Jedrzejczyk v. Skillz Inc.

Background

This proposed securities class action involved Skillz, Inc., a mobile gaming technology company, its officers and directors, and underwriters for Skillz’s March 2021 public offering. Skillz operates a platform that lets users enter paid or free contests through games developed by third parties. The company became public through a merger in December 2020 and conducted a secondary underwritten public offering in March 2021.

The plaintiffs sought to represent people who purchased or otherwise acquired Skillz common stock between December 16, 2020, and May 4, 2021, as well as people who purchased Skillz common stock in the March 2021 offering. Their consolidated complaint alleged five counts: claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934; a control-person claim under Section 20(a) of that Act; claims under Sections 11 and 12(a)(2) of the Securities Act of 1933; and a derivative control-person claim under Section 15 of that Act.

The alleged misleading statements and omissions concerned declining downloads in top games, Skillz’s planned expansion into India, its ability to support synchronous gameplay, user engagement and growth, revenue metrics, disclosure of the main driver of revenue, and the accounting treatment of special-purpose acquisition company warrants.

Motions and Legal Standards

Skillz and the individual defendants moved to dismiss all claims. The underwriter defendants joined parts of that motion and separately moved to dismiss the Securities Act claims against them. The court evaluated the complaint under Rule 12(b)(6), which tests whether a complaint alleges enough facts to state a legally sufficient claim. Securities-fraud claims also had to meet the heightened pleading requirements of the Private Securities Litigation Reform Act and, for claims grounded in fraud, Federal Rule of Civil Procedure 9(b).

Exchange Act Claims

The court held that the complaint did not adequately plead falsity or scienter for the Section 10(b) and Rule 10b-5 claims. Scienter means the required state of mind, such as an intent to deceive or deliberate recklessness.

The court found that the allegations about declining downloads did not show that Skillz’s statements about continued growth were inconsistent with the alleged decline in download rates. Statements about launching in India were forward-looking statements protected by the statutory safe harbor because they described the company’s objective without adequately explaining what it meant to be “on track.” Statements describing Skillz as having a “stickier” or “more engaging” user experience and a “vibrant and growing ecosystem” were non-actionable corporate optimism, or puffery.

The allegations about synchronous gameplay came closer to showing falsity, but the court found that Skillz’s statements concerned what its platform enabled developers to create, not whether particular games with synchronous gameplay were already available. The allegations about revenue-per-user metrics also did not show falsity because the plaintiffs did not adequately establish that Skillz was required to disclose those particular metrics or that the omissions amounted to false statements.

The court separately concluded that scienter was not adequately pleaded, even assuming the synchronous-gameplay statements were misleading. The statements could reasonably be understood as describing a platform feature rather than claiming that fully tested games were already using it. The Section 20(a) claim also failed because it depended on an underlying Exchange Act violation. The motion to dismiss was therefore granted as to the Section 10(b) and Section 20(a) claims.

Securities Act Claims

The court first addressed statutory standing, meaning whether the plaintiff fell within the group authorized by the statute to bring the claim. The complaint identified Kenny Tinkelman as the named plaintiff bringing the Securities Act claims. The court held that Tinkelman did not adequately allege that he purchased shares in the March 2021 offering or that his shares could be traced to that offering. Buying shares on the offering date at the offering price was not enough because the shares could have come from the pool issued in an earlier offering.

The court also held that the Section 12(a)(2) claim failed for lack of statutory standing. That provision applies to public offerings, and the plaintiffs did not allege that Tinkelman purchased directly in the secondary offering; instead, they alleged that his shares were traceable to it.

The court further ruled that, even if the plaintiffs had standing, the complaint did not adequately allege untrue statements or material omissions. The allegations concerning synchronous gameplay and user engagement failed for the reasons given in the Exchange Act analysis. The court found that the prior classification of warrants as equity appeared, as pleaded, to be a good-faith accounting decision and therefore was not actionable. The court also found no material misstatement or omission concerning the classification of “Bonus Cash,” because the financial statements accounted for it and included an explanation in their notes.

Because the plaintiffs did not adequately allege a primary violation under the Securities Act, their Section 15 derivative claim also failed.

Disposition

On July 5, 2022, Judge Richard Seeborg granted in full both the Skillz defendants’ motion to dismiss and the underwriter defendants’ motion to dismiss. The plaintiffs were granted leave to amend, and any amended complaint had to be filed within 30 days of the order.