Joseph Curry v. Yelp Inc.
875 F.3d 1219
9th Cir.2017Background
- Yelp, a public company selling local-business advertising, repeatedly described site reviews as "firsthand" and "authentic" during the Class Period (Oct. 29, 2013–Apr. 3, 2014).
- On April 2, 2014 the FTC disclosed via FOIA over 2,000 business complaints alleging Yelp manipulated reviews (e.g., removing/promoting reviews tied to advertising decisions); WSJ reported the disclosure.
- Plaintiffs (shareholders) sued under §10(b)/Rule 10b-5 and §20(a), alleging Yelp’s statements about review authenticity were false, caused an inflation of stock price, and that disclosure of FTC complaints caused a stock drop.
- The district court dismissed the complaint twice (with initial leave to amend), finding Plaintiffs failed to plead falsity, materiality, loss causation, and scienter with required particularity; leave to amend was ultimately denied as futile.
- On appeal, the Ninth Circuit affirmed, holding Plaintiffs failed to plead loss causation and scienter; it did not reach the district court’s findings on falsity and materiality.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Loss causation — did disclosure of FTC complaints and media reports proximately cause stock loss? | Disclosure of FTC complaints and WSJ/SunTrust reports revealed the falsity of Yelp’s statements and caused the price drop. | The FTC complaints only raised the possibility of misconduct; market speculation, without a revelation of actual fraud, cannot establish loss causation. | Held: Disclosure of customer complaints alone is insufficient to plead loss causation; market speculation about possible fraud does not reveal the pertinent truth. |
| Scienter — did allegations show a strong inference of intent or recklessness by Yelp executives? | Management’s roles, internal practices (filtering, scouts, community managers), and insider stock sales show knowledge/recklessness. | General management awareness and stock sales without prior trading history do not create a strong inference of scienter. | Held: Allegations fail to show Individual Defendants had specific knowledge; insider sales lacked historical context; scienter not adequately pleaded. |
| Section 20(a) control-person liability — does it survive if §10(b) fails? | §20(a) claim depends on §10(b); overturning §10(b) dismissal would save §20(a). | Under settled law, a §20(a) claim cannot survive if the underlying §10(b) claim fails. | Held: §20(a) claim fails because the §10(b) claim was properly dismissed. |
| Denial of leave to amend — was further amendment futile? | Plaintiffs proposed a second amended complaint re-alleging FTC complaints and analyst reports. | District court: Plaintiffs already had leave and failed to cure deficiencies; market-speculation theory remains insufficient. | Held: Denial of further leave was not an abuse of discretion; amendment would be futile under controlling precedent. |
Key Cases Cited
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) (loss causation requires that misrepresentation proximately caused economic loss)
- Loos v. Immersion Corp., 762 F.3d 880 (9th Cir. 2014) (announcement of an investigation or mere possibility of fraud, without disclosure of actual wrongdoing, is insufficient for loss causation)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (pleading scienter requires a strong, cogent inference at least as compelling as any opposing inference)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (PSLRA/Rule 9(b) particularity standards; leave-to-amend review)
- Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) (insider sales support scienter only if dramatically out of line with prior trading practices)
- Metzler Inv. GmbH v. Corinthian Colleges, Inc., 540 F.3d 1049 (9th Cir. 2008) (management’s general awareness does not by itself establish scienter)
- In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694 (9th Cir. 2012) (applying PSLRA and Rule 9(b) heightened pleading standards)