporate 12 1 puffery. See Kaplan, 49 F.3d at 1374 (9th Cir. 1994).10 2 3 II. EA’s Past Game Launch Failures The Court also finds that plaintiffs’ allegations regarding prior game launch failures do not 5 make any of the alleged misstatements actionable. In their Amended Complaint, plaintiffs added 6 several paragraphs detailing the setbacks EA experienced with the past launches of three games: 7 Medal of Honor, The Simpsons, and SimCity. Id. ¶¶ 46-56. Plaintiffs allege that defendants’ 8 statements that they had de-risked the transition technology created the false impression that they 9 had solved the issues that plagued these three games. Id. ¶ 82. Instead, plaintiffs allege, “[BF4’s] 10 launch was plagued by the very defects and development shortfalls that defendants claimed were 11 United States District Court Northern District of California 4 cured by the de-risking that they assured investors would make [BF4’s] launch different than 12 Medal of Honor, The Simpsons and SimCity.” Id. According to plaintiffs, the occurrence of 13 serious defects in BF4 at launch demonstrates that defendants’ statements about the improvement 14 in transition software were false. Pls.’ Opp. at 9; ACC ¶¶ 21, 68, 82. 15 As an initial matter, the Court notes that although the Amended Complaint adds more 16 detail regarding the “disastrous” prior game launches, the prior complaint alleged that “investors 17 were worried about the Company's history of disastrous game launches,” that “[i]nvestors were 18 therefore concerned about EA’s ability to successfully launch Battlefield 4, especially for next- 19 generation consoles,” and that to address those concerns defendants stated that EA “had ‘de- 20 risked’ the technology problems that had caused past botched game launches.” Consol. Compl. 21 ¶¶ 3, 8-11. The Court addressed these allegations in the prior dismissal order, and found that the 22 alleged misstatements, such as defendant Gibeau’s May 7, 2013 statement that EA was in a “much 23 better state” for the next-generation transition and that Frostbite 3 had “largely been de-risked,” 24 and defendant Wilson’s October 29, 2013 statement proclaiming that EA’s launch software “[is] 25 26 27 28 10 This finding would not change even if the Court were to adopt the understanding of “derisk” as “minimizing the risks associated with the technological aspect of game development . . . .” ACC ¶ 80. Indeed, the Court previously held the statements inactionable despite adopting that view, that is, a representation that defendants “improved” upon past development platforms through minimizing associated technological risks. See First Dismissal Order at 12. 13 1 head and shoulders above where we were last time” were non-actionable vague expression of 2 corporate optimism and puffery upon which no reasonable investor would rely. First Dismissal 3 Order at 12, 13. The additional context regarding the prior game launches does not change the 4 Court's analysis. Further, each of defendants’ statements dealt specifically with transition software, and 6 none of the three above-mentioned games is alleged to have been a transition game, or built on 7 transition software. 8 statement in response to request for comparison of current and prior transition technology); id. Ex. 9 C, at 11-12 (defendant making “de-risk” statement in response to question about betting on certain 10 consoles in prior transition); id. Ex. F, at 3 (defendent Gibeau making “de-risk” statement in 11 United States District Court Northern District of California 5 response to question about prior transition platform); id. Ex. H, at 9 (defendant Moore stating that 12 the next-generation games were the best transition games he had seen come from EA); id. at 15 13 (defendant Wilson stating that the next-generation software was head-and-shoulders above where 14 it was before the last transition). See Defs.’ SRJN Ex. B, at 14-15 (defendant Gibeau making “de-risk” 15 16 III. Wilson’s June 20, 2014 Interview 17 The final significant factual additions to the plaintiffs’ Amended Complaint are excerpts 18 from a June 20, 2014 interview with defendant Wilson. In that interview, Wilson discussed BF4’s 19 troubled launch, stating, “when you are building a game on an unfinished platform with unfinished 20 software, there are some things that can't get done until the very last minute because the platform 21 wasn't ready to get done.” ACC ¶ 117. 22 The parties dispute the meaning of Wilson’s statement. Plaintiffs describe the statement as 23 an admission that BF4 was built on an unfinished Frostbite 3 engine, which prevented EA from 24 adequately testing BF4 prior to launch. ACC ¶¶ 2, 89. According to plaintiffs, this admission 25 demonstrates that defendants’ optimistic statements that the platform had been “de-risked” and 26 that the transition software was “head and shoulders” above prior transitions were unwarranted 27 and false when made. Id. Defendants, on the other hand, contend that Wilson’s statement referred 28 only to next-generation platforms, not Frostbite 3. Plaintiffs counter that their reading of Wilson’s 14 1 statement is reasonable, and that the Court must therefore draw the inference in favor of plaintiffs, 2 that Wilson admitted that Frostbite 3 had been unfinished during BF4’s development. While the Court must ordinarily take the plaintiffs’ allegations as true, the Court agrees 4 with the defendants that the context of the statement contradicts plaintiffs’ assertions; accordingly, 5 the Court need not adopt the plaintiffs’ view. See Daniels-Hall, 629 F.3d at 998. (“[A court is 6 not] required to accept as true allegations that contradict exhibits . . . .”). The context of Wilson's 7 statements was in a larger discussion of how the challenges of building a game for next-generation 8 consoles, rather than insufficient testing, led to the difficulties BF4 experienced. Defs.’ SRJN Ex. 9 P, at 3 (“Wilson denied [that EA rushed to launch BF4], however, insisting that DICE had plenty 10 of time to work on the game, before pointing to the challenge of creating a next-gen console 11 United States District Court Northern District of California 3 launch title.”). Even without this context, Wilson’s own statement about building BF4 on an 12 unfinished platform demonstrates that he was referring to next-generation consoles, not Frostbite 13 3: “Not to abdicate responsibility . . . but when you are building a game on an unfinished platform 14 with unfinished software, there are some things that can’t get done until the very last minute 15 because the platform wasn't ready to get done.” 16 responsibility would be meaningless if Wilson were admitting that an unfinished Frostbite 3 17 engine had been responsible for BF4’s problems. Further, Frostbite 3 was not brought up in the 18 interview at all. See generally id. Thus, the Court does not adopt the view that Wilson's June 20, 19 2014 statement constituted an admission that Frostbite 3 was unfinished during the development 20 of BF4. See Daniels-Hall, 629 F.3d at 998.11 Because this allegation does not demonstrate that 21 defendants lacked basis for their optimistic statements at the time those statements were made, the 22 Amended Complaint does not demonstrate that defendants’ statements of corporate puffery are Id. (emphasis added). The disclaimer of 23 11 24 25 26 27 28 Plaintiffs contend that, even if Wilson's comment referred exclusively to nextgeneration consoles, having spoken about EA's close work with Microsoft and Sony triggered a duty for defendants to disclose that the consoles were unfinished. Pls.’ Opp., at 11. The Amended Complaint alleges no specific facts demonstrating that EA at any time concealed or misrepresented the status of next-generation console development. To the contrary, the only allegation plaintiffs have made on the point demonstrates that EA was in fact open about the challenges presented by continued changes to next-generation consoles. See Consol. Compl., ¶¶ 78-80. Plaintiffs have removed these allegations from their Amended Complaint and now imply that such statements were never made. See Pls.’ Opp. at 11. 15 1 actionable. See Kaplan, 49 F.3d 1363. However, even if the Court drew the inference that defendant Wilson had in fact admitted 3 that Frostbite 3 had been unfinished, the result would be the same. A later statement “may suggest 4 that a defendant had a contemporaneous knowledge of the falsity of his statement, if the later 5 statement directly contradicts or is inconsistent with the earlier statement.” In re Read-Rite Corp. 6 Sec. Litig., 335 F.3d 943, 946 (9th Cir. 2003), abrogated on other grounds as recognized in South 7 Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 782-84 (9th Cir. 2008). 8 “admission” does not directly contradict any of the alleged misstatements. 9 constituted a favorable comparison of EA’s current position in relation to the company’s position 10 ahead of the prior transition. ACC ¶¶ 64, 66, 73, 76-77, 84-86. The Amended Complaint lacks 11 United States District Court Northern District of California 2 any specific factual allegations related to prior transition games or technology, except for vague 12 references to prior “transition failures.” See, e.g., ACC ¶ 22. Thus, an admission that Frostbite 3 13 had not been finished until the last minute does not directly contradict statements that Frostbite 3 14 represented an improvement over EA’s last transition software. See Read-Rite, 335 F.3d at 946; 15 see also Splash Tech. Holdings, 160 F. Supp. 2d at 1077 (holding vague assessments of past 16 results inactionable).12 However, Wilson’s Each statement 17 In sum, taking all of non-conclusory factual allegations in the Amended Complaint as true, 18 and drawing all reasonable and uncontradicted inferences in favor of the plaintiffs, the Court 19 continues to find that each of the defendants’ statements represents an inactionable vague 20 statement of corporate puffery. See In re Apple Computer, Inc. Sec. Litig., 127 F. App’x 296, 304 21 (9th Cir. 2005) (holding “this is going to be the best Power Mac ever” inactionable as plausibly 22 held opinion and statement of corporate optimism); In re Cisco Sys. Inc. Sec. Litig., No. C 11- 23 1568 SBA, 2013 WL 1402788, at *13 (N.D. Cal Mar. 29, 2013) (holding statement that company 24 was “extremely well positioned” inactionable); Splash Tech. Holdings, 160 F. Supp. 2d at 1077 25 12 26 27 28 Nor would plaintiffs’ reading of Wilson’s statement contradict Gibeau’s July 23, 2013 statement that EA developed Frostbite 3 to the point of being able to ship games on it. See ACC ¶ 77. Gibeau’s statement is exceedingly vague and does not refer to BF4 or any other particular game. No facts in the Amended Complaint support the inference that EA could not ship any games on Frostbite 3—even if the engine had been unfinished at the time Gibeau made this statement. 16 1 (holding statement that product line “improved” inactionable); Stickrath v. Globalstar, 527 F. 2 Supp. 2d 992, 998-99 (N.D. Cal. 2007) (statements touting “high quality” and “reliable” service 3 were non-actionable puffery that would not be likely to mislead a reasonable consumer). 4 5 IV. Falsity and Scienter 6 Defendants again move to dismiss this action on the additional ground that the Amended 7 Complaint fails to plead with particularity that defendants made false or misleading statements 8 about BF4 intentionally or with deliberate recklessness. In addition to the reasons stated above, 9 the Court agrees that the Amended Complaint fails to adequately allege falsity and scienter for the 10 United States District Court Northern District of California 11 reasons articulated by defendants. Accordingly, the Court DISMISSES plaintiffs’ Section 10(b) claims with prejudice.13 12 CONCLUSION 13 14 15 For the foregoing reasons, the Court GRANTS defendants’ motion to dismiss the Amended Consolidated Complaint with prejudice. 16 IT IS SO ORDERED. 17 18 Dated: April 30, 2015 19 20 ________________________ SUSAN ILLSTON United States District Judge 21 22 23 24 25 26 27 28 13 Defendants move to dismiss plaintiffs' claims for control person liability under Section 20(a) on the ground that the Amended Complaint fails to allege a primary violation under Section 10(b) or Rule 10b-4. To establish liability under Section 20(a), a plaintiff must first prove a violation of Section 10(b) or Rules 10b-5. Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035 n.15 (9th Cir. 2002). As discussed above, plaintiffs have not adequately alleged a violation of Section 10(b) or Rule 10b-5. Accordingly, the Court GRANTS defendants’ motion to dismiss the Section 20(a) claim with prejudice. 17

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