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Southern District Of New York Grants Motion For Judgment On The Pleadings In Securities Class Action Against Software Company
03/18/2025On March 7, 2025, Judge John P. Cronan of the Southern District of New York granted a motion for judgment on the pleadings in a putative class action asserting claims under Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”) against a Chinese software company (the “Company”) and certain of its directors, officers, and underwriters. Lian v. Tuya Inc., et al., 22-cv-6792 (JPC) (S.D.N.Y. Mar. 7, 2025). Plaintiffs alleged that defendants made material misstatements and omissions regarding third-party marketplace activities of customers licensing the Company’s software service. The Court granted defendants’ motion for judgment on the pleadings, holding that plaintiffs failed to sufficiently allege any false or misleading statements.
Plaintiffs, shareholders who allegedly invested in the Company pursuant to its 2021 IPO, alleged violations of Sections 11 and 15 of the Securities Act based on purported misleading statements that allegedly overstated the success of the Company’s software services. Specifically, plaintiffs relied on an independent cybersecurity firm’s report—which purportedly exposed misconduct by numerous of the Company’s customers—to allege that defendants failed to disclose that a material percentage of the Company’s customers participated in a widespread “fake review scheme” on a certain third-party e-commerce platform to improve sales metrics of smart devices developed under the Company’s license. Plaintiffs alleged that this fake review scheme led the third-party e-commerce platform to ban several of the Company’s major customers and their products, causing the Company’s share price to decline significantly. The Court previously granted in part and denied in part defendants’ motion to dismiss, declining at that time to consider defendants’ argument that none of the alleged misrepresentations were false or misleading because defendants “did not properly present those arguments in their opening brief.” Defendants then moved for judgment on the pleadings raising, among other things, this same argument.
The Court granted defendants’ motion for judgment on the pleadings, holding that plaintiffs failed to allege any false or misleading statements. In particular, the Court held that plaintiffs failed to identify any language in the Company’s Registration Statement that could have plausibly suggested to a reasonable investor that the fake review scheme did not exist. The Court determined that the alleged misstatements suffered from a “mismatch” in subject matter and specificity vis-à-vis the alleged fake review scheme, and that alleged statements about the Company’s marketing activities and business with its customers were not implicit assurances that the Company’s customers themselves were not engaging in independent violations of the third-party e-commerce platform’s policies. In so holding, the Court emphasized that the alleged misconduct was committed solely by third parties, and that reasonable investors likely understand that issuers lack special insight into the alleged misconduct of third parties with whom they have arms-length business relationships. The Court, while noting that it respects that Section 11’s “strict-liability operation represents an intentional policy choice by Congress,” emphasized that adopting plaintiffs’ “sweeping theory of falsity” would encourage less transparency by issuers, not more, which is at odds with the purposes of the Securities Act. The Court further observed that “[i]f there is no realistic way to avoid liability for speaking on a topic, issuers might simply choose not to speak on that topic at all. That result would risk denying to investors valuable information about an issuer’s business that otherwise would have been disclosed.”
Accordingly, the Court held that plaintiffs failed to identify any false or misleading statements in the Company’s Registration Statement and determined that it was unnecessary to address defendants’ alternate argument that the alleged fake review scheme was unknowable as a general matter. The Court did, however, grant plaintiffs leave to file a further amended complaint, but only if they could in good faith correct the identified deficiencies in the complaint.
