In re ALPHABET, INC. SECURITIES LITIGATION

• Court: District Court, N.D. California
• Decided: February 28, 2023
• Docket: 3:18-cv-06245
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 NORTHERN DISTRICT OF CALIFORNIA 10 In re ALPHABET, INC. SECURITIES 11 LITIGATION, Case No. 18-cv-06245-JSW

12 ORDER GRANTING MOTION TO

13 SUPPLEMENT THE CONSOLIDATED AMENDED COMPLAINT AND

14 STRIKING MOTION TO CERTIFY THE CLASS

15 Re: Dkt. Nos. 102, 136

16 17 Now before the court is the motion to supplement the consolidated amended complaint and 18 the motion to certify the class both filed by Lead Plaintiff State of Rhode Island, Office of the 19 Rhode Island Treasurer on behalf of the Employees’ Retirement System of Rhode Island 20 (“Plaintiff”). For the reasons stated, the Court GRANTS the motion to supplement the complaint 21 and STRIKES the motion to certify the class. 22 BACKGROUND 23 According to the allegations in the consolidated amended complaint, in March 2018, 24 Google learned that a software bug had allowed third-party developers to access private user- 25 profile data in the Google+ social-networking platform. Plaintiff alleges that Google failed to 26 detect the bug and their belated discovery and investigation of the bug also revealed other security 27 vulnerabilities in the Google+ platform. In or around April 2018, Google’s legal staff prepared a 1 issues, which included warnings that disclosure would likely trigger “immediate regulatory 2 interest,” result in defendants “coming into the spotlight alongside or even instead of Facebook 3 despite having stayed under the radar throughout the Cambridge Analytica scandal” and “almost 4 guarantee[] Sundar [Pichai would] testify before Congress.” (Consolidated Amended Complaint 5 (“CAC”) at ¶ 38.) 6 Despite the internal awareness of data vulnerabilities on the Google+ platform, Plaintiffs 7 allege that Alphabet chose to conceal the issues by omitting any reference in the company’s public 8 filings in the April 2018 and July 2018 Forms 10-Q. Six months later, the Wall Street Journal 9 published an expose entitled “Google Exposed User Data, Feared Repercussions of Disclosing to 10 the Public.” Both the public and Congress’s reactions to the article and revelations were swift, 11 with media reports critical of Google’s business model in “hiding a potentially dangerous breach 12 for six months.” (Id. at ¶ 66.) Plaintiffs originally alleged that as a result of the misleadingly 13 incomplete statements and omissions to the public, Plaintiff were harmed by resulting damage to 14 the share price in October 2018. 15 Upon remand from Plaintiff’s appeal of the dismissal of the claims, the Ninth Circuit found 16 that two of the statements made by Alphabet in its April 2018 and July 2018 Forms 10-Q omitted 17 material facts necessary to make the statements not misleading. In re Alphabet, Inc. Sec. Litig., 1 18 F.4th 687, 693 (9th Cir. 2021, cert denied, __ U.S. __ , 142 S. Ct. 1227 (2022). The Ninth Circuit 19 observed that “the Privacy Bug Memo was not limited to discussing the discovery of the software 20 glitch that had been remediated because it highlighted additional security vulnerabilities that were 21 so significant that they allegedly led to Google’s decision to shut down the Google+ consumer 22 platform.” Id. at 702. The appellate court concluded that these public statements omitted material 23 facts and that “these statements are relevant and were made while Google and Alphabet allegedly 24 chose a strategy of concealment over disclosure.” Id. at 708. Accordingly, although the Ninth 25 Circuit affirmed dismissal of the Rule 10b-5(b) statement liability for the ten remaining 26 statements, it reversed the Court’s dismissal of the April 2018 and July 2018 Forms 10-Q 27 omissions and reinstated Plaintiff’s Rule 10b-5(a) and (c) scheme liability claims, as well as the 1 Now before the Court on remand, Plaintiff moved for certification of the class pursuant to 2 the Federal Rule of Civil Procedure 23. In the opposition to the motion for class certification, 3 Alphabet contends that the damages Plaintiff now alleges for the subsequent decline in the stock 4 price – the April 30, 2019 drop – does not appear in the consolidated complaint. Rather, Alphabet 5 contends, “[i]f Plaintiff wishes to embrace a new legal theory, it must first amend its Complaint.” 6 (Opposition to Class Cert. Motion at 2.) 7 In a separate motion, Plaintiff seeks to supplement the complaint to add a subsequent 8 damages event, occurring after the filing of the original complaint, for decline in the stock price in 9 late April 2019. The Court shall address other relevant facts in the remainder of its order. 10 ANALYSIS 11 A. Legal Standard on Motion to Supplement. 12 Under Rule 15(d), “[o]n motion and reasonable notice, the court may, on just terms, permit 13 a party to serve a supplemental pleading setting out any transaction, occurrence, or event that 14 happened after the date of the pleading to be supplemented.” Fed. R. Civ. P. 15(d); see also Eid v. 15 Alaska Airlines, Inc., 621 F.3d 858, 874 (9th Cir. 2010) (noting that “Rule 15(d) provides a 16 mechanism for parties to file additional causes of action based on facts that didn’t exist when the 17 original complaint was filed”). “While leave to permit supplemental pleading is ‘favored,’ it 18 cannot be used to introduce a ‘separate, distinct and new cause of action.’” Planned Parenthood 19 of S. Ariz. v. Neely, 130 F.3d 400, 402 (9th Cir.1997) (citations omitted). Supplementation is 20 generally favored as “a tool of judicial economy and convenience.” Keith v. Volpe, 858 F.2d 467, 21 473 (9th Cir. 1988). “To determine if efficiency might be achieved, courts assess ‘whether the 22 entire controversy between the parties could be settled in one action.’” Id. (internal citation and 23 ellipses omitted). “The clear weight of authority ... in both the cases and the commentary, permits 24 the bringing of new claims in a supplemental complaint to promote the economical and speedy 25 disposition of the controversy.” Id. at 473; see also Copeland v. Lane, 11-cv-1058-EJD, 2013 WL 26 1899741, at *5 (N.D. Cal. May 6, 2013) (“Matters newly alleged in a supplemental complaint 27 must have some relation to the claims set forth in the original pleading.”). 1 “The legal standard for granting or denying a motion to supplement under Rule 15(d) is the 2 same as for amending one under 15(a).” Paralyzed Veterans of America v. McPherson, No. C 06– 3 4670 SBA, 2008 WL 4183981, at *26 (N.D. Cal. Sept. 9, 2008). The five factors commonly used 4 to evaluate the propriety of a motion for leave to amend (and thus, a motion to supplement) are: 5 (1) undue delay, (2) bad faith or dilatory motive on the part of the movant, (3) repeated failure of 6 previous amendments, (4) undue prejudice to the opposing party, and (5) futility of the 7 amendment. See Foman v. Davis, 371 U.S. 178, 182 (1962). “[T]he consideration of prejudice to 8 the opposing party … carries the greatest weight.” Eminence Capital, LLC v. Aspeon, Inc., 316 9 F.3d 1048, 1052 (9th Cir. 2003). Absent prejudice or a “strong showing” of any other Foman 10 factor, there is a presumption in favor of granting leave to supplement. Id. “Rule 15 advises the 11 court that ‘leave shall be freely given when justice so requires,’” and [t]his policy is ‘to be applied 12 with extreme liberality.’” Id. at 1051. 13 B. Leave to Supplement. 14 Plaintiff seeks to supplement the complaint to add to the loss causation/economic loss 15 section to add facts regarding the drop in stock price in late April 2019 following the filing of the 16 consolidated complaint in this matter. Plaintiff contends that the business risk posed by the 17 “significant and extensive remedial measures” as part of Alphabet’s response to “the events 18 described in the WSJ article” materialized a few days after the filing of the consolidated amended 19 complaint in this matter. (CAC ¶ 76.) On April 29, 2019, Alphabet announced that “product 20 changes” had had an adverse effect on its business, resulting in stricter permissions and 21 “additional controls” necessary “to combat the misuse of our platform and enforce our content 22 policies.” (Id. at ¶¶ 47, 76.) The enhancement of user’s data privacy and reduction of the misuse 23 of other platforms had a negative effect on the effectiveness and volume of advertisements. The 24 effect of diminished advertising revenues and increased costs devoted to engineering resources 25 contributed to the drop in stock value. In their motion to supplement the complaint, Plaintiff 26 contends that on April 30, 2019, Alphabet’s Class A and Class C shares fell as a result of the 27 materialization of risks posed by the remedial measures related to “the events described in the WSJ 1 First, the delay in filing the motion to supplement is explained by the time taken to the 2 appeal of this Court’s order granting Alphabet’s motion to dismiss. There is no undue delay post- 3 remand and the Court finds this factor weighs in favor of supplementation. The Court does not 4 find that Defendant will sustain significant prejudice resulting from delay in filing an amended 5 complaint.1 6 Next, Alphabet contends that Plaintiff proposes the amendment in bad faith. Alphabet 7 claims that with the evidence it has recently produced, it is clear that the product changes that 8 contributed to a slowdown in revenue growth in April 2019 had no connection to the data privacy 9 issue. Alphabet also argues that Plaintiff only sought to amend their complaint once it had 10 received the opposition to the pending motion for class certification. However, Plaintiff has the 11 prerogative to test the evidence and had, in earlier filings, asserted that damages were related to 12 both immediate and belated stock price declines. The Court does not find bad faith. See, e.g., 13 Solaria Corp. v. GCL System Integration Tech. Co., Ltd., 2022 WL 279870, at *3 (N.D. Cal. Jan. 14 31, 2022 (finding no bad faith in seeking to supplement a claim where the underlying violation 15 was pled in the original complaint supplemented by additional violations after filing of the initial 16 complaint). 17 Lastly, Alphabet contends the amendment would be futile. See Klamath-Lake Pharm. 18 Ass’n v. Klamath Med. Service Bureau, 701 F.2d 1276, 1293 (9th Cir. 1983) (holding that futile 19 amendments should not be permitted). To determine futility of amendment, the Court employs the 20 motion to dismiss standard in order to assess whether the proposed amendment is “enough to 21 make out a plausible claim for relief.” SBC Realty Credit Corp. (USA) v. O’Neill, 745 F.3d 564, 22 578 (1st Cir. 2011); Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988) (holding that 23 the “proper test to be applied when determining the legal sufficiency of a proposed amendment is 24 identical to the one used when considering the sufficient of a pleading challenged under Rule 25 12(b)(6).”) Under this standard, the Court must accept all factual allegations as true and construe 26

27 1 As a result of the amendment of the complaint, however, the Court finds that the motion to 1 those allegations in the light most favorable to the plaintiff. Telltabs, Inc. v. Makor Issues & Rts., 2 Ltd., 551 U.S. 308, 322-34 (2007). A proposed amendment may be found to be futile only where 3 “no set of facts can be proved under the amendment to the pleadings that would constitute a valid 4 and sufficient claim.” Miller, 845 F.2d at 214. “Ordinarily, courts will defer consideration of 5 challenges to the merits of a proposed amended pleading until after leave to amend is granted and 6 the amended pleading filed.” Netbula, LLC v. Distinct Corp., 212 F.R.D. 534, 539 (N.D. Cal. 7 2003). 8 Alphabet contends that the proposed amendment to the complaint would be futile because 9 they allege that the facts, including a recently-disclosed set of declarations, do not support the 10 contention that the stock price decline was related in any way to the earlier privacy concerns issue. 11 The authority on a motion to amend clearly prohibits this Court from relying on “material outside 12 of the pleadings when assessing the sufficiency of a complaint.” Khoja v. Orexigen Therapeutics, 13 Inc., 899 F.3d 988, 998 (9th Cir. 2018); see also Lee v. City of Los Angeles, 250 F.3d 668, 688-89 14 (9th Cir. 2001) (holding that district court erred in relying upon extrinsic declaration submitted by 15 defendants to dismiss plaintiff’s claim). Plaintiff alleges in its amendment the factual 16 circumstances to explain how “[b]y the end of the first financial quarter of 2019, the risks from 17 remedial measures related to the events described in the WSJ article … (of which the Google+ 18 crisis was the tipping point) materialized” and how an “adverse effect on Alphabet’s revenues was 19 a materialization of th[ose] risks.” (Proposed Supplemental Complaint at ¶ 82(b).) Taking as true 20 the facts as alleged in Plaintiff’s proposed amended complaint regarding the later price drop, the 21 Court finds the claims are not facially implausible. See In re Gilead Sciences Sec. Litig., 536 F.3d 22 1049, 1057 (9th Cir. 2008) (“[S]o long as the plaintiff alleges facts to support a theory that is not 23 facially implausible, the court’s skepticism is best reserved for later stages of the proceedings 24 where the plaintiff’s cases can be rejected on evidentiary grounds.”). 25 The Court finds that Plaintiff has met the liberal pleading standard under Rule 15. See 26 Eminence Capital, 316 F.3d at 1051 (“Rule 15 advises the court that ‘leave shall be freely given 27 when justice so requires,’” and [t]his policy is ‘to be applied with extreme liberality.’”). The 1 weigh in favor of Plaintiff. The Court finds there was no undue delay, bad faith, or significant 2 || prejudice to Alphabet and the amendment is not futile. Accordingly, the Court GRANTS 3 || Plaintiffs motion to supplement the complaint. 4 CONCLUSION 5 For the foregoing reasons, the Court GRANTS Plaintiffs motion to supplement the 6 || complaint and STRIKES Plaintiffs motion to certify the class. Further, the Court LIFTS the stay 7 on discovery. 8 9 IT IS SO ORDERED. a | 10 Dated: February 28, 2023 \ | he ( 11 : F ; f li / JEFFREY $. WHITE 12 / “Unit 4 States PAstrict Judge

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