Case Name: ?? James O?Donnell, Jr. v. Coupons.com Incorporated, et al.
Case No.: ?????? 2015-1-CV-278399 (lead case)
This is a consolidated securities class action.? In their amended consolidated complaint (the ?Amended Complaint?), plaintiffs James O?Donnell, Jr., Angella So, Andrew Nguyen, and Herbert Silverberg allege violations of the Securities Act arising from omissions from the registration statement and prospectus associated with the 2014 initial public offering of defendant Coupons.com Incorporated (the ?IPO?).? (Amended Complaint, ? 1.)
Coupons operates an Internet-based platform used by retailers and consumer packaged goods companies (?CPG?s) to provide consumers with coupons.? (Amended Complaint, ? 2.)? Plaintiffs allege that the registration statement at issue failed to disclose that 4Q13?s strong transactions and revenue were driven substantially by a one-time ?December to Remember? holiday campaign by the world?s largest CPG, Procter & Gamble (?P&G?).? (Id., ? 4.)? The campaign yielded $3 million in revenues, resulting in revenues of $52.6 million for the quarter, compared to $35.8 million for 4Q12.? (Id., ?? 40-41, 65.)?? Plaintiffs allege that Coupons insiders were aware of the one-time nature of the campaign.? (Id., ?? 4, 50.)? P&G had featured coupons for a single brand, Pampers, through the first half of 2013, but by 4Q13 all of its various brands were listed, significantly increasing the number of coupons available on the platform.? (Id., ???49-54.)? Given that all other major CPGs were already using Coupons, the growth resulting from P&G?s addition of numerous brands to the platform in 4Q13 was not to be replicated.? (Ibid.)
On February 9, 2015, Coupons issued a press release announcing its 2014 financial results.? (Amended Complaint, ??55.)? Total revenue for 4Q14 was $60 million, which, while an increase over 4Q13, missed the Company?s 4Q14 guidance range of $62-64 million and analysts? consensus guidance of $64.3 million.? (Ibid.)? On an earnings call and in a subsequent financial statement, Coupons attributed the guidance miss to the failure of a few large CPGs to repeat holiday campaigns.? (Id., ?? 56-59, 64.)? The stock price declined sharply on this news and never recovered.? (Id., ? 63.)
Plaintiffs allege three causes of action for violations of sections 11, 12(a)(2), and 15 of the Securities Act, arising from the failure to disclose the one-time nature of the ?December to Remember? campaign and the uncertainty that similarly substantial sources of revenue growth were available.? (Amended Complaint, ? 65.)
On November 12, 2015, the Court sustained a demurrer by Coupons and the individual defendants to this action (collectively, the ?Coupons Defendants?) to the prior, ?corrected consolidated complaint,? which alleged a failure to disclose that the unusual 4Q13 revenues were attributable to a number of holiday campaigns by large CPGs, rather than the ?December to Remember? campaign specifically.? Currently at issue is the Coupons Defendants? demurrer to each claim in the Amended Complaint for failure to state a claim.? (Code Civ. Proc., ? 430.10, subd. (e).)
- Preliminary Issues
Defendants Goldman, Sachs & Co., Allen & Company LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and RBC Capital Markets, LLC (collectively, the ?Underwriter Defendants?) move to join in the Coupons Defendants? demurrer.? The motion for joinder is GRANTED given that the arguments raised by the demurrer apply equally to all defendants.? Both the Coupons Defendants and the Underwriter Defendants filed declarations indicating that they participated in the meet and confer required by Code of Civil Procedure section 430.41, but were unable to resolve the issues raised by the demurrer.
The Coupons Defendants? request for judicial notice of the prospectus associated with the IPO is GRANTED with respect to the existence and contents of this document, but not as to the truth of its contents.? (Evid. Code, ? 452, subd. (h); StorMedia Inc. v. Superior Court (Werczberger) (1999) 20 Cal.4th 449, 456, fn. 9.)? Their supplemental request for judicial notice of Coupon?s February 9th, 2015 press release filed with the SEC and of filings in the VeriFone matter, discussed below, are GRANTED to the same extent.? (Evid. Code, ? 452, subds. (d) and (h).)
The Coupons Defendants? request for judicial notice of the full text of a January 14th, 2015 Seeking Alpha article referenced in the complaint is DENIED.? The article does not ?form the basis of the allegations in the complaint? (cf. Ingram v. Flippo (1999) 74 Cal.App.4th 1280, 1285, fn. 3), and the content of that document is not at issue.
- Analysis
Section 11 creates a private remedy for any purchaser of a security if any part of the registration statement ?contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading….?? (In re Stac Electronics Securities Litigation (9th Cir. 1996) 89 F.3d 1399, 1403-1404, quoting 15 U.S.C. ? 77k(a).)? No scienter is required; defendants are liable even for innocent or negligent misstatements or omissions.? (Ibid.)? ?The ?materiality? of [a statement or] omission is a fact-specific determination that should ordinarily be assessed by a jury.?? (Id. at p. 1405.)? Only where ? ?the adequacy of [any] disclosure or the materiality of the statement is so obvious that reasonable minds could not differ are these issues appropriately resolved as a matter of law.? ?? (Ibid., internal citation omitted.)[1]
Here, plaintiffs allege that the one-time nature of the ?December to Remember? campaign and the uncertainty of similarly substantial sources of revenue growth were ?required to be stated? on the registration statement pursuant to item 303 of SEC Regulation S-K.? (Amended Complaint, ? 65.)? Item 303 requires the disclosure of (i) ?any unusual or infrequent events or transactions ? that materially affected the amount of reported income from continuing operations? and (ii) ?any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.?? (17 C.F.R. ? 229.303(a)(3)(i)-(ii); see Steckman v. Hart Brewing, Inc. (9th Cir. 1998) 143 F.3d 1293, 1296 [there is liability under section 11 if a registrant fails to state a material fact required to be stated under Item 303].)
Defendants urge that the ?December to Remember? campaign was neither an ?unusual or infrequent event? nor a ?known trend or uncertainty? under item 303, and that the uncertainty of CPG promotional spending was amply disclosed.
With respect to the first point, a single promotional campaign clearly does not constitute a ?trend.?? (See In re Thornburg Mortg., Inc. Securities Litigation (D.N.M. 2011) 824 F.Supp.2d 1214, 1260 [events during a short time span are not a ?trend? under Item 303 as a matter of law].)? However, the ?December to Remember? campaign could constitute an ?unusual event or transaction? or an ?uncertainty? in terms of whether a similar campaign would be repeated in the future.? (See Steckman v. Hart Brewing, Inc. (9th Cir. 1998) 143 F.3d 1293, 1297 [citing ?the likely non-renewal of a material contract? as an example of a disclosure required under item 303].)? The critical issues are materiality and whether the disclosure pertains to a relatively predictable result of known circumstances (which is required) or, by contrast, ?involves anticipating a future trend or event or anticipating a less predictable impact of a known event, trend or uncertainty? (which is not).? (Ibid., quoting Securities Act Release No. 6835, ??73,193 at 62,842; see also In re Ply Gem Holdings, Inc. Securities Litigation (S.D.N.Y. 2015) — F.Supp.3d —, 2015 WL 5707652, *4 [the instruction to item 303 ?states that ?discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported information not to be necessarily indicative of future operating results or of future financial condition.? ?].)
Defendants do not challenge plaintiffs? allegations as to materiality and, while it is a somewhat close issue (see In re Ply Gem Holdings, Inc. Securities Litigation, supra, 2015 WL 5707652 at *4 [revenue impacts of less than 5% are typically non-material]), the allegations are adequate to survive demurrer in this respect.? However, defendants correctly argue that the uncertainty of CPG promotional spending was disclosed, and there is nothing to indicate that defendants had any greater or lesser certainty with respect to P&G?s future promotional spending specifically.[2]? The registration statement expressly warned that
revenues may fluctuate due to changes in promotional spending budgets of CPGs and retailers and the timing of their promotional spending.? Decisions by major CPGs or retailers to delay or reduce their promotional spending or divert spending away from digital promotions could slow our revenue growth or reduce our revenues. ? [Q]uarter-to-quarter comparisons of our net revenues and operating results may not be meaningful and the results of any one quarter or historical patterns should not be considered indicative of our future sales activity??.
(Dec. of Benjamin M. Crosson ISO Demurrer, Ex. A, pp. 13-15, italics added.)? While plaintiffs allege that the ?December to Remember? campaign was known to be a one-time event, the disclosure essentially (and somewhat obviously) states that no promotional spending should be assumed to be recurring.? There was no need to specifically highlight the ?December to Remember? campaign given that its one-time nature was consistent with the disclosed risk of uncertain promotional spending by ?major CPGs.?? (See Plymouth County Retirement Ass?n v. Primo Water Corp. (M.D.N.C. 2013) 966 F.Supp.2d 525, 559 [statements that registrant had no control over retailers and that its major retailers could choose to discontinue its products at any time adequately disclosed the registrant?s alleged reliance ?on Wal?Mart and Lowe?s entering massive product promotions?], citing In re Convergent Technologies Securities Litigation (9th Cir. 1991) 948 F.2d 507, 516 [a company ?need not detail every corporate event, current or prospective? and ?[t]he securities laws do not require management to bury the shareholders in an avalanche of trivial information?a result that is hardly conducive to informed decisionmaking?], internal citations and quotations omitted; In re Marsh & Mclennan Companies, Inc. Securities Litigation (S.D.N.Y. 2006) 501 F.Supp.2d 452, 472-473 [?Contingent commissions were a consistent source of income prior to and throughout the Class Period. They did not constitute an ?unusual or infrequent? revenue source, nor are there sufficient allegations that MMC should have expected that revenue source to change in some way that would require its disclosure under Regulation S?K, Item 303.?]; In re Stac Electronics Securities Litigation (9th Cir. 1996) 89 F.3d 1399, 1407-1410 [section 11 claim failed where prospectus described the risks of which plaintiffs complained and advised investors not to predict future returns on the basis of any single quarter].)
Finally, plaintiffs? theory that defendants should have disclosed that the growth resulting from the ?December to Remember? campaign was not to be replicated calls for the type of prediction as to future performance that courts have held is not required by item 303.? (See In re VeriFone Securities Litigation (9th Cir. 1993) 11 F.3d 865, 869-870 [registrant was not required to disclose that a particular market was ?saturated? and growth was expected to slow].)? Furthermore, this theory fails in light of plaintiffs? allegation that total revenue for 4Q14 was $60 million?an increase of over $7 million from 4Q13, well exceeding the $3 million attributed to the ?December to Remember? campaign.? (Amended Complaint, ? 55.)
Plaintiffs consequently fail to state a claim under sections 11, 12(a)(2), or 15 of the Securities Act.? Given that they do not indicate how they might amend their complaint to state a cause of action, defendants? demurrer is SUSTAINED WITHOUT LEAVE TO AMEND.? (See Camsi IV v. Hunter Technology Corp. (1991) 230 Cal.App.3d 1525, 1542 [?absent an effective request for leave to amend in specified ways,? it is appropriate to deny leave to amend unless ?a potentially effective amendment [is] both apparent and consistent with the plaintiff?s theory of the case?]; Goodman v. Kennedy (1976) 18 Cal. 3d 335, 349 [?Plaintiff must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading?], quoting Cooper v. Leslie Salt Co. (1969) 70 Cal. 2d 627, 636.)
Footnotes:
[1] Section 12(a)(2) imposes similar liability on sellers of securities for misstatements or omissions in a prospectus, and Section 15 imposes liability on those who ?control[ ] any person liable? under sections 11 and 12.? (In re Ply Gem Holdings, Inc. Securities Litigation (S.D.N.Y. 2015) — F.Supp.3d —, 2015 WL 5707652, *4.)? Claims under sections 11, 12, and 15 may consequently be considered together for purposes of determining whether the statements or omissions at issue are actionable.? (Ibid.)
[2] The Amended Complaint alleges only that this particular promotion was a one-time event to drive P&G?s 2Q14 revenue, and that P&G had not participated in a similar program before December 2013 and did not participate in a similar program in December 2014.? (Amended Complaint, ?? 48-50.)? It does not allege that defendants knew anything at all about P&G?s plans for future promotional spending, on Coupons or elsewhere.