ENTRY ON DEFENDANTS' MOTION TO DISMISS
WILLIAM T. LAWRENCE, District Judge.
This cause is before the Court on the Defendants' motion to dismiss (Dkt. No. 75). This motion is fully briefed and the Court, being duly advised,
Investors in Angie's List, Inc. ("Angie's List"), a publicly-traded corporation with its principal place of business in Indianapolis, Indiana, have filed this putative class action alleging that corporate and individual officer malfeasance was responsible for Angie's List stock-price decline in 2013. The class period asserted by the Plaintiffs extends between February 13, 2013, and October 23, 2013.
Angie's List operates a subscription-based website that publishes customer reviews of "high cost of failure" services, i.e., home remodeling, plumbing, and roofing. "Highly rated" service providers—those who receive an "A" or "B" on an A through F scale—are then invited to advertise on the website, offering discounts and other promotions to Angie's List members. Lead Plaintiff United Food & Commercial Workers Local 464A Pension Fund ("Local 464A") filed a Consolidated Class Action Complaint ("the Complaint") (Dkt. No. 65) alleging that Angie's List, its Chief Executive Officer William S. Oesterle, its Chief Marketing Officer Angela R. Hicks Bowman, its Chief Accounting Officer Charles Hundt, its Chief Operating Officer Mark Howell, and its Chief Financial Officer Robert R. Milliard made materially false and misleading statements regarding: 1) the stability and predictability of the two core revenue streams that the paid membership model ("PMM") provided to Angie's List; and 2) Angie's List's present success and long-term sustainability based upon those streams. The facts alleged in the Plaintiffs' Complaint are as follow.
A. The Paid Membership Model
The PMM is unique to Angie's List and sets it apart from its competitors. In order to be a member of Angie's List—to have access to the website and the ability to post and view ratings of service providers—one has to pay a subscription fee. This is in contrast to, for instance, Yelp!, where anyone—for free—can post a review and read reviews posted by others. The benefits of the PMM were touted by the Defendants as follows: 1) it creates a membership base of consumers who are motivated, engaged, and willing to provide meaningful, reliable reviews; and 2) it provides a superior advertising platform for local service providers, as the membership base is comprised of "engaged, affluent, educated, and busy" consumers. Compl. ¶ 29. By charging membership fees, Angie's List was able to offer "a premium product." Id. ¶ 13.
The PMM generated a so-called "flywheel" of two separate, but related, predicable revenue streams: 1) membership subscription fees (which accounted for approximately 27% of Angie's List revenue in 2013); and 2) paid advertising contracts with local service providers (which accounted for approximately 73% of Angie's List revenue in 2013). As Defendant Howell stated, "the more members that [sign up], the more service providers that sign up[;] it drives word-of-mouth with the membership and they feed on themselves." Id. ¶ 30.
B. Expansion into New Markets
Since its inception in 1995, Angie's List has been expanding across the nation; it is now available in 253 markets. Angie's List divides its markets into cohorts according to the time period in which the markets transition to the PMM. For example, markets that were established prior to 2003, including Indianapolis, New York, San Francisco, and Washington, D.C, are the oldest, most mature cohort. Markets established after 2010 are the newest cohort.
The key growth strategy for Angie's List is to aggressively advertise in new markets to increase the membership base and expand the number of customer reviews. In order to accomplish this, Angie's List offers complimentary memberships to new members in the new markets. Within 24 to 30 months, the complimentary memberships transition to introductory rate memberships and then to fully paid memberships. Angie's List touted obtaining paid memberships as the key to its success; this is what gave it "an engaged user." Id. ¶ 37. As Defendant Oesterle noted, paying members are "ready, willing and able to consume the services, which makes them unbelievably valuable for the service companies." Id. Thus, the broader base of loyal and engaged members increased the number of local service providers that desired to advertise on the website, which in turn increased the advertising rates. This model of expansion was represented to work in Angie's List oldest and most mature cohort and was touted as providing a path for future expansion into new markets.
C. Price Cuts
In 2013, Angie's List began cutting the price of membership subscriptions in its oldest cohort. Specifically, "Angie's List dramatically reduced new member subscription fees by as much as 75% by offering memberships at near-complimentary introductory rates in established markets, such as Indianapolis, New York, Chicago, San Francisco, and Washington D.C., among others." Id. ¶ 54. The Complaint alleges that Angie's List
According to the Plaintiffs, the Defendants made several fraudulent statements between February and October 2013. Specifically, the Complaint alleges that the
Id. ¶ 9.
On February 13, 2013, Angie's List announced its fourth quarter 2012 financial results. In the accompanying press release, Defendant Oesterle contributed much of Angie's List's success to its oldest, most mature cohort, stating that "the operating characteristics of our oldest cohort continue to demonstrate the potential for the entire business." Id. ¶ 56. Similarly, in Angie's List's 2012 Form 10-K, 1Q 2013 Form 10-Q, and 2Q 2013 Form 10-Q, signed by Defendants Oesterle, Millard, and/or Hundt, the PMM was emphasized, noting that "subscription fees from members represent a significant source of working capital and provide a relatively predicable revenue stream," and that "the markets in these older cohorts have begun to achieve penetration rates that allow us to transition beyond introductory membership and advertising rates." Id. ¶ 57.
During the May 21, 2013, conference, the PMM was again the emphasis. Defendant Oesterle noted that Angie's List was "the premium provider in the marketplace" because "[w]e charge. Other people don't." Id. ¶ 58. Defendant Howell similarly highlighted the success of the PMM during the August 15, 2013, conference, noting that "the more members that you get through that first 30 months, the more service providers that sign up[;] it drives word-of-mouth with the membership and they feed on themselves." Id. ¶ 59.
The Complaint alleges that these statements were materially false and misleading when made because
Id. ¶ 60.
Other misleading statements were made regarding "Angie's List's ability to secure and retain lucrative advertising contracts with service providers." Id. ¶ 62. In Angie's List's 2012 Form 10-K, 1Q 2013 Form 10-Q, and 2Q 2013 Form 10-Q, signed by Defendants Oesterle, Millard, and/or Hundt, Angie's List touted the contracts with local service providers as a providing "a relatively predicable revenue stream." Id. During the September 12, 2013, conference, Defendant Oesterle reiterated the importance of renewing the local service providers' contracts. He stated that
Id. ¶ 64. The Complaint alleges that these statements "were materially false and misleading when made because the Company was taking undisclosed actions that diluted its putative base of `highly qualified leads' and severely threatened the membership base underlying the predictability of the Company's service provider advertising revenue stream." Id. ¶ 65.
Other allegedly false and misleading statements continued to be made for the same reasons noted above during the Class Period. During the March 5, 2013, conference, Defendant Millard noted that "the oldest cohort provides a path for the other cohorts." Id. ¶ 67. Similarly, in the 1Q 2013 Press Release, Defendant Oesterle said that "the operating characteristics of our oldest cohort continue to demonstrate the potential for the entire business." Id. During the April 24, 2013, conference call, Defendant Oesterle again noted that the "mature markets represent this wonderful case where they are profitable." Id. Finally, during the July 24, 2013, conference call, Defendant Oesterle reiterated that "it is very positive news that we continue to grow the oldest cohorts at rapid rates" and "there is all good news in the mature cohort." Id.
E. Angie's List Stock Prices Drop
On September 20, 3013, Angie's List disclosed that its Chief Technology Officer Manu Thapar had been terminated on September 27, 2013; no replacement was named. Following this announcement, Angie's List common stock declined by approximately 10%—from $22.49 per share to $20.30 per share.
On October 2, 2013, the Wall Street Journal reported that Angie's List "slashed membership prices by roughly 75%," reducing the membership fee from around $40 to around $10. Following this report, the price of Angie's List common stock fell almost 18%—from $20.99 per share to $17.31 per share.
On October 23, 2013, Angie's List released is third quarter 2013 financial results, which missed analysts' expectations. Angie's List disclosed that its third quarter 2013 revenue was $65.5 million (analysts expected approximately $66.1 million in revenue) and projected that its fourth quarter 2013 revenue would be $68 to $69 million (analysts forecasted revenue of $70.4 million). It disclosed that it spent $28.2 million on marketing expenses (an 8% increase) and spent $9,000 to acquire each new local service provider. Finally, it reported that it experienced a 10% increase in new subscribers (in contrast to increases of 20% in 2011 and 16% in 2012) and lost 155,000 members. Following this, the price of Angie's List common stock fell approximately 5%—from $15.45 per share to $14.64 per share.
F. Procedural History
In late 2013 and early 2014, complaints were filed in this Court by a variety of Plaintiffs—who purchased Angie's List stock during the Class Period—on behalf of themselves and those similarly situated. Those cases were consolidated into the present action. See Dkt. No. 50. Local 464A, a joint-labor-management-sponsored trust fund established to provide retirement benefits to members of Local 464A, was appointed as lead plaintiff, and its selection of counsel was approved by this Court on June 16, 2014. See id.
The Complaint alleges two Counts against the Defendants: 1) violations of § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10B-5 promulgated thereunder by the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5; and 2) violations of § 20(a) of the Exchange Act against the individual Defendant officers.
The Defendants move to dismiss the Complaint in its entirety pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that the Complaint fails to state a claim for which relief can be granted. In reviewing a Rule 12(b)(6) motion, the Court "must accept all well pled facts as true and draw all permissible inferences in favor of the plaintiff." Agnew v. National Collegiate Athletic Ass'n, 683 F.3d 328, 334 (7th Cir. 2012).
In addition, Rule 9(b) governs pleading requirements in fraud actions generally, providing that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). Therefore, "[a] complaint alleging fraud must provide the who, what, when, where, and how." Borsellino v. Goldman Sachs Grp., Inc., 477 F.3d 502, 507 (7th Cir. 2007) (internal quotation marks omitted).
Finally, the Private Securities Litigation Reform Act ("PSLRA") further heightens the pleading standard for plaintiffs alleging securities fraud claims. The Act requires that, if a plaintiff alleges that the defendant either made an untrue statement of material fact or failed to state a material fact necessary in order to keep statements from being misleading, the plaintiff must "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." 15 U.S.C. § 78u-4(b)(1). In addition, a plaintiff must, "with respect to each act or omission . . . state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).
Count I of the Plaintiffs' Complaint alleges violations of Section 10(b) of the Exchange Act. That provision provides, in relevant part, the following:
15 U.S.C. § 78j(b). SEC Rule 10b-5, promulgated pursuant to Section 10(b), makes it unlawful:
17 C.F.R. § 240.10b-5.
The Defendants move to dismiss the Complaint in its entirety arguing that the Plaintiffs have failed to state a claim under these provisions. While the Defendants set forth a variety of reasons why the Complaint fails, the Court need only address one, as it is dispositive.
In their response, the Plaintiffs set forth "what this case is really about." Pls.' Resp. at 1. They note that the Defendants' statements were materially false and misleading regarding: 1) "the stability and `predictability' of the two core revenue streams that the Company's paid membership model (the "PMM") provided"; and 2) "how the Company's `oldest cohorts' typified the PMM's present success and long-term sustainability." Id. The Court agrees with the Defendants that the Complaint fails to state a claim with regard to both allegations.
A. Statements Regarding the Stability and Predictability of the Two Core Revenue Streams
As noted above, the two core revenue streams the PMM provides to Angie's List are membership fees and contracts with local service providers. The streams are very much intertwined; as the membership base increases, more local service providers are enticed to advertise on Angie's List, which, in turn increases the membership base. The Complaint asserts that the repeated statements made by Angie's List and its officers were materially false and misleading because the "slashing" of the membership fee: 1) "compromised the predictability of the revenue derived from its member subscription fees"; and 2) "impaired the PMM's ability to offer service providers a `qualified' and `engaged' pool of potential customers—the very asset that the Company routinely touted as the critical feature in securing and maintaining advertising revenues and in differentiating itself from its competitors." Id. ¶ 54. The problem is that these allegations, as the Defendants note, are nothing more than unfounded assumptions and speculation which is insufficient under the PSLRA. See, e.g., Defs.' Reply at 7 ("[T]here are no facts alleged explaining how, when, and to what extent that `relatively predictable revenue stream' . . . was impacted.").
Simply put, the Complaint is devoid of any facts regarding the outcome of the reduction in membership fee. All of the following questions are left unanswered:
The Complaint assumes "yes" to all of these; yet, "the PSLRA requires facts supporting beliefs to be pled with particularity . . . [which] is a more stringent standard." City of Austin Police Ret. Sys. v. ITT Educ. Servs., Inc., 388 F.Supp.2d 932, 944-45 (S.D. Ind. 2005) (dismissing a case "where the allegations . . . are made on information and belief"). Simply put, the Defendants' allegedly misleading statements were only "material" if, as the Plaintiffs assume, the fee slashing resulted in a diluted membership base. Yet, there are no facts to suggest as much. This is not to say that the "slashing" had no negative effect. It may be true that decreasing the membership fee—from, for example $40 to $10—did indeed attract a "lower quality" consumer thus making Angie's List less attractive to advertisers. Unfortunately for the Plaintiffs, however, there is nothing to support that assumption in the Complaint.
B. Statements Regarding how Angie's List Oldest Cohorts Typified the PMM's Present Success and Long-Term Sustainability
The same problem lies with the Plaintiffs' second group of allegations. The Complaint alleges the following:
Compl. ¶ 60. Once again, the Plaintiffs' Complaint is premised on an unfounded assumption: that the key cog in the PMM was the "substantial" or "mature" membership fee. As the Defendants note, "no Defendant made or is alleged to have made this representation." Defs.' Reply at 9.
The Complaint essentially equates a lower membership fee with no membership fee. This is inaccurate. The characteristic that Angie's List touted as setting it apart from its competitors is the fact that its members paid; the PMM, however, is not based on any set fee. Moreover, as the Defendants note, Angie's List achieved membership growth—and membership revenue—"through growing the number of new members." Id. The emphasis was never placed on the amount of the fee, and the Complaint is devoid of any facts to suggest otherwise. Moreover, the Plaintiffs' allegations are also premised on the assumption that Angie's List's oldest cohort was not doing well, and thus had to lower the membership fees to keep pace with competitors (as opposed to, as the Defendants note, simply a desire to conduct a routine price test). However, the Wall Street Journal article in no way eludes to this assumption.
In all, the Court finds that the assertions in the Plaintiffs' Complaint are simply too vague and attenuated to withstand the heightened pleading requirements. Lacking the necessary particularity as to the when, where, what, and how the "slashing" of the membership fee actually threatened the two core revenue streams or somehow illustrated that the PMM was not working, the Plaintiffs' claims premised on these allegations must be
C. Section 20(a)
Section 20(a) of the Exchange Act provides a basis for holding individuals and businesses liable for acts of securities fraud if they control other individuals or businesses that violate the securities laws:
15 U.S.C. § 78t (emphasis added). As the Defendants note, liability under section 20(a) must be based on an underlying violation of the securities laws or the rules promulgated under them. Because the Plaintiffs have failed to plead a predicate violation of Section 10(b) or Rule 10b-5, the Section 20(a) claims must be
The Plaintiffs have failed to state a claim of securities fraud under section 10(b) of the Exchange Act and Rule 10b-5 of the SEC. The Plaintiffs' allegations do not meet the heightened pleading requirements of Rule 9(b) or the PSLRA. Pursuant to Rule 12(b)(6), the Plaintiffs' allegations of control person liability under section 20(a) of the Exchange Act fail to state a claim upon which relief can be granted. For these reasons, the Defendants' motion to dismiss (Dkt. No. 75) is
The Plaintiffs have one additional opportunity to amend their Complaint. See Barry Aviation, Inc. v. Land O'Lakes Mun. Airport Comm'n, 377 F.3d 682, 687 (7th Cir. 2004) ("The better practice is to allow at least one amendment regardless of how unpromising the initial pleading appears because except in unusual circumstances it is unlikely that the court will be able to determine conclusively on the face of a defective pleading whether plaintiff actually can state a claim.") (quotation marks and citation omitted). The Plaintiffs may file an amended complaint