In re Facebook, Inc.
2015 U.S. App. LEXIS 12798
| 2d Cir. | 2015Background
- Facebook conducted a major IPO on May 18, 2012 after filing a Registration Statement and a Free-Writing Prospectus that disclosed mobile usage growth and uncertainty about mobile monetization; underwriters received revised, lower revenue estimates prior to the IPO.
- Plaintiffs filed multiple related putative shareholder derivative suits (SDNY, California state, Delaware Chancery) alleging directors breached duties by failing to disclose the mid‑quarter impact of mobile usage on revenue projections; some suits also alleged oversight and insider trading theories.
- Certain plaintiffs (Crocitto, Jones) purchased pre-IPO investment units in SharesPost that converted to Facebook shares months after the IPO; their subscription agreements acknowledged no direct interest in Facebook securities pre-conversion. Another plaintiff (Levy) bought shares in the IPO itself.
- Facebook removed the state actions to federal court and the MDL Panel transferred the cases to SDNY; the district court chose to resolve threshold dismissal grounds before resolving complex subject‑matter jurisdiction/remand issues.
- The district court dismissed all derivative suits because none of the putative derivative plaintiffs adequately pleaded contemporaneous ownership (Rule 23.1); plaintiffs appealed, arguing the court should have decided remand/jurisdiction first.
- The Second Circuit affirmed, holding the district court properly resolved the Rule 23.1 contemporaneous‑ownership threshold before difficult jurisdictional questions and that none of the plaintiffs satisfied the contemporaneous‑ownership requirement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether district court erred by deciding Rule 23.1 contemporaneous‑ownership before adjudicating subject‑matter jurisdiction/remand | Jones/Levy: court should decide remand/jurisdiction first; Crocitto (filed in SDNY) did not contest jurisdiction | Facebook: district court may resolve a clear threshold defect first to avoid arduous jurisdictional inquiries | Court: district court did not abuse discretion; Rule 23.1 standing may be decided before complex jurisdictional questions |
| Whether plaintiffs satisfied Rule 23.1 contemporaneous ownership | Crocitto/Jones: formulaic allegations of continuous ownership suffice; argued SharesPost holdings made them owners | Facebook: SharesPost units expressly acknowledged no direct ownership pre‑IPO; conversion occurred post‑IPO and was at manager's discretion | Court: Crocitto and Jones failed Rule 23.1; SharesPost units did not give contemporaneous or equitable ownership |
| Whether Levy’s IPO purchase satisfied contemporaneous requirement under a "continuing wrong" theory | Levy: alleged wrongdoing was continuing, so purchasing on IPO day suffices | Facebook: core wrongful acts (Registration Statement disclosures) predated Levy’s acquisition | Court: declining expansive continuing‑wrong view; Levy lacked ownership during the primary alleged misconduct and failed Rule 23.1 |
| Whether dismissal on Rule 23.1 standing is permissible absent addressing other alternative grounds (demand futility, ripeness) | Plaintiffs: court should not reach merits‑affecting threshold before jurisdiction/remand | Facebook/district court: Rule 23.1 is a non‑merits, prudential standing threshold logically antecedent to jurisdictional analysis | Court: affirmed dismissal on Rule 23.1 and declined to reach alternative grounds; dismissal proper and jurisdiction need not be adjudicated first |
Key Cases Cited
- Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574 (court may decline to decide jurisdictional question when other threshold grounds are appropriate)
- Steel Co. v. Citizens for a Better Env't, 523 U.S. 83 (court must be sure of Article III jurisdiction before reaching merits, but prudential sequencing allowances exist)
- Sinochem Int'l Co. v. Malaysia Int'l Shipping Corp., 549 U.S. 422 (district courts may resolve threshold non‑jurisdictional issues first for judicial economy)
- Ortiz v. Fibreboard Corp., 527 U.S. 815 (class certification and other antecedent non‑jurisdictional questions can be resolved before Article III standing)
- In re Bank of N.Y. Derivative Litig., 320 F.3d 291 (2d Cir.) (contemporaneous ownership requirement: plaintiff must own stock during the activities that are primary basis of complaint)
- Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (court may reach class‑certification type questions that are logically antecedent to Article III issues)
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standards: conclusory formulaic recitals insufficient)