In re Dropbox Securities Litigation

Background

Lead Plaintiff Ognjen Kuraica represented a proposed class of investors who purchased or otherwise acquired Dropbox common stock pursuant or traceable to Dropbox’s initial public offering. The plaintiffs sued Dropbox, certain Dropbox officers and directors, certain Sequoia entities, and the underwriters. They asserted claims under Section 11 of the Securities Act, which addresses material misstatements or omissions in a registration statement, and Section 15, which imposes potential controlling-person liability when there is a primary securities-law violation and control over the primary violator.

The plaintiffs alleged that Dropbox’s IPO registration statement failed to disclose that its rate of converting free registered users into paying users was slowing or declining. They argued that three groups of statements were misleading: the disclosure of the number of paying users, statements about registered users who were more likely to pay, and statements about the performance of user cohorts. They also alleged that Dropbox violated Item 303 of Securities and Exchange Commission Regulation S-K by failing to disclose a known material negative trend.

Motions and Legal Standard

Dropbox and the registration-statement defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally sufficient claim. The underwriter defendants joined that motion, and the Sequoia defendants joined it and filed a separate motion. On a motion to dismiss, the court generally accepts well-pleaded factual allegations as true but need not accept conclusory allegations or unreasonable inferences.

The court took judicial notice of Dropbox’s registration statement, Securities and Exchange Commission filings, stock-price information, and a financial analyst report for the limited purpose of considering what those documents said—not whether the facts asserted in them were true. It also considered the registration statement and analyst report under the incorporation-by-reference doctrine because the complaint referred to them and their authenticity was not disputed.

Section 11 Claims

The court held that the complaint lacked a single factual allegation about Dropbox’s user-conversion rate. The plaintiffs’ theory depended on an alleged decline in that rate, but the court found that the plaintiffs offered only speculation. The court stated that the plaintiffs appeared to confuse the user-conversion rate with disclosed rates of revenue growth and paying-user growth.

The court declined to infer a declining conversion rate from Dropbox’s disclosed revenue and paying-user figures because Dropbox’s revenue depended on three factors: obtaining new users, converting free users into paying users, and upgrading or expanding existing paid subscriptions. The disclosed decline in revenue growth could have resulted from the other factors, or from some combination of all three. The court also found that Dropbox’s disclosures of revenue, paying users, and average revenue per paying user did not create a materially misleading impression by omitting the separate conversion-rate metric.

The court further concluded that the complaint did not show that the challenged historical statements were false or misleading. Regarding Dropbox’s statement about registered users with characteristics making them more likely to pay, the court found that the plaintiffs did not allege that Dropbox disbelieved the statement, that supporting facts were untrue, or that omitted information about the basis for the opinion made it misleading.

The court therefore granted the motion to dismiss the Section 11 claims.

Item 303 Claims

The court also granted the motion to dismiss the claims based on Item 303. It found that Dropbox had disclosed declining revenue-growth rates and paying-user-growth rates, and that investors could calculate the revenue-growth trend from the disclosed figures. The plaintiffs did not provide factual allegations about the alleged decline in user conversion, how that decline materially affected revenue, or why user conversion rather than the other two revenue drivers caused the decline.

The court also found that the plaintiffs did not adequately allege that defendants knew of a material trend that was not already captured by Dropbox’s disclosures.

Section 15 Claims

Because the plaintiffs failed to establish a primary federal securities-law violation, the court granted the motions to dismiss the Section 15 controlling-person claims.

Statute of Limitations

The court granted defendants’ motions to dismiss on the alternative ground that the claims were time-barred. Securities Act claims generally must be brought within one year after the plaintiff discovered, or reasonably should have discovered, the alleged untrue statement or omission.

The court concluded that the information available from March through October 2018 was abundant and largely consistent with Dropbox’s registration statement, which disclosed slowing revenue and paying-user growth. The court found that the plaintiffs had not pleaded facts supporting delayed discovery. It therefore held that the evidence showed the plaintiffs discovered, or should have discovered, the alleged violations at least one year before filing their initial complaint on October 4, 2019.

Disposition and Leave to Amend

The defendants requested dismissal with prejudice based on the statute of limitations. The court did not adopt that request. It concluded that amendment was not yet futile and stated that the plaintiffs would need, at a minimum, to identify a factual circumstance plausibly distinguishing their awareness of the claims in November 2018 from the information disclosed in August 2018 or earlier.

The court granted defendants’ motions to dismiss with leave to amend as to all claims and ordered the plaintiffs to file an amended complaint by January 6, 2020, as stated in the opinion.