In re Netflix, Inc. Securities Litigation

Background

Fiyyaz Pirani, acting as trustee of Imperium Irrevocable Trust, sued Netflix, Inc., Reed Hastings, Ted Sarandos, Spencer Neumann, and Gregory Peters individually and on behalf of people and entities that purchased or otherwise acquired Netflix common stock during the alleged class period of January 19, 2021, through April 19, 2022. The complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5, and Section 20(a) of that Act.

Pirani alleged that Netflix and its officers made false or misleading statements and omissions about Netflix’s market penetration, business metrics, long-term growth, the effects of the COVID-19 pandemic, and account sharing. The complaint alleged that between approximately 91.7 million and 100 million households globally—and between approximately 29.7 million and 30.3 million households in the United States and Canada region—used Netflix through account sharing. It further alleged that account sharing caused Netflix’s markets to be more saturated and hindered its ability to acquire paying members. Netflix disclosed in April 2022 that it estimated more than 100 million additional households were sharing accounts, after which its stock price fell by more than 35 percent, according to the complaint.

Documents Considered

The court held that many of the documents defendants identified—including shareholder letters, earnings-call transcripts, and certain securities filings—were incorporated into the complaint by reference because Pirani repeatedly relied on them and did not dispute their authenticity. The court disregarded information about Netflix stock repurchases in a 2021 Form 10-K because the complaint did not allege insider trading or a financial motive and the information would have supplied an alternative factual narrative. The court denied as moot defendants’ request concerning two quarterly filings that neither the court nor defendants relied on. The court took judicial notice of three SEC-filed documents for the limited purpose of considering what information was available to the market.

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

To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must allege a material misrepresentation or omission, scienter (the required state of mind), a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Defendants argued that Pirani had not adequately alleged a false or misleading statement or scienter. Because the court found the falsity issue dispositive, it decided the motion on that ground.

The court rejected defendants’ argument that the complaint failed to identify the challenged statements, holding that the complaint’s explanations following its quoted material adequately identified the statements and the reasons they were allegedly misleading. The court therefore denied the motion to dismiss on that ground.

The court nevertheless held that Pirani failed to plead with particularity that the statements were false or misleading when made. The allegations showed that Netflix took some steps to monitor or restrict account sharing, but they did not adequately establish the level of monitoring at particular times or show that defendants knew during the class period that account sharing was creating the alleged growth problems. The allegations from former employees did not specify with sufficient detail when discussions occurred, what was discussed, or who made particular statements. The court also noted Netflix’s explanation that the impact of account sharing had been obscured by pandemic-related growth.

The court granted defendants’ motion to dismiss the Section 10(b) and Rule 10b-5 claim for failure to plead falsity. It did not decide defendants’ remaining arguments concerning falsity because amendment could affect the analysis.

Section 20(a) Claim

Section 20(a) imposes potential liability on people who control a primary violation of federal securities law. Because the Section 10(b) claim was dismissed, the court dismissed Pirani’s Section 20(a) claim as well.

Disposition

Judge Tigar granted defendants’ motion to dismiss without prejudice. Leave to amend was granted solely to cure the deficiencies identified in the order, and any amended complaint was required to be filed within 28 days.