In Published Opinion, Ninth Circuit Applies Federal Loss Causation Pleading Standards to California State-Law Securities Fraud Claim

    On May 19, 2021, the Ninth Circuit issued an important opinion holding that the pleading standards for loss causation under federal law apply to California state-law securities fraud claims brought in federal court. In addition to impacting future cases involving such claims in federal court, this opinion stands to be influential with California state court judges as well.

    In Irving Firemen’s Relief & Retirement Fund v. Uber Technologies, Inc., et al., Case No. 19-16667, the Ninth Circuit affirmed the district court’s dismissal of a putative class action against Uber and its founder and former CEO, Travis Kalanick. The complaint alleged that several investors acquired Uber stock through a series of private offerings conducted between June 2014 and May 2016. The complaint further alleged that, starting in 2017, several acts of Uber corporate misconduct came to public light, including, among other things, sexual harassment allegations by a former Uber engineer, the alleged theft of trade secrets from Google affiliate Waymo by a Uber employee, and a U.S. Department of Justice criminal investigation into Uber’s foreign practices. According to the complaint, the defendants “misled investors by concealing material risks to their business, which allegedly allowed them to market and sell Uber securities at inflated prices,” and when those business practices came to light, Uber’s valuation declined, reducing the value of those securities to the tune of billions of dollars.

    The plaintiff asserted a single claim of securities fraud under Sections 25400(d) and 25500 of the California Corporations Code. The district court granted the defendants’ motion to dismiss, in part on the ground that the plaintiffs failed to adequately plead loss causation. The appeal followed.

    In affirming the district court, the court held the pleading requirements for loss causation under Federal Rules of Civil Procedure 8(a) and 9(b) and federal securities law applied to the California state-law securities fraud claim. Although the court noted that “California law still governs claims brought [in federal court] pursuant to sections 25400 and 25500,” it found no California case law that directly addressed the pleading standard for loss causation. Citing California authority holding that federal law is “unusually strong persuasive precedent” in construing sections 25400 and 25500, the court went on to hold that federal pleading requirements applied to the loss causation element of the California state-law claim.

    Applying those standards, the panel held that plaintiff’s complaint failed as a matter of law because it alleged only that the stock price was overvalued when purchased, and did not adequately assert any of the alleged misstatements that caused the decline in the stock price. In so doing, the court rejected the plaintiff’s view that, to satisfy its pleading requirements, it “need only show that the proposed class members purchased securities that were overvalued—or inflated—at the time of the offerings.”

    Given the potential ramifications of this opinion, the plaintiff will likely file a petition for rehearing en banc and such a petition will likely be given serious consideration by the full Ninth Circuit.