In re FASTLY, INC. SECURITIES LITIGATION

Background

This proposed class action concerned allegations of securities fraud involving Fastly, Inc., an edge cloud platform company. Joshua Bixby was Fastly’s chief executive officer, and Adriel Lares was its chief financial officer during the proposed class period. Andrew Zenoff was the court-appointed lead plaintiff.

The complaint covered people who acquired Fastly stock between May 6 and October 14, 2020. It asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 against all defendants. It also asserted a Section 20(a) control-person claim against Bixby and Lares.

The claims focused on Fastly’s relationship with TikTok. Fastly disclosed on August 5, 2020, that TikTok was its largest customer during the second quarter of 2020, accounting for 13% of quarterly revenue and 12% of revenue for the first half of the year. Fastly warned that a U.S. ban on TikTok could create uncertainty about its ability to serve the customer and could negatively affect its business. On October 14, 2020, Fastly reduced its third-quarter revenue expectations and withdrew its 2020 revenue guidance, citing lower-than-expected TikTok usage and lower usage by several other customers.

Judicial Notice and Incorporated Documents

The court granted defendants’ requests concerning several documents. It took notice of two public articles for the context and timing of U.S. government statements about trade with China, not necessarily for the truth of their contents. It also allowed defendants to rely on documents referenced in and central to the complaint, including Fastly’s Securities and Exchange Commission filings, earnings-call transcripts, investor presentations, and certain published articles. The court took judicial notice of additional documents, including a government report, a later Fastly filing, and stock-sale records for Bixby and Lares.

Legal Standards

The court applied Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. At this stage, factual allegations are generally accepted as true, but legal conclusions without supporting facts are not. The complaint must include enough facts to make liability plausible.

Because the claims alleged fraud, the complaint also had to satisfy heightened pleading requirements under Rule 9(b) and the Private Securities Litigation Reform Act. The plaintiff had to identify each allegedly misleading statement, explain why it was misleading, and plead particularized facts supporting a strong inference that defendants acted with scienter, meaning an intent to deceive or deliberate recklessness.

Section 10(b) and Rule 10b-5 Claims

The court explained that a securities-fraud claim requires particularized allegations of a material misrepresentation or omission, scienter, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Defendants challenged only the allegations of a material misrepresentation or omission and scienter.

May and June Statements

The plaintiff argued that defendants’ May and June 2020 statements about the strength and stability of Fastly’s enterprise customers, stronger demand, and customer usage expansion were misleading because they did not disclose TikTok as a customer or TikTok’s potential difficulty with U.S. government action.

The court held that the omission of TikTok was not actionable because defendants never represented that TikTok was not a Fastly customer. The court also found that Fastly had already disclosed the relevant general risk: the U.S. government could restrict business with Chinese companies, putting a substantial portion of Fastly’s revenue at risk. The court found no specific facts showing that TikTok would be singled out or that defendants knew otherwise when they made the statements. The plaintiff therefore failed to plead falsity for the May and June statements.

August Statements

The plaintiff argued that defendants’ August statements were misleading because they said Fastly was assuming TikTok usage would remain “status quo” and believed it could replace most lost TikTok traffic if the United States banned the application. According to the plaintiff, TikTok had already begun shifting traffic away from Fastly, other customers had reduced usage, and Fastly had limited ability to replace TikTok’s traffic.

The court found that the “status quo” statement was reasonably understood in context as a truthful statement that business with TikTok had not yet been cut off. The plaintiff did not identify specific facts showing what defendants knew, or when they knew it, about TikTok’s traffic changes. The court also found that the plaintiff did not plead particular facts showing that defendants did not genuinely believe they could replace the lost business. The allegations were characterized as unsupported hindsight speculation rather than particularized allegations of a misleading omission.

Forward-Looking Statements and Safe Harbor

The court held that several challenged statements about revenue guidance, future customer expansion, TikTok’s expected usage, and Fastly’s ability to replace traffic were forward-looking statements. Under the Private Securities Litigation Reform Act’s safe harbor, a forward-looking statement generally is not actionable when accompanied by meaningful cautionary language. The court found that Fastly’s warnings specifically addressed the risks alleged by the plaintiff, including unpredictable customer usage and possible government restrictions affecting customers connected to China.

The court also concluded that the plaintiff failed to allege that defendants had actual knowledge that the forward-looking statements were false. General allegations about TikTok’s risks and media reports did not establish that defendants knew TikTok would be banned or knew how any ban would affect Fastly.

Historical Information and Corporate Optimism

The court treated statements reporting historical revenue, customer counts, customer spending, and related historical performance as non-actionable descriptions of past results. It also found that statements such as customers being in “good shape” or Fastly seeing “stronger demand” were vague expressions of corporate optimism. The plaintiff did not adequately allege that defendants knew TikTok was not in the condition described when they made those statements.

Scienter

The court separately considered whether the complaint supported a strong inference that defendants intended to deceive investors or acted deliberately recklessly. It found that the complaint did not allege with sufficient detail that Bixby or Lares knew the challenged statements were false.

The court rejected reliance on the core-operations doctrine, which can sometimes support an inference that senior executives knew facts central to a company’s business. The plaintiff did not allege specific admissions, detailed executive involvement in the company’s operations, witness accounts, or other facts showing what Bixby or Lares knew and when they knew it.

The court also found that the alleged insider stock sales did not support scienter. Although Bixby and Lares sold more shares during the proposed class period than during the preceding 161 days, the court found the sales were more, but not dramatically more, than their prior trading. The court also noted that the sales were made to satisfy tax obligations or under predetermined trading plans, which reduced the inference that the executives controlled the timing to benefit from undisclosed information.

Finally, the court rejected the alleged motive to maintain Fastly’s stock price for a stock offering or an acquisition. It treated those motives as routine corporate objectives that, without more, did not support scienter. Considering the allegations as a whole, the court found that an honest mistake was a more compelling explanation than intentional or deliberately reckless deception.

Section 20(a) Claim and Disposition

The court dismissed the Section 20(a) claim because the plaintiff had not adequately pleaded a primary violation of federal securities law. The court granted defendants’ request for judicial notice as described in the order and granted defendants’ motion to dismiss the amended complaint with leave to amend. The plaintiff had 28 days from the date of the order to file a second amended complaint. The order prohibited adding new claims or parties without court permission or the agreement of all parties and required a redline showing changes from the existing complaint.