In re Unity Software Inc. Securities Litigation

Background

Lead Plaintiffs Oklahoma Firefighters Pension and Retirement System and Indiana Public Retirement System brought a federal securities class action against Unity Software Inc.; Unity officers and directors John S. Riccitiello, Luis Felipe Visoso, and Ingrid Lestiyo; Silver Lake Group, LLC; and SC US SSF 2013 (TTGP), LLC and Sequoia Capital Operations, LLC. The plaintiffs alleged violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

The alleged misstatements concerned Unity’s Audience Pinpointer advertising tool and Unity’s ability to serve advertising customers after Apple changed privacy settings affecting user tracking. The plaintiffs alleged that Unity and the other defendants failed to disclose that Audience Pinpointer was losing customers and revenue. The alleged class period ran from May 11, 2021, through May 10, 2022.

Requests to Consider Documents

The defendants asked the court to consider documents under incorporation by reference and judicial notice. Incorporation by reference allows a court deciding a dismissal motion to consider documents on which a complaint necessarily relies. Judicial notice allows consideration of certain facts that are not reasonably disputable, including some public records.

The court treated Exhibits 1–9 and 12–14 as incorporated by reference because the amended complaint necessarily relied on statements in those documents. The court also took judicial notice of the identified Securities and Exchange Commission filings as public documents whose accuracy could not reasonably be questioned. But the court did not use those materials to resolve factual disputes or accept the truth of disputed statements at the dismissal stage.

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

To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must allege a material misrepresentation or omission, the required state of mind, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Securities-fraud claims also must satisfy heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. In particular, the complaint must identify each allegedly misleading statement and explain why it was misleading, with specific facts supporting the required state of mind.

The court granted the motion to dismiss the Section 10(b) and Rule 10b-5 claims. It held that the plaintiffs had not pleaded with the required particularity facts showing that Audience Pinpointer had serious known technical flaws during the class period that made the challenged statements false when made.

The court considered the five confidential witnesses’ allegations. It found that most of the witnesses’ observations concerned events before the class period. The court found that the allegations concerning the class period—such as vague complaints from an unspecified number of customers at unspecified times—did not establish when and how Audience Pinpointer’s alleged problems made particular statements false. The court also rejected the argument that pre-class-period problems, without more, established that the problems continued during the class period or that defendants knew their statements were false.

Because the court dismissed these claims based on the failure to plead falsity with particularity, it did not address the defendants’ remaining arguments.

Section 20(a) Claims

Section 20(a) imposes potential control-person liability when there is a primary violation of the federal securities laws and the defendant exercised actual power or control over the primary violator. The plaintiffs based their Section 20(a) claims on the alleged Section 10(b) and Rule 10b-5 violations.

The court granted the motion to dismiss the Section 20(a) claims because the plaintiffs had not adequately pleaded the required primary securities-law violation. The court therefore did not address whether the defendants exercised actual power or control.

Disposition

The court granted the defendants’ motions to dismiss with leave to amend. Lead Plaintiffs could file an amended complaint by April 5, 2024.