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On March 22, 2021, the Northern District of California denied in part a motion to dismiss securities fraud claims against a software company and certain of its officers alleging that the company used coercive sales practices to sell its cloud-based products. City of Sunrise Firefighters’ Pension Fund v. Oracle, 2021 WL 1091891 (N.D. Cal. 2021) (Freeman, J.). The court held that plaintiff “adequately pled a narrow omission-based theory of [securities] fraud[,]” centering on defendants’ statements about the drivers of the company’s cloud revenue growth and the reasons for the subsequent deceleration of that growth, where defendants allegedly failed to disclose that “engineered deals” were a material driver of the growth or that the dwindling efficacy of its sales practices had a material impact on this deceleration.

Omission-Based Claim Adequately Pled as to Cloud Revenue Growth

Plaintiff contended that defendants’ “statements about cloud revenue and growth were false and misleading because they failed to disclose that [the company] was engaged in improper sales tactics to boost sales of flawed products.” More specifically, plaintiff alleged that defendants “misleadingly attributed [the company’s] cloud revenue growth to the quality and competitiveness of its cloud offering, while failing to disclose that engineered deals were a material driver of those results.” The court determined that plaintiff “has provided additional allegations from the [confidential witnesses] along with new allegations from industry members that establish the materiality of revenue generated through [the] [s]ales [p]ractices.” For example, one confidential witness who was a former executive “reported that 90-95% of Company-wide cloud sales during fiscal years 2016 and 2017, at a minimum, were engineered deals.” The court held that “[a]t this stage, allegations relating to the reasons for which customers adopted [the company’s] cloud products over the competition are adequate to state an omission-based claim under Section 10” of the Securities Exchange Act.

Omission-Based Claim Adequately Pled as to Cloud Revenue Growth Deceleration

Plaintiff also alleged that defendants misled investors about the reasons for the company’s cloud revenue growth deceleration, for example by stating that the deceleration was due to customers waiting for the company’s next generation cloud product. Plaintiff alleged that customers refused to renew short-term subscriptions that the company had sold using coercive sales tactics, that customers were resisting these tactics with the assistance of consultants, and that there was a smaller pool of targets as the company had already used its sales tactics on many of its customers. The court held that “[a]t this stage, the allegations relating to cloud growth deceleration are adequate to state an omission-based claim under Section 10.”

The court emphasized that the company “does not have a stand-alone duty to disclose its sales practices. However, as with [d]efendants’ statements about drivers of cloud growth, once [d]efendants made statements about the reasons underpinning cloud growth deceleration, investors would have been interested to know that the dwindling efficacy of [the company’s] sales practices had a material impact on this decline.” The court stated that the company’s “affirmative representations about cloud growth deceleration and drivers of cloud growth ‘affirmatively create[d] an impression of a state of affairs that differs in a material way from the one that actually exist[ed].’” Quoting Brody v. Transitional Hosps. Corp., 280 F.3d 997 (9th Cir. 2002). The court further explained that “[t]his is particularly true during a Class Period where the nascent cloud market exploded and [the company’s] competitors enjoyed robust growth.”