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(Article from Securities Law Alert, February/March 2019) 

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On February 26, 2019, the Southern District of New York dismissed in its entirety a securities fraud action against an online hotel search platform operator and the underwriters of its IPO. Holbrook v. Trivago, 2019 WL 948809 (S.D.N.Y. 2019) (Buchwald, J.).[1] The court found defendants had no obligation under Section 11 of the Securities Act of 1933 to disclose in the company’s IPO Registration Statement either (i) violations of the company’s landing page standards by the company’s largest advertiser, or (ii) a modification to the company’s market algorithm known as the “relevance assessment” that imposed financial penalties on advertisers that failed to adhere to the company’s landing page standards. The relevance assessment temporarily boosted revenues in the months following the IPO, but revenues dropped once advertisers began conforming their landing pages to the company’s standards.

Plaintiffs contended that defendants had a duty to disclose these issues under Item 303 of Regulation S-K, which requires the disclosure of “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)(ii). The court explained that Item 303’s “‘reasonably expects will have’ standard suggests that there must be a fairly substantial probability that the known risk at issue will materialize and have a material impact—if not a more-likely-than-not standard, then something not too much below that.”

The court found plaintiffs failed to plead “any factual allegation from which to infer that” the violations of the company’s landing page standards by its largest advertiser were “of the scope and magnitude necessary to impute knowledge of likely materiality.” The court further found that the company’s implementation of the relevance assessment to incentivize the advertiser’s compliance was “of no moment.” The court reasoned that “[t]he mere fact of a change in policy does not render the impetus for that change material for purposes of Item 303.”

The court deemed equally meritless plaintiffs’ contention that the company “should have known that the relevance assessment would have a significant impact on future revenues because it had observed increased revenue attributable to the relevance assessment for (at most) 15 days” prior to the IPO. The court reasoned that “[t]he payment of penalties of unspecified scale and significance over such a brief period of time simply does not support conclusions about how or when advertisers would react to the relevance assessment going forward from the time of” the IPO. The court stated that “as a matter of law 15 days does not a trend make.”

The court also rejected plaintiffs’ argument that these omissions rendered other aspects of the IPO Registration Statement materially misleading. The court explained that “[t]he touchstone for a finding that otherwise true statements have been rendered misleading by omissions is whether such information was necessary in light of the context, manner of presentation, and language of the statements at issue so that what was revealed would not be so incomplete as to mislead.” The court noted that “a duty to disclose does not spring solely from plaintiffs’ interest in that omitted fact.” Here, the court found there was no duty to disclose triggered by, for example, the company’s “broad, non-specific description of pricing” or its enumeration of a generalized and “non-exclusive list of factors that could cause [the company] to downwardly deviate from its historical growth rates.”

The court dismissed plaintiffs’ claims under Sections 11 and 15 of the Securities Act, as well as plaintiffs’ related claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The court denied plaintiffs leave to amend.