Kang v. PayPal Holdings, Inc

Background

Huei-Ting Kang and Arthur Flores sued PayPal Holdings, Inc. and four individual defendants—Daniel Schulman, John Rainey, Doug Bland, and Joseph Gallo—for alleged securities fraud. They sought to represent purchasers of PayPal common stock during the period from April 27, 2016, through July 28, 2021. The complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 for misleading statements and scheme liability, plus a Section 20(a) claim against Schulman and Rainey based on alleged control-person liability.

The alleged misstatements concerned three subjects: PayPal’s compliance with a 2015 Consumer Financial Protection Bureau consent order governing PayPal Credit; PayPal’s compliance with Regulation II, which limits many debit-card interchange fees; and PayPal’s response to concerns raised about PayPal Credit promotions by for-profit educational institutions. The plaintiffs alleged that later reports, public comments, regulatory inquiries, and investigation announcements revealed the truth and caused PayPal’s stock price to fall.

Court’s Analysis

The court applied Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not allege enough facts to support a legally recognized claim. For the Rule 10b-5 statement claim, the court held that the plaintiffs did not plausibly plead an actionable false or misleading statement. The court reasoned that a later regulatory inquiry does not by itself make earlier compliance statements misleading, especially when PayPal had not been found to be violating the relevant requirements.

The court also found that the complaint did not plausibly allege that PayPal violated the consent order. The allegation that some customers did not recall consenting to enrollment was too bare, the alleged understanding between PayPal and merchants did not create additional legal duties, and the plaintiffs did not allege that PayPal failed to honor a merchant’s promotional offer. Regarding Regulation II, the court said the complaint did not establish that PayPal’s arrangement with Bancorp was an actual regulatory violation. The court also characterized many of PayPal’s and the individual defendants’ general compliance statements as vague corporate “puffery,” meaning statements too general to be treated as actionable factual representations.

Independently, the court held that the plaintiffs did not plead a strong inference of scienter, meaning an intent to deceive or conscious disregard of the risk of misleading investors. The complaint did not plausibly allege that any individual defendant knew about an actual regulatory violation. The alleged confidential-witness information, the importance of the products, and the defendants’ stock sales did not establish the required mental state. The court stated that the Rule 10b-5(b) claim therefore failed because the plaintiffs plausibly alleged neither an actionable misstatement nor a strong inference of scienter.

The court dismissed the Rule 10b-5(a) and (c) scheme-liability claim because the alleged scheme consisted of the same statements and regulatory conduct that the court had found insufficient, and the plaintiffs likewise failed to allege a strong inference of scienter. The Section 20(a) claim against Schulman and Rainey also failed because it depended on an underlying securities-law violation that the plaintiffs had not adequately pleaded.

Disposition

Judge Charles R. Breyer granted PayPal’s motion to dismiss all claims. Because this was the court’s first substantive order on a complaint in the case, it granted leave to amend. The plaintiffs were permitted to file an amended complaint within 21 days of the order. The opinion does not state that the dismissal was with or without prejudice.