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Ninth Circuit:
Plaintiff’s Inability to Define ‘Cloud’ Software Is Fatal to Securities Fraud Class Action
Opinion Says Pleading Standard Not Met in Case Asserting That Software Company Falsely Touted ‘Cloud Native’ Products as Plaintiffs Failed to Nail Down Meaning
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals yesterday affirmed the dismissal of a class action complaint alleging that a data software company made materially misleading public statements by falsely claiming, in violation of securities laws, that it possessed an “original cloud native” platform, finding that the failure to provide proof of what the term meant at the time it was used defeated any chance of adequately pleading falsehood.
Pointing out that the meaning of the term was “cloud” and that the two articles relied on by the representative plaintiff to support a proposed definition were written after the expiration of the class period, the court found that the complaint failed to establish what the term meant when it was used in the challenged public statements.
Appealing the dismissal on behalf of the putative class was lead plaintiff Mariusz J. Klin, who filed a complaint on June 7, 2019 against technology company Cloudera Inc. and several of its officers and directors, asserting claims under the Securities Act of 1933 (the “Securities Act”), the Securities and Exchange Act of 1934 (the “Exchange Act”), and Securities and Exchange Commission Rule 10b-5.
On April 28, 2017, Cloudera held an initial public offering and its stock price closed at $15 per share. Just over two years later, on June 5, 2019, the stock price fell more than 40% after the company announced negative quarterly earnings.
Lacking Key Attributes
Klin had purchased stock in the company between the initial public offering and the June 2019 price drop. He asserted, on behalf of himself and similarly situated investors, that Cloudera’s software “was not a cloud-native offering” as described in public statements and was “widely panned by Cloudera’s existing and potential customers for lacking the key attributes of cloud products.”
He asserts that Cloudera’s lack of a viable cloud product during the class period was evinced by an announcement in March 2019 that the company would be shifting focus to sales of a newly created cloud-based product.
At issue in the case is the higher pleading standard imposed by Federal Rule of Civil Procedure 9(b) which provides that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” The rule applies to all claims, even those lacking an element of fraud, if the complaint alleges a unified course of fraudulent action.
Then-District Court Judge Lucy H. Koh of the Northern District of California (now a Ninth Circuit judge) dismissed the complaint, with leave to amend, on May 25, 2021, finding that the pleading “did not explain what it meant to have ‘cloud native’ products or ‘cloud-native architecture,’ ” making it impossible for the court to find that they had adequately pled falsehood.
Amended Complaint
Following the dismissal, Klin filed a second amended complaint asserting that “cloud-native” and “cloud architecture” had fixed meanings, namely they “meant to reasonable investors that such offerings…had specific material attributes such as the use of containers, ease-of-use, seamless scalability, security and elasticity, none of which the Company’s Class Period product offerings provided.”
Senior District Court Judge Maxine Chesney of the Northern District of California dismissed the operative complaint without leave to amend, finding that the amended pleading had not cured the definitional problems because “plaintiffs plead no evidentiary facts” to support the proposed meaning.
Circuit Judge Eric D. Miller authored yesterday’s opinion affirming the judgment of dismissal. He wrote:
“Cloudera offers products that use the cloud—that is, they do not operate locally, but instead on remote servers that customers can access through the internet. If that description seems vague, we have made it deliberately so:…[T]he precise meaning of terms related to the ‘cloud’ is at the heart of the parties’ dispute.”
Miller continued:
“Because the relevant cloud-related terms in the challenged statements lack a plain or ordinary meaning, Klin had to ‘plead facts’ supporting his definitions of those terms….Because he did not do so, the district court correctly dismissed the claims based on those statements.”
Senior Circuit Court Judge Marsha S. Berzon and Circuit Court Judge Lawrence VanDyke joined in the opinion.
Heightened Pleading Standard
Miller explained that “[i]n general, a plaintiff’s complaint need only contain ‘a short and plain statement of the claim showing that the pleader is entitled to relief’ ” but “when fraud is involved, Federal Rule of Civil Procedure 9(b) imposes a higher pleading standard.”
Turning to the claims asserted, he wrote:
“Because Klin’s claims under the Exchange Act allege securities fraud, they are subject to Rule 9(b)’s heightened pleading standards….[E]ven though fraud is not an element of Klin’s Securities Act claims, those claims too are subject to Rule 9(b) because they rely on the same factual allegations underlying the Exchange Act claims.”
He pointed out that, under the heightened standard, the complaint must explain what is misleading about the purportedly fraudulent statement and why it was false at the time it was made. He added:
“In addition, for those claims based on the Exchange Act, the Private Securities Litigation Reform Act of 1995.…reinforces Rule 9(b) by requiring that the complaint ‘specify’ not only ‘each statement alleged to have been misleading’ but also ‘the reason or reasons why the statement is misleading.’ ”
The case is In re: Klin v. Cloudera Inc., 22-16807.
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