Ninth Circuit Holds Disclosure of FTC Consumer Complaints Insufficient to Establish Loss Causation

Skadden, Arps, Slate, Meagher & Flom LLP

Curry v. Yelp, Inc., No. 16-15104 (9th Cir. Nov. 21, 2017)

The Ninth Circuit affirmed the dismissal of a putative securities fraud class action against Yelp, Inc. for failure to adequately allege loss causation and scienter.

Yelp, Inc. hosts a website that provides reviews of businesses. In response to a Freedom of Information Act request, the Federal Trade Commission (FTC) disclosed more than 2,000 complaints from businesses claiming that Yelp had manipulated reviews of their services. The plaintiffs alleged that this disclosure revealed that Yelp’s prior statements about the independence and authenticity of its reviews were false, and that Yelp’s stock dropped as a result.

The district court dismissed the complaint, and the Ninth Circuit affirmed. The court explained that the announcement of an investigation is insufficient to establish loss causation under Ninth Circuit law. Given that standard, the lesser revelation of mere consumer complaints — which were not followed by an investigation — certainly cannot meet the heightened pleading standards of the PSLRA and Federal Rule of Civil Procedure 9(b). In short, the court concluded, the plaintiffs cannot simply assert that “where there is smoke, there must be fire.”

As an additional basis for dismissal, the court also held that the plaintiffs failed to adequately plead scienter. In rejecting the plaintiffs’ attempt to invoke the core operations theory, the court reasoned that management’s general awareness of the daily business did not satisfy the pleading standard. The court noted that 2,000 complaints represented a small fraction of Yelp’s business — just one in 26,500 reviews — and, therefore, the FTC complaints were not so central to the company’s operations as to support a strong inference of scienter.

The court also held that the plaintiffs’ allegations of stock sales were insufficient to plead scienter. In particular, the plaintiffs failed to allege specifics of the individual defendants’ prior trading history, despite the district court’s directives to do so. Absent such allegations, the plaintiffs could not allege that the sales were dramatically different from prior trading practices.

This summary can be found in the March 2018 issue of Inside the Courts.