Sohovich v. Avalara, Inc.

• Court: Court of Appeals for the Ninth Circuit
• Decided: March 31, 2025
• Docket: 24-1646
• Status: Unpublished

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS MAR 31 2025 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

MARTIN SOHOVICH, On behalf of No. 24-1646 himself and all others similarly situated, D.C. No. 2:22-cv-01580-MJP Plaintiff - Appellant,

v. MEMORANDUM*

AVALARA, INC.; SCOTT MCFARLANE; BRUCE CRAWFORD; MARION FOOTE; EDWARD GILHULY; WILLIAM INGRAM; MARCELA MARTIN; TAMI RELLER; BRIAN SHARPLES; RAJEEV SINGH; SRINIVAS TALLAPRAGADA; KATHY ZWICKERT,

Defendants - Appellees.

Appeal from the United States District Court for the Western District of Washington Marsha J. Pechman, District Judge, Presiding

Argued and Submitted March 4, 2025 San Francisco, California

Before: GOULD and NGUYEN, Circuit Judges, and BENNETT, District Judge.**

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. ** The Honorable Richard D. Bennett, United States District Judge for the District of Maryland, sitting by designation. Martin Sohovich filed a class action suit against Avalara Inc. and its Board

of Directors (collectively, “Avalara”) alleging violations of Sections 14(a) and

20(a) of the Securities Exchange Act of 1934 and SEC Rule l 4a-9. He alleges that

Avalara misrepresented the fairness of the company’s $8.4 billion sale to Vista

Equity Partners Management, LLC through false and misleading Proxy statements

and financial projections. The district court dismissed the case with prejudice

based on Sohovich’s failure to adequately plead the objective falsity or misleading

nature of any of the Proxy statements or Projections. Sohovich timely appealed.

We have jurisdiction under 28 U.S.C. § 1291. Our review is de novo and

“we accept all factual allegations as true and view them in the light most favorable

to Plaintiffs. In addition to the factual allegations in the complaint, we may

consider any materials incorporated into the complaint by reference.” Glazer

Capital Mgmt., L.P. v. Forescout Techs., Inc., 63 F.4th 747, 763 (9th Cir. 2023).1

To survive dismissal, a plaintiff must allege “enough facts to state a claim to relief

that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

(2007). In addition, the Private Securities Litigation Reform Act or the “PSLRA

imposes formidable pleading requirements to properly state a claim and avoid

dismissal under Rule 12(b)(6).” Glazer, 63 F.4th at 765 (cleaned up). “To plead

1 Avalara’s unopposed motion to supplement or correct the record with the full copy of its “Analyst Day” presentation is granted. See Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005) (explaining the incorporation by reference doctrine).

2 24-1646 falsity adequately under the PSLRA, the complaint shall specify each statement

alleged to have been misleading, the reason or reasons why the statement is

misleading, and, if an allegation regarding the statement or omission is made on

information and belief, the complaint shall state with particularity all facts on

which that belief is formed.” Id. (citing 15 U.S.C. § 78u-4(b)(1)). “In doing so,

the plaintiff must ‘reveal the sources of his information.’” Id. (cleaned up). But “a

defendant will not be liable for a false or misleading statement if it is forward-

looking and either is accompanied by cautionary language or is made without

actual knowledge that it is false or misleading” under the PSLRA’s safe harbor

provision. Id. at 767 (cleaned up); 15 U.S.C. § 78u-5(i)(1)(B). Also inactionable

is puffery or subjective, “vague statements of optimism” about a company’s value

or performance. See In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th Cir. 2010).

Applying these principles, we affirm in part, reverse and vacate in part, and

remand.

1. At the outset, the PSLRA’s safe harbor does not apply here. The Proxy’s

statements that the projections were “prepared on a reasonable basis” or “reflected

the best currently available estimates and judgments” are “not forward-looking.”

See In re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1141 (9th Cir. 2017). They

are instead statements about the preparation of, and basis for, the projections that

incorporated then-existing, verifiable facts. The district court’s meticulous

3 24-1646 analysis of the issue was therefore correct.2

2. The Proxy’s statements about Avalara’s challenges with new and upsell

bookings are not objectively false or misleading. Avalara never stated that it did

not need new bookings, and Avalara’s purportedly contradictory statements

indicating it was “doing well” are puffery. See In re Cutera, 610 F.3d at 1111

(“[I]nvestors do not rely on vague statements … like ‘good,’ ‘well-regarded,’ or

other feel good monikers”). The “numerically specific” figures Sohovich says

Avalara emphasized do not render the puffery actionable. Avalara did not tout

25% growth in Q1 2022 upsell bookings “to claim that the company would not

need any new bookings,” and the Analyst Day materials citing the 25% figure

reveals that 25% is in fact lower than the upsell growth rate of 35% in 2020 and

44% in 2021. The 116% net retention rate, meanwhile, refers to cross-sell, not

upsell. The district court thus properly rejected this claim.

3. The district court also properly dismissed Sohovich’s claims regarding

the Proxy’s statement on Q2 2022 results being “below management expectations.”

Determining whether a claim survives requires the court to consider context and

apply “judicial experience and common sense.” See Ashcroft v. Iqbal, 556 U.S.

662, 679 (2009). The district court’s observation that “public guidance differs

from management’s own expectations,” especially given that Q2 2022 was the first

2 The parties’ dispute about whether the issue was preserved is thus immaterial.

4 24-1646 relevant quarter where Avalara failed to beat analysts’ revenue expectations, was

therefore not an “improper inference” or error.

4. The district court correctly found that the Proxy’s statements about the

impact of lost business from Partner A and other international risks were not

objectively false or misleading. Aside from being puffery, Avalara’s minimization

of the impact of any potential loss of business from Partner A does not mean that

the loss would have no impact on the company. Nor does the prospect of other

international business make the projections false or misleading in light of

Avalara’s continued emphasis on other challenges in the area.

5. The district court also correctly found that the Proxy’s statements about

macroeconomic and compliance risks were not false or misleading. Avalara’s

rhetoric about its “resilience” and “insulation from macroeconomic risk” is

puffery. See Glen Holly Entm’t, Inc. v. Tektronix Inc., 352 F.3d 367, 379 (9th Cir.

2003). Meanwhile, CEO Scott McFarlane’s statement that by 2025, “80% of

organizations will be forced” to use programs like Avalara is also “the kind of

booster confidence any reasonable investor would expect from a CEO.” In re

CornerStone Propane Partners, L.P. Sec. Litig., 355 F. Supp. 2d 1069, 1087 (N.D.

Cal. 2005). It is also too generalized and incapable of objective verification to be

false or misleading when it was made. Cf. In re Facebook, Inc., 87 F.4th 934,

948–49 (9th Cir. 2023) (finding statement that risks could materialize plausibly

5 24-1646 false where “in fact, those risks had already materialized”). The district court

therefore properly rejected these claims.

6. But the district court erred in holding that Avalara’s statements about the

Institutional Shareholder Services’ (ISS) view of the sale was not objectively false

or misleading. Sohovich alleges that Avalara quoted ISS’s report without

permission and that the report stated “‘the merger consideration is a substantial

discount to ALVR historic trading levels;’” that Altair’s “‘scathing criticism of the

merger’” was “‘credible;’” that Avalara “‘has a strong market position focused on

one of the two certainties in life, taxes,’” and it “‘remains viable in the medium to

long term with sufficient cash balances and cash flow to achieve management’s

operational objectives;’” that “ISS also found that ‘[t]he shift in narrative from

[Avalara’s] management is concerning, with a whiplash turn from positive

comments … to current worries about employee attrition, European growth,

product development, and squandered opportunities;’” and that ISS explicitly

recommended a vote against certain parts of the deal, including the “golden

parachute” proposal for the CEO, which had no “compelling rationale.” These

particularized allegations, credited as true, “‘create an impression of a state of

affairs that differs in a material way from the one that actually exists,’” i.e., that

ISS’s recommendation was not as approbatory as Avalara touted. See In re

Facebook, Inc., 87 F.4th at 948. Indeed, it was “cautionary.”

6 24-1646 That some of the report’s unfavorable excerpts were filed by a third-party, in

a separate SEC filing, does not render Avalara’s statements about the report not

false or misleading. See Miller v. Thane Int’l, Inc., 519 F.3d 879, 881 (9th Cir.

2008) (“Investors are not generally required to look beyond a given document to

discover what is true and what is not. Ordinarily, omissions by corporate insiders

are not rendered immaterial by the fact that the omitted facts are otherwise

available to the public.” (cleaned up)). And while Avalara is correct that the ISS

ultimately issued a recommendation for the sale, “statements literally true on their

face may nonetheless be misleading when considered in context.” Id. at 886. “For

that reason, the disclosure required” by law “is measured not by literal truth, but by

the ability of the material to accurately inform rather than mislead.” In re

Convergent Tech. Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991).

7. The district court similarly erred in holding that the omission of inorganic

growth from the May and July Projections was not objectively false or misleading.

The omission is misleading, according to Sohovich, because “acquisitions have

always been a material part of Avalara’s growth story and management made clear

that they would continue to be a part of the Company’s DNA going forward.” He

cites a host of specific statements by Avalara’s management from earnings calls,

the Analyst Day presentation, and a press release as support. He underscores how

Avalara had always included inorganic growth in its guidance, and when it did not,

7 24-1646 it “explicitly stated as such,” like when CFO Tennenbaum did so on Analyst Day.

Sohovich also buttresses these claims with uncontested allegations that Avalara

acquired “twenty-eight companies from 2007 to 2021, including twelve between

2018 to 2021.” “Requiring more detail than those presently alleged would

transform the PSLRA’s formidable pleading requirement into an impossible one.”

Glazer, 63 F.4th at 769. Sohovich’s plethora of particularized allegations plausibly

suggests that the omission—and the lack of notice about such omission—could

materially mislead a reasonable investor.

Avalara’s counterarguments are unavailing. That it may not have an

obligation to include inorganic growth in projections or that doing so could be too

speculative and therefore potentially unlawful misses the point. Avalara has not

cited specific acquisitions as a source of growth in its previous guidance, and the

PSLRA’s safe harbor protects Avalara’s forward-looking statements so long as it is

“accompanied by cautionary language or is made without actual knowledge that it

is false or misleading.” Glazer, 63 F.4th at 767 (cleaned up). And the fact that

Avalara lost a potential acquisition during the sales process does not mean it

planned to cease pursuing inorganic growth. As Sohovich points out, Avalara

indicated quite the opposite in its communications, including right after the sale.

Sohovich thus adequately pled the objective falsity or misleading nature of the

8 24-1646 omission of inorganic growth from the projections.3

8. As just discussed, Sohovich has adequately pled the objective falsity of

the Proxy’s statements about the ISS report and the omission of inorganic growth

from the projections. He may therefore have a viable Section 14(a) and Rule 14a-9

claim, which, in turn, suggests the viability of a section 20(a) claim. See Glazer,

63 F.4th at 765 (noting that section 20(a) liability is derivative of other Exchange

Act violations). It was thus error for the district court to dismiss Sohovich’s

section 20(a) claim.

9. The district court properly dismissed Sohovich’s claims about the Proxy

supplement. Sohovich neither specifies, as in the district court, which Proxy

statements were “regurgitate[d]” nor explains, with sufficient particularly, the

reasons why the statements are misleading. See 15 U.S.C. § 78u-4(b)(1)(B).

3 Avalara’s attempt to distinguish NECA-IBEW Pension Tr. Fund (The Decatur Plan) v. Precision Castparts Corp., which found the omission of inorganic growth in projections materially misleading, is also unpersuasive. Fed. Sec. L. Rep. ¶ 99,901 (D. Or. Oct. 3, 2017). That defendant Precision in The Decatur Plan, unlike Avalara, “focuse[d] on M&A first” and foremost does not defeat Sohovich’s allegations at this stage. All well-pled “allegations of material fact must be taken as true and construed in the light most favorable to the non-moving party.” Glazer, 63 F.4th at 763. Sohovich has alleged, repeatedly and with particularity, that M&A has always been a part of Avalara’s “DNA,” much like Precision, which also engaged in significant M&A activity and likewise stated that M&A was in its “DNA.” See Fed. Sec. L. Rep. ¶ 99,901. Notable, too, is Precision’s disclosure of its omission of M&A in its forecasts—something Avalara did not do here. As Sohovich argues, it potentially makes Avalara’s omission more misleading given the allegations of Avalara’s history of including inorganic growth in its forecasts.

9 24-1646 ***

In sum, we REVERSE the district court’s holding that Sohovich did not

adequately plead the objective falsity or misleading nature of Avalara’s statements

about ISS’s recommendation of the sale and the omission of inorganic growth from

the Projections. We also VACATE the district court’s dismissal of Sohovich’s

section 20(a) claim. Because it declined to reach the other elements of Sohovich’s

Section 14(a) and Rule 14a-9 claim, the district court, on REMAND, should

address, as to Avalara’s statement about ISS’s report and the Projections’ omission

of inorganic growth: (1) subjective falsity and negligence, except for CEO

McFarlane; (2) materiality, to the extent the district court found them immaterial;

and (3) loss causation. Afterward, the district court should consider whether

Sohovich’s claim amounts to a viable section 14(a) or Rule 14a-9 violation so as to

trigger section 20(a) liability. We otherwise AFFIRM.

Each party shall bear its own costs.

10 24-1646