Jedrzejczyk v. Skillz Inc.

Background

Thomas Jedrzejczyk and three other Skillz shareholders filed a proposed securities class action under the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5, and the Securities Act of 1933. The operative Second Amended Consolidated Complaint pursued only Exchange Act and Rule 10b-5 claims against Skillz and four current or former corporate officers. The plaintiffs alleged that defendants made false or misleading statements or failed to disclose material facts between December 16, 2020, and May 4, 2021.

The plaintiffs’ allegations fell into four categories: declining download rates for Skillz’s most popular games; user-engagement and revenue measures, including average revenue per paying user and monthly average users; statements about the availability of synchronous games; and statements about user engagement that allegedly failed to disclose the role of aggressive, uneconomic spending on paid user incentives called “Bonus Cash.” Defendants moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not adequately state a legal claim.

Court’s Analysis

The court considered whether the plaintiffs adequately pleaded falsity, scienter, and loss causation. Scienter means the required wrongful state of mind, such as an intent to deceive or deliberate recklessness. Loss causation means a causal connection between the alleged misstatement and the investors’ losses.

For the download-rate allegations, the court held that statements describing the games as continuing to grow were not necessarily inconsistent with a later decline in the rate of growth. The court also found it unclear whether some statements referred to download growth or revenue growth. It concluded that the plaintiffs had not adequately pleaded falsity, scienter, or loss causation. The court noted that the stock price dipped and then rebounded after the short-seller report that plaintiffs identified as a corrective disclosure.

For the user and revenue metrics, the court held that the defendants were not required to disclose every metric relevant to the business. The complaint did not adequately explain why defendants’ failure to separately disclose average revenue per paying user made their statements about monthly average users false or misleading. The court also distinguished a case involving user metrics that were inconsistent with one another, finding that the metrics here were related but not dependent on each other.

For synchronous gameplay, the court interpreted the challenged statements as describing what the Skillz platform enabled, not representing that Skillz itself produced or made available particular synchronous games. The court also found that the plaintiffs’ loss-causation allegations were weakened by the stock-price rebound after the short-seller report they identified as the corrective disclosure.

For user engagement and Bonus Cash, the court held that statements describing a “stickier, more engaging, and continuously improving” user experience and a “vibrant and growing ecosystem” were non-actionable puffery—general promotional language that ordinarily cannot support a securities-fraud claim. The complaint also did not adequately allege that user engagement was performing poorly or that the statements directly contradicted the alleged role of cash incentives. The court again noted the difficulty of pleading loss causation based on the short-seller report and stock-price rebound.

Because the plaintiffs failed to adequately plead their Section 10(b) and Rule 10b-5 claims for all four categories, the court held that the related Section 20(a) claim also failed. Section 20(a) creates derivative liability for controlling persons and requires an underlying Section 10(b) violation.

Disposition

The court granted defendants’ motion to dismiss without leave to amend. The court stated that a separate judgment would enter. The opinion does not state that the court certified a class.

Classification note

This is classified as a procedural order because the court disposed of the case through a Rule 12(b)(6) motion to dismiss, even though it analyzed whether the allegations satisfied the securities-fraud pleading requirements.