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Southern District Of New York Dismisses Securities Act Claims As Untimely And Pares Claims In Putative Class Action Against Robotic Software Company
11/26/2024On November 4, 2024, Judge Denise L. Cote of the United States District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a putative class action brought under Sections 10b-5 and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5, as well as under Sections 11 and 15 of the Securities Act of 1933 (“Securities Act”), against a robotic process automation (“RPA”) software company (“Company”) and certain of its executives (“Individual Defendants”). In re UiPath, Inc. Sec. Litig., 23-cv-7908 (DLC) (S.D.N.Y. Nov. 4, 2024). Plaintiffs alleged that the Company misrepresented its financial condition and business operations. Although it dismissed all of plaintiffs’ Securities Act claims as time-barred and most of plaintiffs’ Exchange Act claims, the Court held that plaintiffs identified several actionable misstatements and adequately alleged scienter to support claims under the Exchange Act.
Plaintiffs alleged that the Company made four sets of misrepresentations in offering documents issued in connection with its initial public offering (“Offering Documents”) and in public statements. First, plaintiffs alleged that the Company inflated its financial outlook by using a purportedly misleading financial metric called Annualized Renewal Run-Rate (“ARR”). Second, plaintiffs averred that the Company misstated the success of its alleged “land-and-expand” business model, under which the Company focused on growing its business through existing customers. Third, plaintiffs claimed that Offering Documents’ risk disclosures framed events that allegedly had already occurred as merely hypothetical. Fourth, plaintiffs alleged the Company understated the competitive threats that its business faced in the RPA market from an alleged competitor.
The Court found that Securities Act claims were barred by the one-year statute of limitation applicable to Securities Act claims. Although an action was commenced within one year of the alleged misstatements, a claim under the Securities Act was not asserted until a second amended complaint was filed more than a year later. Plaintiffs argued that, because their initial complaint was filed within the limitations period, they were entitled to tolling under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974). The Court rejected this contention, holding that no reasonable plaintiff seeking to lead a class and no reasonable investor who acquired shares in the IPO could have relied reasonably on the initial complaint tolling the statute of limitations because it did not contain a claim under the Securities Act. The Court noted that the initial complaint also did not allege that plaintiff who filed it had standing to assert such a claim.
The Court further held that once the one-year statute of limitations had run, defendants were entitled to rely on that and “assess their litigation risks accordingly.” The Court held that the differences between a claim under the Securities Act, which entails essentially strict liability and potential liability for pure omissions, as compared to claims under the Exchange Act, were meaningful and would impact the litigation and potential settlement such that defendants would be prejudiced if the Securities Act claims were not dismissed. The Court rejected plaintiffs’ argument based on the timing of the appointment of lead plaintiff, holding that nothing stopped plaintiffs or anyone else from filing claims earlier.
In assessing plaintiffs’ Exchange Act claims, the Court first concluded that plaintiffs failed to identify a misstatement concerning the Company’s use of the ARR metric. Although plaintiffs alleged that the ARR figures were misleading because they rested on the assumption that the Company would renew existing client contracts and continue to earn non-recurring revenue, the Court found that the Company made numerous adequate disclosures, including that ARR “does not reflect any actual or anticipated reductions in invoiced value [due to] service cancellations” and affirmatively warned that “investors should not place undue reliance upon ARR as an indicator of [the Company’s] future or expected results.”
Next, the Court concluded that plaintiffs failed to plead that any of the alleged statements regarding the Company’s successful, historical track record of expanding its business with existing customers were false. The Court found it significant that, while each alleged statement was supported by Company data, the alleged confidential-witness statements upon which plaintiffs principally sought to rely to demonstrate falsity were generic and failed to refute the precise figures provided by the Company. The Court then determined that plaintiffs did not allege adequately that the Offering Documents mischaracterized certain risks as merely hypothetical when they allegedly had already materialized. Rather, the Court found that the Offering Documents’ 42 pages of risk disclosures were replete with “fulsome” disclosures addressing the same adverse events that plaintiffs claimed the Company distorted.
Finally, while it found that most of the alleged statements by the Company about the risks posed by one of its competitors were too vague to be actionable, the Court found plaintiffs adequately pleaded that the Company misstated (1) that the Company allegedly did not frequently compete with the competitor and (2) that, when it does, that competition allegedly has no impact on the rate at which the Company wins over clients. In so holding, the Court found that plaintiffs proffered sufficiently concrete confidential-witness allegations from a former Company salesperson and executive that refuted the Company’s alleged statements. The Court further found that plaintiffs adequately alleged that the Company’s alleged misstatements about risks posed by the competitor were made with scienter, citing additional confidential-witness allegations stating the Company allegedly strategized how to compete with the competitor, including through marketing campaigns and hiring the competitor’s talent.
Accordingly, the Court denied the Company’s motion to dismiss as to plaintiffs’ Exchange Act claims to the extent they are premised upon certain alleged misstatements about the risks posed to the Company by its competitor but granted the motion as to the remainder of plaintiffs’ Exchange Act claims and all of their Securities Act claims.
